2008: The Year in Review

       

As 2008 draws to a close, it can be said that this has been a most unusual year for the automotive industry. That is, of course, an understatement. This has been an unprecedented year, and certainly the most challenging year we’ve experienced since we first began publishing our trade-in values in 1957. A perfect storm of events – a doubling of fuel prices for much of the year, a faltering economy accompanied by a 40% decline in the stock markets, the demise of several major financial institutions and a government bailout of several others, a housing crisis threatening the stability of many families and their financial foundation, record level increases in unemployment, a dramatically changing political climate, to name a few – has conspired to undermine our overall economic stability. While the automobile industry has not been suffering alone, it has certainly been hard hit and is likely to experience long term issues as we fight our way through this very difficult business cycle.

         Subjectively speaking, this has been a year without rest. As those of us who have been active in the industry for any length of time know, there are usually periods of the year when the used vehicle markets are extremely stable and experience little fluctuation. Historically those stable periods offer those of us in the guidebook business time to focus on some of the fringe components of the business while still safely watching our critical pricing responsibility. Not so this year. First the spike in fuel prices created significant movement among both the fuel-sippers and the fuel-guzzlers. Each market segment (and those in-between) demanded careful attention as consumers responded to the abrupt economic impact of fuel costs on their budgets and their response eventually filtered down to dealers’ buying/trading decisions.  Then the already supply-burdened luxury car and truck segment that demanded close watching and adjusting all year was further deflated by the economic crisis that brought demand almost to a halt. Ultimately that lack of demand reached down to all segments of the market and has brought us to where we are today.

Plenty of objective evidence exists to illustrate the unprecedented market we have experienced this year as well. In general, the luxury car and truck segment of the market has experienced a 15-30% decline from last year’s less than stellar market.  This has been a year of unprecedented erosion in used vehicle values as the following examples, based on Galves trade-in values, illustrate:  

Luxury Cars & SUV’s	December 2007	December 2008	Difference	Decrease
Two-year old Mercedes E350	$25,800	$18,200	$7,600	29%
Four-year old Mercedes S430	$27,500	$20,500	$7,000	25%
Three-year old Porsche Cayenne S	$32,800	$27,700	$5,100	16%
Three-year old BMW 750Li	$38,500	$33,000	$5,500	14%
Two-year old Lexus RX350	$29,000	$25,200	$3,800	13%

 

Mid-Level Cars & SUV’s	December 2007	December 2008	Difference	Decrease
Two-year old Ford Fusion SE	$10,900	$8,650	$2,250	21%
Two-year old Gr Cherokee Laredo	$13,200	$10,700	$2,500	19%
Two-year old Explorer Eddie Bauer	$16,100	$13,150	$2,950	18%
Three-year old Avalon XLS	$18,300	$15,600	$2,700	15%
Three-year old Accord EX	$12,900	$11,700	$1,200	9%

 

We believe that 2009 will continue to see steady declines, but not at the rate we saw this year. Much of the adjustment has already been made in the values and while we believe demand will continue to be diminished, so will supply. Eventually people need to replace vehicles and used vehicles should be in relatively high demand compared to new vehicles given their dramatically eroded values and consumers’ shrunken budgets.

 

 

An Unprecedented Market

We are currently in a somewhat unprecedented market. Not only have we had to deal with a fuel price issue (which has miraculously abated in the last month), we are now faced with a credit issue that together with a loss of disposable income and general confidence in the economy for a large segment of the consumer base has put severe downward pressure on an already shaky market.  And on top of that it is November, traditionally among the weakest of months in the wholesale auto industry. All in all, something of an imperfect storm. In short, the next couple of weeks should provide an excellent opportunity to buy vehicles but a poor climate in which to sell them.

Hardest hit may be those economy cars and trucks that spiked inordinately during the fuel price hikes. Because many dealers have stocked their inventories with them and have no further demand for them and fuel prices have moderated to the extent that consumers are no longer in panic mode, those vehicles are rapidly coming back to earth. Most vulnerable are the hybrids that experienced such a buying frenzy a couple of months back.

In general, late model vehicles of all sorts are experiencing particularly low demand levels. Buyers seem to be holding back for fear of what the next round of rebates and incentives might bring. For that reason, 2007 and 2008 vehicles of all sorts are generally softer than usual.

The market will probably see erosion in even the most traditionally stable vehicles. Honda Civics and Accords, Toyota Corollas and Camrys, Acura RSXs, Scions and their ilk are all likely to experience softening along with just about everything else in the marketplace. European and Asian luxury cars have already experienced significant declines and those are likely to continue, particularly among the more expensive models.

Even many vehicles in the most popular price ranges may suffer some along with everything else. They held up particularly well during the recent overall declines in the market and will probably decline some as general demand for vehicles of all sorts softens.

SUVs and pickups have actually moderated to some extent, probably due to a diminished supply and some short term memory issues for those consumers who pay attention to fuel prices.

We always reach a period of the year when no matter what the book says, buyers want to buy for less. I call it a false market. Sale prices may actually have only a passing resemblance to what vehicles should be worth and will be worth at some time in the near future. Our sense is that this false market will occur a bit early this year and may last for an extended period of time.

The Economic Crisis

I’m writing this as Congress debates how to deal with the current economic crisis that is stifling most of the nations business endeavors including, of course, the automotive industry. Reports are that at the present time there is very little action in the used vehicle marketplace, certainly not a surprise given the economic climate. With the exception of lease terminations and program vehicles there is very little supply. While that might normally signal an upturn in market conditions, a similar lack of demand is, it seems, creating a stagnant market that may very well have nowhere to go but down as we enter the normally sluggish months of October and November.

Previous to the economic crisis we were experiencing some renewed vigor in the segments that had been hardest hit by the spike in fuel prices. Our best guess is that those gains will be forfeited in the near future as the poor business climate and seasonal stagnation take their toll. We’ve already seen a “back-to-reality” movement among those highly fuel efficient vehicles that had captured consumers’ fancy until there were no other delusional retail buyers left out there willing to pay the exorbitant prices necessary to own such a vehicle. Most of the more mainstream economy segment should hold up quite well in the near future as we expect very little supply in that segment and continued reasonable demand.

We continue to think that relatively high levels of lease terminations among the European and Asian luxury segment will overwhelm demand and that that market segment will remain weak. One wonders, however, how cheap these vehicles can get before they begin bumping up against the near luxury segment. When you can buy an ’06 Mercedes S350 for very similar money to an ‘06 Infinity M35, it gives one pause for thought.

While full-size pickups and SUVs had gotten so cheap they actually regained some desirability and accompanying price recovery in recent weeks, we think they will once again begin to falter as we enter the winter months and the sluggish economy forces consumers to pay increasing attention to fuel prices.

Of course all bets are off if the government doesn’t do something to jolt the economy out of its current dismal state.

Dan Galves

Market Stabilizes But Quality Vehicles Remain Scarce

The current used vehicle market has stabilized in many segments due largely to a general lack of supply and some moderation of fuel prices. The scarcity of product is largely due to a decrease in dealer consignment vehicles at auction due to a slump in new vehicle sales and a resulting lack of trade-ins as well as the willingness of many dealers to keep for retail vehicles they would formerly have deemed unsuitable for their lots. One of our auction consultants told us that one auction bigwig confided that while every successive sale seemed to set a new record for dealers in attendance, each sale also saw a similarly unprecedented lack of inventory for sale. Were it not for the sluggish economy and the seasonal decline we usually experience at this time of year we might expect to see a really robust market. As it is, we are seeing some general stability in what is usually a deteriorating market.

Specifically, those mid and full size SUVs and pick-ups that were almost ‘unsaleable’ in previous weeks are actually attracting some attention among dealers and apparently among consumers as well. The other side of the coin is that some of those economy cars that have seen an uptick during what are normally very sluggish summer months are beginning to experience some minor erosion. Those few vehicles, mostly hybrids, that have experienced significant increases in value over the past few months are coming back to reality. We think you will see some significant declines in cars such as the Toyota Prius and Honda Civic Hybrids over the next few weeks.

Scarcity has moderated the decline of sport coupes and convertibles recently and that trend will probably continue. The one segment that seems to have continued its relatively steep decline is the Asian and European luxury vehicle contingent. Supply still seems to be overwhelming demand in much of that market.

While we are certainly glad to see some relative stability in what has been a very difficult market to stay abreast of, we remain cautious for the future. It is, after all, almost October, after which of course comes November and December, traditionally weak months in the wholesale calendar. Scarcity of product, however, may very well moderate the severity of declines we are used to seeing over the next few months.

A Shift in the Market

There has been something of a positive shift, or at very least some stabilization, in certain of the more volatile used vehicle market segments in the last couple of weeks. As usually happens eventually in these type of unusual market conditions brought on by specific economic factors such as a spike in fuel prices or a tightening of restrictions among lenders, the shortening of supply and severely eroded market value of the hardest hit segments eventually find a level at which there is enough demand to create some competition in those segments that have gone begging for the past several months. Such seems to have happened among the hard hit full size SUV and pick-up segments in recent days. A lack of trade-ins, institutional selling, and consignment sales have curtailed the supply in these segments. At the same time, dealers and consumers have come to the conclusion that these vehicles have become so cheap compared to some other related market segments (mid-size and compact SUVs and pick-ups) that they have actually become more desirable as well as harder to find, conditions that eventually add strength to a weakened market.

So you will find some stabilization among these segments in our current editions and even some increases among certain of the vehicles. We consider that a positive and hope that it will bring some calm to what has been a highly confused market. As long as the supplies stay relatively low and the values continue to be sufficiently depressed versus the more fuel efficient competition, things should remain somewhat stable. The most likely threat to this welcome respite would be a significant spike in supply as it looks as if fuel prices are moderating a bit.

Fuel efficient vehicles continue to be inordinately strong. Certain hybrids that are in extremely short supply new (Toyota Prius and Honda Civic in particular) have spiked in value to what we think is an extreme (ridiculous??) degree, but such is the reality of the marketplace. Other fuel efficient vehicles in short supply new (Mini Coopers come to mind) are almost as strong, relatively speaking, as the hybrids. A 2006 Mini Cooper S is worth about the same as a comparable BMW 325 or a Mercedes C280, both of which cost at least as much as $10,000 more than the Mini when new. A base Mini of the same vintage is worth the same as a comparable Cadillac DTS, which cost about $20,000 more when new. Such is the craziness of the market we inhabit. Where applicable among the same models, 4-cylinders are worth as much or more than 6-cylinders, and 6-cylinders as much or more than 8-cylinders.

The rest of the market remains pretty stable for what is normally a slowly declining late summer market. Convertibles are eroding a bit more quickly in general and the European luxury segment continues to erode, especially among the more expensive and gas-guzzling models, but not as rapidly as in the recent past.

A Difficult Start to 2008

As we said a couple of weeks ago in our Market Conditions section of galves.com, , we would report back on the unusually weak market conditions we were experiencing in mid-January as the “spring market” continued to reveal itself – or not. Regretfully, thus far the market has continued to be rocky during a period of the year when it is typically at its strongest. Hardest hit continues to be the European luxury car segment (Audi, Bmw, Jaguar, Mercedes, Volvo*, Saab*) followed closely by the Asian luxury segment and larger pick-ups and SUVs of all makes. It is highly unusual for book values to drop significantly and on such a wide range of vehicles at this time of year, but there is no denying the validity of those adjustments in the current market and we suspect that we have not yet hit a stabilization level for those particular market segments. We do expect the pace of the market erosion to slow down as we move further into spring, but given the large number of vehicles available in these segments and the weak demand, where it will stop is anybody’s guess at the moment.

Even the usually stable Japanese imports are experiencing atypical erosion in a spring market – late models in particular – though not nearly to the extent of the luxury segment. Still, very unusual for this time of year and will probably continue to drop at a slow pace.

What’s holding up well? Good domestic vehicles, economy vehicles, and good vehicles in the lower price ranges. But good domestics are scarce, especially in the northeast where new vehicle sales are so heavily biased toward imports. In addition, the public is beginning to recognize that the domestic manufacturers are building solid vehicles that rival the imports in quality and often surpass them in value (a 2006 Chevy Cobalt is about $4500 cheaper than a comparable Honda Civic, a Mercury Montego about $4000 cheaper than a comparable Honda Accord, etc.). Economy vehicles have, of course, strengthened as the price of gas has increased. Diesels are pretty much off the charts compared to their gasoline burning counterparts. As manufacturers increase rebates and incentives in an effort to spur new vehicle sales, the market for “price range vehicles” that can undercut new vehicle monthly payments significantly increases as the supply decreases.

That is about the limits of the good news for the moment. Even those sport coupes and convertibles that are generally so strong this time of year are lukewarm at best for the moment.

We will make it a point to keep even more current than usual with the market conditions updates as this unusual market unfolds.

Dan Galves

*Questionably “European,” questionably “luxury,” but very weak nevertheless.