| -

IRVINE, Calif. — Analysts from Kelley Blue Book believe the effects from generous incentives handed out by several automakers in recent weeks are spilling into the used-vehicle market.

An example from the May edition of the Blue Market Report showed how shoppers enticed by new-vehicles incentives are mulling another option. More buyers are considering that for the price of a new non-luxury vehicle, they can purchase a used entry-level luxury unit, creating an increase in demand for used luxury vehicles.

"The plethora of choices is increasing competition among segments as the economy still plays a role in consumers' purchase decisions," noted Juan Flores, director of vehicle valuation at Kelley Blue Book.

"Popular segments such as full-size SUVs and hybrids are taking a back seat to more practical, cost-effective people movers," Flores continued. "Car shoppers are opting for ‘value,' especially with the availability of cheaper vehicles across all segments."

KBB indicated that overall values are up 1.7 percent this month, with minivans and compact cars outperforming the market.

"While there is strength in the market, it is at a reduced rate compared to prior months," Flores interjected.

Further Passenger Car Analysis

Analysts went on to emphasize compact cars are flourishing compared to their mid-size and full-size counterparts.

They found that compact cars have jumped 2.6 percent. Looking at a year-over-year comparison, the segment gain is 1.7 percent. KBB attributed the reasons for rises in part due to the soft economy since these units are affordable and offer enhanced fuel economy.

Kelley Blue Book mentioned two specific units that have climbed the most. They are Saturn's Ion and the Mitsubishi Lancer with 11.3-percent and 7.2-percent jumps, respectively.

"These historically low performers also benefit from the economy as consumers take advantage of the few remaining deals available in the market," Flores pointed out.

Going in the opposite direction in a segment with strong overall gains were the Suzuki SX4 and the Hyundai Elantra. Analysts spotted a 0.9-percent drop for the SX4 and a 0.1-percent dip for the Elantra.

"With so many alternatives available, demand has remained relatively soft for these vehicles, keeping their values relatively flat and lagging the overall segment," Flores explained.

Moving on to midsize cars, Kelley Blue Book mentioned the entire segment jumped 1.9 percent for the month and 3.6 percent from this time last year. Two vehicles that highlighted the gains were a pair of domestic offerings, the Dodge Stratus and Lincoln MKZ. The report noted a 10-percent rise for the Stratus and a solid 7.2-percent increase for the MKZ.

Sliding in the opposite way according to analysts were two vehicles that often perform well. They said Toyota's Camry and the Hyundai Sonata slumped 2.5 percent and 2.4 percent, respectively.

While gas prices have not jumped enough in the company's opinion to make hybrids a cost-effective option, Kelley Blue Book believes this situation could change as costs at the pump pick up heading into summer.

"The premium costs incurred by hybrid buyers are pushing shoppers toward less expensive yet similarly fuel-sipping segments: compact and subcompact cars," Flores stated.

To date, analysts indicated hybrid cars are decreasing 1.2 percent this month and 4.4 percent for the year.

Among the group of underperforming hybrids are the Toyota Camry Hybrid (down 6.0 percent), Lexus GS450h (off 3.9 percent) and Toyota Prius (down 3.6 percent).

However, KBB noted two units bucking the hybrid trend. Those vehicles were the Chevrolet Malibu Hybrid and Honda Civic Hybrid, "since they are relatively cheaper models among their peers." Analysts found the Malibu Hybrid climbed 3.5 percent and Civic Hybrid edged up by 1.6 percent.

Update on Trucks

Shifting over to the truck segment, analysts expect that values of both minivans and mid-size trucks will continue to rise steadily.

Described as one of the most affordable family haulers available, Kelley Blue Book found minivans continue to garner interest among U.S. families, providing utility and space for a reasonable price. The company noted minivans are up 4.8 percent from the previous month and 10.3 percent from last year.

Analysts determined the best-performing minivans to be the Dodge Caravan and Kia Sedona, increasing 9.5 percent and 11.3 percent, respectively. The only minivan they found to be depreciating this month was the Honda Odyssey, slipping 2 percent. They also believe the Odyssey is by far the most expensive model in this segment.

In regard to midsize trucks, KBB revealed a 2.1-percent increase for the month and 7-percent climb since last year.

Enjoying the strongest gains in the report were the Dodge Dakota (up 4.7 percent), Ford Ranger (4.6 percent higher) and Nissan Frontier (up 4.4 percent). Suffering slight decreases were the Toyota Tacoma (off 0.1 percent) and Mitsubishi Raider (down 0.2 percent)

"The Tacoma did not increase this month mainly due to its position as the segment leader, while the Raider was held back by a lack of overall demand given the superior alternatives available," Flores explained.

More Overall Market Discussion

Flores prefaced his broad look at the market by stating several industry observers agree. Flores and other experts think the sector is "in as good of a place as it can be, given past turmoil."

The KBB analyst went on to share why he took such a stance.

"Last year's plummeting sales and bankruptcies pushed manufacturers to reevaluate their business plans, resulting in investments toward better products, a reduction in fleet sales, a renewed focus on days' supply, temporary plant closures to manage existing inventory and production, and changes to their existing lease strategies, among many other actions," Flores spelled out.

Analysts also emphasized that foot traffic on the lot has increased since the beginning of the year. They pointed out that it's costing OEMs extra resources to create that situation with incentives and the availability of credit being the major drivers.

"In addition, Kelley Blue Book is seeing a big push for sales by OEMs and dealers before spring ends as demand stabilizes in the summer season," Flores interjected.

In the coming months, analysts reminded industry observers that all segments will incur seasonal and fuel-related changes in valuations. Kelley Blue Book said it forecasts a moderate rise in fuel prices in the second and third quarter that will continue upward at moderate levels through March 2011.

Other general economic indicators Kelley Blue Book used for its analysis included the expectation that unemployment would slightly increase or remain stable through the end of the year. Also the company believes interest rates should remain relatively steady but increase slightly.

"The used-vehicle supply will decrease slightly as normal seasonal demand patterns are expected to return after two years of abnormal market behavior," Flores noted.

"Based on these predictions and seasonality, the compact segment is expected to strengthen, while luxury cars will soften. It also is expected that mid-size crossovers will return to normal depreciation patterns, while the SUV segment will soften in the third quarter as consumers shop for more fuel-efficient vehicles," he continued.

"Finally, Kelley Blue Book expects strength in pickup trucks in the third quarter as a predominantly seasonal trend, which is negatively impacted by gas prices," Flores added.

Residual Analysis Update

Kelley Blue Book wrapped up its May report with Eric Ibara, director of residual value consulting, offering his take on residual values.

Despite all the hoopla with several automakers offering zero-percent financing, Ibara reiterated that in general, residual values tend not to be affected by current incentives. He said that's because the incentives' impact would need to reach three years into the future in order to impact 36-month residuals.

"However, the continuation of attractive lease programs would have the effect of increasing the volume of vehicles returning to the captives in three years, so from that viewpoint, residual values could be impacted," Ibara considered.

"Incentives utilizing cash to the consumer will have a negative impact on current used-car prices, but unless carried over for three years, is unlikely to affect future residual values," he continued.

Ibara went on to mention that short-term spikes in lease volumes could have only a small impact on future values.

"However, a lease program lasting five or six months could build a sufficiently large volume that is more likely to push down auction values when that bubble of vehicles return to the captive finance company," he noted.