McLEAN, Va. -

A headline contained within the latest edition of Guidelines produced by NADA Used Car Guide usually refers to what happens when a television show loses appeal.

But this time, the reference to “jumping the shark” was connected with the escalating prices for compact and midsize cars.

“As any dealer can attest, prices for used, late-model compact and midsize cars have been on an upward tear since the beginning of the year as wholesale prices through May have increased by 27 percent and 18 percent, respectively,” NADA Used Car Guide executive automotive analyst Jonathan Banks began.

“This compares to a ‘mere’ 10-percent increase for the market as a whole and is dramatically better than truck segment performance where prices are either flat or down year-to-date,” he continued.

NADA UCG pointed out these trends are a reversal from what the industry witnessed last year as used-car prices lagged behind used-truck price appreciation.

“The oft-cited drivers of high fuel prices, lean supply and strong demand have conspired to push used-car prices to heights never seen before and have many wondering how much higher prices can go,” Banks acknowledged

In an attempt to provide guidance on this question, Banks took a closer look at how prices have performed across the wholesale-to-retail price spectrum and how the state of fuel prices, supply and May’s new vehicle sales results will impact car prices over the next couple of months.

Recent Compact & Midsize Price Trends

Beginning first on the wholesale side, analysts determined prices for May continued to shatter previous highs with prices for compact and midsize cars jumping an additional 3 percent on a mileage and mix adjusted basis over April’s lofty levels.

They noted May also marked the fifth month in a row that month-over-month wholesale price increases have equaled or exceeded 3 percent, and cumulatively, prices have increased by double digits since the beginning of the year.

On the retail side, NADA UCG mentioned used prices have also appreciated considerably since the beginning of the year, but in most cases, not at the rate witnessed on the wholesale side.

“In fact, used compact car retail increases are 10 points back of wholesale increases,” Banks declared.

“Given the inequality in price movement between the wholesale and retail sides of the market, margins have contracted considerably on a year-over-year basis for fuel-efficient segments although accounting for the lag between wholesale purchase and retail sale will widen these spreads a bit,” Banks explained.

NADA UCG conceded that new-vehicle prices have also moved up for compact and midsize cars, “but again, at a pace which is far removed from what we’ve seen on the used side,” Banks stressed.

“Even with these transaction prices increasing on new vehicles, retail prices for one-year-old units have closed the gap between new and used, moving to within 80 percent of new sales prices in the intermediate compact segment. This is a significant departure from last year,” he went on to say.

“In addition, the proximity of used-retail prices to new will naturally transfer some used purchase demand over to the new side, as the used price discount isn’t large enough to supersede the perceived benefits of purchasing new such as no previous owners, no unknown mechanical issues, better credit terms, etc,” Banks remarked.

A Look at Gas Prices & Wholesale Supply

The Guidelines report showed that while wholesale prices for the full month of May continued to move upward, the past three weeks of auction activity indicate that prices for compact and midsize cars may have reached their tipping point. Prices for these two segments have either flat-lined or receded slightly.

“These results can be attributed in large part to lower gas prices and the improving supply picture being portrayed by Japanese OEMs,” Banks surmised.

In terms of fuel costs, analysts think it’s not a coincidence that prices also peaked the week of May 9, hitting a mark of $3.96 per gallon. Since that time, they said prices have fallen by 18 cents and are now back in the $3.78 range.

“It’s our expectation that gas prices will continue to decline somewhat through June and in to July, as crude oil prices continue to hover around $100 a barrel,” Banks explained.

“Given the clear relationship between gas and used-car prices, we can expect some slackening in demand for fuel efficient models as gas prices retract,” he added.

On the supply side, NADA UCG emphasized dealer concern over the availability of new-vehicle inventory forced many to concentrate efforts on acquiring used stock to see them through the lean months following the Japan earthquake and tsunami on March 11.

“This accentuated the high demand already in place for compact and midsize cars due to increasing fuel prices,” Banks stated.

“Over the past couple of weeks however, Japanese OEMs have continually brought good production news to the forefront with Toyota stating that production will be back above 90 percent by the end of June and Honda claiming that they will reach this level by August, with both estimates being much sooner than either OEM had projected just a month ago,” he went on to highlight.

In some cases, analysts contend May’s lackluster new sales results will also help the inventory picture as the days’ supply for certain high demand models such as Honda Accord and Civic and Toyota Camry actually increased on a month-over-month basis.

“While clearly not out of the woods, the improving supply situation should take the edge off and provide some wholesale demand relief in the coming weeks,” Banks stressed. 

So Have Compact Prices Truly "Jumped the Shark?"

In order to answer that question, Banks reiterated wholesale and retail prices for compact and midsize cars are up considerably across the board since the first of the year, having been stimulated by a fuel price and supply-driven increase in demand. He also interjected that supply concerns lifted new-vehicle prices by way of MSRP increases and incentive reductions, which provided additional room for used-vehicle prices to grow both in wholesale and retail terms.

However, Banks believes May’s new-vehicle sales retreat to 11.8M SAAR after having recorded SAARs above 13 million for the last three months elevates the likelihood that manufacturers will increase incentive spending as this month rolls along.

“It’s been noted by many analysts that the dramatic month-over-month drop in new car incentives was a significant factor behind May’s poor sales results, which supports this assumption,” Banks said. “This anticipated contraction in new car transaction prices will apply downward pressure on used-car prices, both retail and wholesale.

“Factoring in a small decline in demand due to lower fuel prices and improving new-vehicle supply, we anticipate that used prices for compact and midsize car segments will begin to recede from current highs as we push through June and into July,” Banks asserted.

“It should be noted that while we expect prices to wane, we do not anticipate that prices will take a precipitous slide backward as Japanese OEM production will still be compromised through August,” he emphasized.

“Users of the Official Used Car Guide should expect to see compact and midsize car value movements from June to July generally move in line with these assumptions,” he added.

Discussion about Other Vehicle Segments

While analysis about compact and midsize cars dominated much of the recent edition of Guidelines, NADA UCG also touched on other wholesale segments and gave some projections for future movement.

On the used side, AuctionNet wholesale prices in May were a mixed bag as passenger cars and vans both recorded modest gains of 0.5 to 1.2 percent, while CUVs, pickups and SUVs all dropped between 0.6 and 1.2 percent.

“While down, large pickup and SUV price declines were only slightly above what we would normally expect to see for the month and are still above averages recorded last May by about 2 percent,” Banks indicated. “

“Clearly the decline in returning used supply continues to act as a counterbalance to high fuel prices,” Banks continued.

The report went on to mention how May’s luxury car prices improved mildly over April’s figures as near-luxury compact cars such as the BMW 3-Series and luxury midsize cars such as the Mercedes-Benz E Class realized 1 to 2 percent gains.

“From an official Used Car Guide perspective, car values for June reflect the strength witnessed month-to-date for fuel efficient segments with values being raised accordingly over May’s figures,” Banks stated.

“Regarding trucks, heading into June we expected truck demand to continue to soften due to elevated gas prices and as a result, values for most truck segments declined mildly for this month’s edition,” he indicated.

“Looking ahead to July’s edition, it’s our expectation that truck prices will stick closely to normal seasonal trends barring an unexpected increase in gas prices,” Banks predicted.

“This should translate to moderate downward value adjustments for most segments and models, although larger trucks will experience more significant drops due to their heightened sensitivity to elevated gas prices,” he added.

Review of May’s New-Vehicle Performance

NADA UCG also took a look back at how May’s new-vehicle sales settled.

Analysts conceded last month’s new-vehicle sales were a dramatic departure from the previous three months as inventory availability, lower incentives and mixed economic news conspired to drive the month’s SAAR to 11.8 million, which is the lowest figure recorded since August of last year.

Overall, analysts calculated May’s new-vehicle sales were down 4 percent on a year-over-year basis and were off by 8 percent relative to April.

“Although cars outsold trucks by a rate of 51 percent to 49 percent, trucks captured an additional percentage point over April’s share of the market, a statistic that can be attributed in part to the retention of heavy incentives by OEMs on trucks while incentives were reduced dramatically on cars,” Banks explained.

While year-over-year sales were off for the market as a whole, NADA UCG pointed out Japanese manufacturers — particularly Honda (off by 22 percent) and Toyota (off by 32 percent) — were especially hard hit as they continue to work through production disruptions resulting from March’s natural disasters.

Compounding matters, analysts noted total incentive spending was reduced by nearly 30 percent as both OEMs tried to preserve already thin inventory levels.

Banks noticed that Ford (up 5 percent), Kia (up 53 percent) and Volkswagen (up 28 percent) were a few of the lone bright spots for the month with sales increasing both annually and sequentially.

“Each has a reinvigorated car line up deep with appealing design and high in fuel efficiency, factors which are increasingly raising consumer awareness and demand,” Banks surmised, while sharing an example of how the Ford Fiesta jumped 27 places in May to capture the No. 1 spot of most unique views on NADAguides.com.

Analysis of Leading Economic Indicators

Banks thinks May’s new-vehicle sales performance is not only a reflection of the temporary market disruptions caused by events in Japan, but can also be attributed to a growing sense of pessimism regarding the economy.

Per the Conference Board’s Consumer Confidence Index, consumer confidence in May fell by nearly six points to 60.8, a level last seen in November of last year.

Banks also mentioned May’s unemployment figures also took a turn for the worse, jumping up a tenth of a point to 9.1 percent.

“While still better than the 9.6-percent rate observed in May of last year, any movement up is sure to give consumers pause,” Banks insisted.

NADA UCG added negative news continued to be reported in both the housing and financial markets as the closely watched S&P/Case-Shiller Home Price Index reached a two-year low and the Dow took some significant hits over the course of May and into early June.

“All of this being said, there are bright spots,” Banks interjected.

Although home prices continue to decline, he noted the percent of loans 90 days past due declined for the fifth month in a row. And while the volatility of the Dow has increased, Banks said it has remained above 12,000 for the majority of the year, a level last seen consistently in early 2008.

In addition, NADA UCG reiterated fuel prices have dropped 18 cents since peaking at $3.96 the week of May 9, crude oil prices continue to hover around the $100-per-barrell mark and consumer purchase plans for used vehicles increased for the second month in a row, jumping by four-tenths of a point per the Conference Board’s purchase intender survey.

Banks described the last item in that series as “a sign that bodes well for near-term used-vehicle demand.”