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IRVINE, Calif. — Values grew in all segments in March, and this trend is expected to continue into the second quarter, particularly on compact and subcompact models, Kelley Blue Book reported Tuesday.

Interestingly, while March is generally a strong month for values, KBB discovered that this March's trends exceeded those traditionally seen in the past.

Overall, the company said used-vehicle values were up 2.2 percent, a hefty climb relative to the 0.5 uptick witnessed last March.

However, the company noted that most of the appreciation seen was limited to 2008 and older models.

"One-year-old vehicles (MY 2009) have not fared as well, staying flat or even dropping in some cases, narrowing the spread between one- and two-year-old vehicle values," the company said.

Larger volumes of the newer models at auction also played a role in keeping their values down, the company noted.

On average, domestic vehicles appreciated 2.9 percent, which is almost double the 1.5 percent on import units.
"In many segments, the disparity in month-over-month performance is even more pronounced. If we take compact cars, for example, values for domestics were up 5.2 percent, while values for imports were only up 1.8 percent for the month," KBB reported.

"More specifically, the Ford Focus was up 6.6 percent, while the Honda Civic was up a more modest 2.6 percent," the company continued. "While the disparity between the changes for these two vehicles certainly seems significant at face value, if we take into consideration the current values of these vehicles, we can gain a little perspective.

On average, a two-year-old Honda Civic LX Sedan (MY 2008) has an auction value of a little more than $12,000. Compare this to a two-year old Ford Focus SE Sedan, which has an auction value of just over $9,000, and we can see that a comparably equipped import vehicle typically commands a significant premium over its domestic counterpart. As consumers continue to stretch their dollars further, domestic values will remain strong due to their lower cost of entry compared to an import vehicles," according to KBB.

And, officials said the perceived quality gap is closing.

"Significant improvements in new vehicles being offered by Ford and GM also have helped to restore the confidence of consumers in domestic brands, and helped to chip away at the perceived quality gap between domestic and import vehicles," officials stated.

Further helping the brand perception, KBB explained, "In addition, the major recalls issued by Toyota and Honda have brought the untarnished image of these manufacturers back down to reality, further reducing the perceived quality gap between domestic and import vehicles."

Toyota Trends

Looking more specifically at Toyota, KBB officials said the average year-over-year change in 36-month residual values from this automaker is expected to increase by 4.2 percentage points.

"While Toyota's increase is below the industry average increase of 6.2 percentage points, it still outperforms a number of other brand increases. Year-over-year changes in residual values in the May/June release are largely being driven by changes within the vehicle segments."

Toyota's ramped up incentive and financing offers announced in early March are helping to drive up consideration in the automaker's offerings, according to KBB.

"The latest data shows 38 percent of in-market new-car shoppers now are considering a Toyota, returning to levels recorded prior to the recall announcements. Additionally, this week's levels are 10 percentage points higher than when Toyota's consideration was at its lowest point in the midst of the recall crisis, at only 28 percent in early February," officials explained.

Eric Ibara, director of residual value consulting at KBB, noted, "The incentives being offered by Toyota and now Honda are definitely bringing customers back to those brands. However, Kelley Blue Book doesn't expect this will have an impact on residual values unless these incentive offers extend into June of this year."

Looking Ahead

Taking a look down the road, KBB said, "Through the second quarter Kelley Blue Book is forecasting values for most car segments to continue to climb. We also are anticipating values for compact cars to increase 1.8 percent, subcompact cars to increase 3.5 percent and midsize cars to appreciate 0.8 percent."
Gas prices will likely tick upward during the summer months and supplies of vehicles at auction will remain somewhat limited, contributing to KBB's forecast.

While smaller vehicles tend to show stronger values at auction, on the other hand, the higher gas prices could have a more negative impact on larger vehicles, officials highlighted.

"Alternatively, we expect values for full-size trucks to drop 3 percent through the same period in response to the expected rise in gas prices. So while a limited supply at auction is expected to keep values for many segments strong through the next quarter, rising gas prices could play a role in bringing down the value of vehicles with less-than-ideal fuel economy," according to the company.

Going forward, the company also expects consumer demand for used vehicles to remain high.

"Continued weakness in the economy is another factor keeping demand for used vehicles higher. With the national unemployment rate still hovering just below 10 percent and bankruptcy filings and loan delinquencies on the rise, many consumers are purchasing a used or certified pre-owned vehicle as an alternative to a new vehicle due to their lower cost of entry," KBB executives explained.

"Additionally, strong incentive support from OEMs such as Honda and Toyota has increased foot traffic in showrooms, bolstering not only new-vehicle sales, but ultimately, sales of used vehicles," officials indicated.

Furthermore, KBB pointed to the aggressive lease and financing offerings in March as an indication that credit is becoming more available for consumers looking to finance vehicles.

"We would expect to see demand remain strong or even increase as credit markets thaw and it becomes easier for consumers to obtain financing. For these reasons, Kelley Blue Book expects that values will remain strong for many segments in the short term, especially if attractive financing opportunities remain available for consumers," executives noted.