Rising Fuel Prices

You may be noticing that as fuel prices are increasing, the spreads between 4 & 6 cylinder engines and 6 & 8 cylinder engines have been diminishing or disappearing altogether.

As vehicles age, their original cost differences give way to “the law of supply and demand,” and demand for fuel efficiency over performance has created a situation where the market is definitely favoring fewer cylinders where available.

So a 2005 8 cylinder Mercedes Benz ML 500 that cost almost $8,000 more than the 6 cylinder ML350 when new is worth only $400 more in today’s market. Similar situations exist among vehicles like 4 cylinder vs. 6 cylinder Accords, Camrys, A4s, Sonatas, Mercedes C-class, Jettas, etc., and among 6 cylinder vs. 8 cylinder vehicles like Audi A6s, BMW 5-series, Infiniti M-series, Jaguar X and S-types, Mercedes E-class, Lexus GSs, etc.

In some cases, while we continue to show ADD’s for larger optional engines, it has become necessary for us to remove the dollar amounts on these ADD’s as our way of urging some caution when dealing with these larger, more fuel-thirsty vehicles. The V8 ADD’s on Grand Cherokees and 4Runners are just a couple of examples of this. And while we have not done the same thing in regards to diesel/turbo diesel ADD’s (despite being told by some dealers we actually should) we have been significantly decreasing the ADD amounts on these vehicles over that past couple of issues. We expect these declines to continue unless things change dramatically in the near future.

As you might expect, on the opposite side of the spectrum are the hybrids, compacts and sub-compact cars that have all come to the forefront of the public consciousness lately and this strong demand has of course forced values to increase on most of these vehicles.

In short, when it comes to cylinders these days, less is more.

The Unusual Spring Market Continues

I’m not sure if there are pockets of stability in an unstable market or pockets of instability in a stable market, but the resulting “mixed up” spring market exists no matter which position you take. There are areas of the market that are quite stable: primarily the economical gas sipping vehicle segment, the under $12,000 or thereabouts price segment, the relatively rare domestic car segment, or some combination of the above. Instability and a continued depressed market still exists where there is an over-supply of product or severely diminished demand most often related to fuel consumption or a combination of the two. So European luxury cars and SUVs (and Asian luxury products to a slightly lesser extent because of lesser volumes) and all but the unusual and/or exceptional full-size SUVs and pickups continue to decline in what is typically a stable period for those products. 

An example of the precipitous decline in the European luxury segment is the BMW 525. Normally you expect vehicles to depreciate less as they age, so you would expect a 2005 525 to have depreciated more from April ’06 to April ’07 than from April ’07 to April ’08 as it aged. In fact, that is not the case.
       TOTAL DEPRECIATION
           April 2006 - April 2007: $6600
           April 2007 - April 2008: $7700

This is a highly unusual occurrence and illustrates the weakness in the market for even such generally desirable products as the BMW 5-series. You can find similar examples in the other depressed segments such as full-size SUVs and pickups.

So I guess it is a somewhat stable market in the sense that what has done well for the past few months continues to hold up and what has been weak continues to erode, though at a reduced pace. I suppose there will come a time when those weaker market segments will find their low-water mark, but thus far they do not seem to have reached it. There are definitely some bargains out there and consumers tend eventually to discover them. When an ’05 BMW 325 gets in the same price range as an
’05 Accord EX 6-cyl., as is currently the case, retail buyers often respond by succumbing to their emotional side, and as much as I respect the Accord it doesn’t move me, nor I suspect most consumers, nearly as much as the 3 series Beemer. Even the Jaguar X-Type gains some serious consideration when it can be bought for a couple of thousand less than a comparable Accord (and you get AWD as a throw-in!).

Most convertibles and sport coupes are holding up but not experiencing the kind of hyper-activity that is typical for this time of year. Minivans are experiencing something of resurgence as consumers are reawakening to their more practical aspects. The domestic and import market for 4-cylinder cars has been relatively good all along but seems to have spiked recently and many of those more ordinary, mainstream cars will see an increase in value.

Galves Values & Auction Data

We frequently get asked if we consider auction results when determining our Galves values. We do, and what we think sets us apart from other valuation guides in this area is that our professional consultants, who have typically spent decades in and around auctions, are experienced enough to interpret the auction data - taking into account a variety of factors that can distort pure auction results- in a way that is more useful and realistic for our subscribers.

What distorts auction results?

“No Sales”: Probably the most important of all the factors that distort the used vehicle market as reflected in auction data are the large numbers of unsold vehicles, particularly at the elite auctions, that are NOT reflected in auction results. Most of these vehicles are unsold because there were either no bidders or the final bids were not sufficiently strong to warrant a sale. In either case, they did NOT reach what the owner perceived as their market value and, in fact, suggest a lesser market value than those that were sold. Currently there are lots of “no sales,” particularly in certain market segments (late model full size SUVs and pick-ups as well as the European & Asian luxury market). We recently tracked one manufacturer’s full size SUV and pick-up offerings at an elite auction and out of approximately 170 units, less than 25% were sold. That kind of sales percentage is not unusual, especially among the ordinary dealer consignment offerings, and yet that weakness is NOT reflected in the auction data.  To look at an auction sheet without considering “no sales” can be dangerously misleading. 

Export markets: Those vehicles that have export value and happen to meet the specialized criteria in terms of color, equipment, and production dates can be worth thousands more than the same vehicle that does not meet the export criteria, thus distorting the market. In addition, mileage is usually a “non-issue” on exportable vehicles and that can skew auction results even more.

Seller incentives: Institutional sellers often offer incentives in the form of cash, floats, or buybacks that can severely inflate the prices of vehicles sold at auction.

Certified programs: Vehicles that qualify for manufacturers’ certified programs, especially those pre-qualified, often bring exceptional (and distorted) prices.

Color and equipment preferences: Certain color and equipment combinations can add significant value and can misrepresent values for lesser equipped vehicles of the same type. Details regarding important optional equipment are not usually included in auction data.

Elite sellers: The elite auctions all have a variety of elite sellers whose business model is predicated on having acquired over the years optimum exposure, reputations, and sources for high quality and often unique vehicles. Their vehicles typically bring significantly more than what would reflect a normal market.

So yes, we certainly do pay attention to auction results, but with the understanding that it is a useful component of our evaluation process only if tempered by an understanding of some of the shortcomings- distortions - of the data. Fortunately our consultants are professionals and they are aware of the circumstances that can distort this information and they take into account those factors when considering auction data.

Market Update: April 4, 2008

While the same basic economic conditions still prevail(see: “The Spring Market: a Perfect Storm?” below)and continue to affect the used vehicle resale market, there seems to have been some stabilization in those market segments hardest hit by the supply/demand imbalance over the past couple of weeks. It also appears that those market segments that were performing reasonably well previously may have gained some additional strength during the same time period. To some degree the market conditions are self-correcting. The supply diminishes as people refrain from trading in vehicles - or dealers refrain from selling vehicles - for the meager dollars they are being offered and the demand for such vehicles increases as their transaction prices become lower. So the decline in the hard hit European and Japanese luxury vehicle segment has slowed (we are not yet ready to say it has stopped or turned around), and the same is true for the weakened full size SUV and pick-up markets. At the same time the more economical and efficient smaller vehicle segment and the harder to find lower price range vehicles have gained in strength and may have increased in value in some instances. Both of these positive trends – a slowing of the decline in the weakest segments and a strengthening in the previously stable segments - will be reflected in the upcoming books where appropriate. We still recommend caution, however, in being overly optimistic in either case and in assuming that these recent trends are the norm for the duration of this unusual market.    

The Spring Market: a Perfect Storm?

We are currently experiencing what, for me, is an unprecedented market for this time of year. While I was not expecting as long and strong a spring market as last year’s, neither was I expecting the weakness that we are currently experiencing in what have been some of our most active market segments for the past several years, namely pick-ups, full size SUVs, and luxury cars.  

Like the formation of “the perfect storm”, a variety of factors have conspired to create this unusually difficult market, any one of which by itself would not have affected the market significantly but together have had a huge impact. Gasoline prices, the housing slump and mortgage crisis, a weak stock market, a shrinking job market, strong rebates and incentives in the face of slow new vehicle sales, global warming and the “greening” of vehicles, increasing rate of inflation, an impending presidential election: any one or two of these might have caused a ripple in the spring market, together they have caused a rising wave. 

A brief overview of the areas of strengths and weaknesses in the current market serves as a reminder of just how much the used vehicle market is a function of supply & demand. Find the segments with the greatest supply and least demand and you will pinpoint the weakest markets. Full size SUVs and pick-ups have dominated new vehicle sales for the past several years. Now, they are returning to the market in large numbers as their owners move on to something else. Gas prices and ecological considerations - to say nothing of the fickle need of us humans for something “different” - have pushed them largely out of favor as of late and demand for them has plummeted.The only thing that will promote the sale of all but the most unusual of trucks is a price that makes them irresistible. When you can buy that ’04 Chevy Tahoe for $2000 LESS than an ’04 Toyota Rav 4, who cares about the price of gas and what the neighbors think. The same can be said for the luxury market, especially the European segment. They sold/leased a ton of them in the past several years as we experienced a strong economy and were largely insulated from the spectre of global warming. A year ago a 2 year old (a 2004 model) Mercedes E320 sedan was worth around $26,000. Today the same 2 year old vehicle (a 2005 model) is worth around $22,000, or $4,000 less. That savings will buy a lot of gas and ease a person’s ecological conscience as well.  There are bargains out there and they are largely a function of supply overwhelming demand in certain market segments.   

The same law of supply and demand dictates what is doing well in the market. American cars, for example, are both relatively scarce and cheap compared to their imported counterparts. This means they are in some demand due both to their scarcity (especially in the northeast) and fit into that under $12,000 retail market that is also in demand. So the same 2 year old (2004 model) Buick LeSabre Custom that was worth $8200 a year ago is worth $9000 today (2005 model).  

The point is that this is a very unusual and difficult market for all but the most desirable vehicles. It is a time when a guidebook must function at its highest level in order to stay abreast of the marketplace and provide their clients with information that will enable them to function optimally in spite of the unusual circumstances. In the course of my responsibilities as editor I have become very familiar with the other appraisal tools available to the industry and I can say with confidence that no other used vehicle appraisal tool is as current or accurate, and therefore “useable”, as Galves. In my opinion that includes actual auction results which, though clearly useful and relevant, have to be interpreted with an understanding of condition variation, color preferences, equipment penetrations and values, export markets, special marketing incentives, elite sellers, and, probably most important, a real sense of the preponderance of “no sales” for certain vehicles. The reality is that most ordinary consignment dealers are lucky to sell one out of every three vehicles run. We take into account all those variables when we consider auction results and use them as part of our valuation resources. If you don’t, you can be seriously misled by auction information.  

We recognize that our traditional trade-in perspective is representative of the lower end of the wholesale used vehicle spectrum and can be conceived of as being “low”. We added the “Galves Market Ready” value as an effort to represent a higher level of the wholesale spectrum and give dealers a useful tool when dealing in those higher levels. If used and understood properly, we are confident that no valuation tool is as accurate and current and useful as Galves. Given the current difficult market conditions we are particularly committed to staying on top of the market and continuing to protect our subscribers’ downside while still reporting a level of pricing that makes it possible to buy, trade & sell effectively.

Dan Galves