Never Had Year Like This

Orlando, Fl The value of a car is like a block of ice on the pavement. It's always melting, always depreciating, says Charlie Vogelheim, an auto-industry analyst and former executive editor of used-car value guide Kelley Blue Book. The price never goes up. But ice melts faster when the outside temperature is 98 F (36 C) opposed to 33 F (0.5 C). Likewise, the vagaries of market conditions affect used-car

Orlando, Fl — The value of a car is like a block of ice on the pavement.

“It's always melting, always depreciating,” says Charlie Vogelheim, an auto-industry analyst and former executive editor of used-car value guide Kelley Blue Book. “The price never goes up.”

But ice melts faster when the outside temperature is 98° F (36° C) opposed to 33° F (0.5° C). Likewise, the vagaries of market conditions affect used-car prices and value predictions. As much as residual setters try to be analytical, they never know when the equivalent of a heat wave or cold front may move in to mess up their calculations.

“Just when you think you got this business nailed, they throw a 2008 at you,” says Eric Ibara, Kelley's director-residual value consulting, referring to a year of imponderables, ranging from soaring fuel prices to plunging auto sales to some auto makers backing off leasing.

At the Consumer Bankers Assn.'s annual auto finance conference here, Ibara and fellow residual prognosticators discuss job challenges, used-car trends and future possibilities.

Despite best efforts at predicting vehicle values, “there is no pattern to follow that says this is the way it is going to be,” says Ricky Beggs, vice president and managing editor of the Black Book price guide.

“In normal times, forecasting can be accurate; we can use a model to predict within a degree of accuracy,” Ibara says.

But 2008 was not normal. Nor is 2009 just a typical year in the life of the auto industry. “We've never had a year like this, with peaks and valleys so extreme,” Beggs says.

“Last year kind of went crazy,” Ibara adds. “Gas prices spiked to $4 a gallon — with consumers thinking they'd hit $5 — and then just as quickly prices came down.”

The increased fuel costs did a number on fullsize pickup truck and SUV prices, new and used, as many consumers fled those segments. The depreciation on big trucks was three times the normal rate.

Then the value for those vehicles rose as fuel prices fell. Consequently, a person who bought a big SUV in the summer of 2008 at a slashed price “is sitting on equity today,” says Terrence Wynne, director-editorial and data services for NADA Used Car Guide.

“Consumers can be fickle,” Beggs says. “It can affect prices. I've never seen anything change as much as it did then, with great fluctuations in a short amount of time.”

One of this year's wild cards affecting used-car prices could be prospective incentives auto makers offer to spur flagging new-car sales.

“It's difficult to gauge what effect creative incentive programs will have on prices because we don't know the details,” Wynne says. “It's a very untraditional market this year. It makes it tough to predict values.”

Guide books serve two purposes. One, largely for the leasing industry, is to predict vehicle values two to three years out. Two, mainly for dealers doing trade-ins, is to predict current used-car values.

Many consumers in the market for a new vehicle want to know a guide-book value of their potential trade in. But those values differ based on the condition of a vehicle, and most owners think theirs is in better shape than it is.

“Dealers tell us 90% of vehicles that come to them as trade-ins are not in excellent condition, yet the owners think that they are in that condition,” says Ibara. “So the dealer has to walk their customers through that.”

“A vehicle is not in excellent condition because you washed it a week ago,” Beggs adds.

He foresees “a good market going forward” for the rest of 2009. That doesn't mean used-car prices will shoot up. “But there will be activity.”

Kelley Blue Book is not forecasting a big rebound in used-car prices this year, Ibara says.

Nevertheless, some used-car values are amazingly strong. One conference attendee reports seeing a used Nissan Altima priced at $15,900 — only $3,000 less than a new Altima at the same dealership.

“We've got to figure out a way to sell new, or the used supply will be squeezed to the point where the better deal is the new car,” says Randy Dye, dealer principal at Daytona Dodge and Chrysler in Daytona Beach, FL.

Some consumers are paying more for used cars than they're worth, Rene M. Abdalah, a vice president at RVI Group, an insurer of residual values, tells Ward's. “The loan-to-value exceeds 100% when someone financing a car pays $11,000 and it is only worth $10,000. It's a little scary.”

When originating a loan in a volatile market, “you run the risk of overvaluing or undervaluing a vehicle,” Wynne says. “It can come back to bite you 18 months later.”

He emphasizes that today's price guide books are just that — guides.

“A few years ago, people thought of guide books as gospel,” Wynne says. “Our current position is we are a guidebook, these are our calculations, done with transparency, and maybe there are other resources.”

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