| -

McLEAN, Va. — According to NADA Used Car Guide, there are four reasons why analysts believe wholesale vehicle prices will moderate and follow seasonal depreciation patterns during the remainder of the year. 

The specific reasons given by Jonathan Banks, executive automotive analyst for NADA Used Car Guide, included margin erosion, new-vehicle sales, returning used supplies and segment performance. Banks and his colleagues delved deeper into each of those elements.

—Margin Erosion: The first factor Banks cited as a reason for sharp appreciation in wholesale prices is that the gap between wholesale and retail prices continues to narrow. 

"Based on NADA's analysis of the margin between used-retail prices, provided by J.D. Power PIN data, and used wholesale AuctionNet prices, the margin between wholesale and retail prices has declined dramatically during 2010," Banks indicated.

One example the company offered was how mid-size CUVs experienced margin declines of up to 50 percent compared to the beginning of this year. They believe dealer demand for used models drove up wholesale prices with retail prices not experiencing parallel movements.

Furthermore, based on historical data, analysts emphasized that this relationship is likely unsustainable since historical retail prices create a ceiling for wholesale price appreciation.

"The emphasis on selling used products during the downturn has improved efficiencies and driven demand for better tools to improve turn rates, pricing and financing for used products, which explains part of this reduction since expenses on the dealer side have improved," Banks highlighted.

"However the tighter margins surely will drive dealers to look for better margins in the future," he added.

—New-Vehicle Sales: Further explaining its prediction, NADA Used Car Guide reported that increasing new-vehicle sales should result in a higher amount of trade-ins.

The company cited forecasts by Global Insight that indicated new-vehicle sales are expected to jump by 13 percent this year; thereby increasing potential used trade-in volume by approximately 1 million units

"The expectation is that 2010 sales will outpace 2009 in every month, excluding August, which was buoyed by Cash-for-Clunkers, reaching 11.8 million units for the year," Banks explained.

"It should be noted that Global Insight's forecast is in line with most forecasts, including NADA's," he continued.

—Returning Used Supply: In addition to rising levels of trade-ins, NADA Used Car Guide's analysis also showed that an increase in used supply — driven by past new sales and seasonal factors — will also provide dealers with additional inventory relative to 2009. 

The analysts' estimates indicated that the total pool of new vehicles returning to the market will gradually increase in the second quarter of this year. They also noted that the year-over-year change will increase by 4 percent in June.

"This increase in used supply, coupled with the expected increase in trade-ins, will help align expected demand increases with available supply, thereby slowing down the upward movement in wholesale price experienced so far in 2010," Banks stressed.

—Segment Performance: Analysts found that prices across all segments have shown similar strength with no particular movement based on fuel economy.

NADA Used Car Guide determined supply for car segments has remained relatively stable indicating that demand is the primary driver of the price increases this year.

"With the national average price of fuel looming near $3, small car segments may have the potential for upward movement as we move into the historical high season for gas prices," Banks explained.

"NADA witnessed price appreciation on 2003 through 2006 luxury models, which may indicate a recovery in the luxury segment as consumers move into ‘affordable' luxury models," he noted. "This portends to stronger luxury price performance when unemployment begins to improve as we move forward from the jobless recovery."

Moving on to a discussion about trucks, analysts noticed wholesale prices in this segment have led the market.

They spotted an average increase of about 20 percent for 5-year-old or newer truck, CUV and SUV prices on a year-over-year basis. Analysts added that these increases are on top of the recovery from the historically low prices for trucks and SUVs driven by the dramatic increase in gasoline prices in 2008.

"In this case the recovery in prices is driven by manufacturers' dramatic production cuts on truck and SUV models ultimately resulting in constrained supply of both new and used vehicles for these segments," Banks determined.

One example he shared was connected with General Motors. Banks said the automaker is in short supply of its full-size SUV offerings and is considering an increase in production.

NADA Used Car Guide also shared more elements that could push prices in the truck segment.

"With housing starts and construction just starting to show signs of life, demand for these models will continue to increase thereby keeping prices high in the short-term since it is unlikely that manufacturers will be able to adjust production until late 2010," Banks offered.

"Fuel prices clearly will play a role in the performance of used prices for these models and the recent increase in barrel prices and the tight supply of refined gasoline are concerns; however fundamentals are pointing to a possible reduction in oil prices, or at the very least stability during the next few months," he went on to note.

With all of those elements in play, NADA Used Car Guide expects wholesale prices to remain stable during the next two months with gas prices expected to cause differing performance between cars and trucks. Analysts added that guidebook valuations through May will project this stability, which outperforms typical seasonal trends.

"We expect the market to begin exhibiting mild depreciation beginning in the latter half of the second quarter; however on a year-over-year basis used prices are expected to remain at or above levels experienced during 2009," Banks stated.

Other Recent Observations

Banks mentioned that overall passenger car segment performance has been flat for April. He said prices for 2007-2009 model-year vehicles on average showed a nominal $21 increase, which calculated into just 0.1 percent.

"If the remainder of April follows this path, passenger car prices will outperform the expected seasonal declines for the segments," Banks pointed out.

NADA Used Car Guide noticed that the intermediate subcompact car segment enjoyed the best April performance, increasing by 1.8 percent.

"This fits in well with our assumption that consumers are still gravitating towards economical options as the jobless economic recovery has not stimulated increased incomes for many consumers," Banks interjected.

Elsewhere, analysts reported that model-year 2007-2009 near-luxury and luxury midsize cars declined 4.2 percent during the first weeks of this month. They mentioned the Audi A6, Infiniti M, Mercedes E Class and Lexus GS all posted declines with the A6 dropping more than 10 percent this month.

Their analysis also revealed that the Cadillac CTS showed one of the larger declines in the near luxury segment with prices dropping about 5.5 percent while the prices of the Audi A4 and BMW 3 Series remained flat. 

Conversely, Banks said the Infiniti G35 and the BMW 5 Series bucked the trend and posted gains this month.

"All intermediate-priced and several upper-priced segments showed mild price appreciation whereas all luxury and premium luxury segments have shown mild to moderate price depreciation," Banks explained

"Older luxury models, however, performed significantly different than newer counterparts. On these older vehicles, most luxury/premium luxury/upper segments showed price appreciation," he continued.

Moving on to another segment, analysts highlighted that midsize SUVs continue to do extremely well in the wholesale lanes through the first week of April. They cited AuctionNet data that indicated 5-year-old and newer midsize SUVs rose another $286 in April from the previous month. These units now have climbed $1,236 for the year.

Finally, Banks concluded his latest report by noting large two-wheel drive SUVs and pickups are underperforming as compared to their four-wheel drive counterparts in terms of used car guide value, as well as wholesale and asking prices.