The seemingly endless increases on prices for cars is creating some concern on when the market is going to peak. How does a consumer, dealer and lender protect themselves in an extremely volatile automotive market and make the right decisions from a long-term standpoint.  Anyone familiar with the used vehicle market knows that rapid price movements are not uncommon. The past 3 years have proven this and 2011 is no different.  Manheim’s Used Vehicle Value Index confirms this with the index hitting an all-time high in April. 

Predicting the direction of used vehicle prices is tough, but predicting where gas prices go is even tougher.  However one relationship suggests that we are in a position to see gas prices decline.  We don’t expect a drop like we witnessed in 2008, but there seems to be room for gas prices to decline. When considering a higher demand market for oil and the supply disruptions that continue to impact the market prices are not expected to plummet like they did in 2008, but there is an inevitable decline in gas prices perhaps after the peak months of May and June.  The chart below shows the relationship between barrel prices and gas prices.  As you can see right now it appears that we are still paying a premium for some speculation driven by the geopolitical situation in the Middle East and North Africa.

 

Based on this relationship even if barrel prices remain around $100, which we believe they will, gas prices should drop to somewhere between $3.50 - $3.75 per gallon. Maybe not incredibly good news but better than the $3.98 we are paying today.  The consensus seems to be that gas prices will continue to rise but considering the historical relationship and the profits we are witnessing for oil companies and for oil producing nations there will eventually be a stronger consumer reaction to the high prices which will inevitably drive prices closer to the historical relationship.

If this occurs used prices on small cars should decline later in the summer from the peak we are expecting during June; this also will make purchases for larger vehicles make a lot more sense.  From a consumer perspective the time to buy may be now especially if you have a high demand small vehicle to trade in and need a larger vehicle for lifestyle changes or for more utility.  Japanese manufacturers just announced another round of incentives to stimulate buying before Memorial Day.  With more deals and high trade-in values buyers may find purchasing a vehicle a very pleasant experience; as long as you’re not buying a Prius.

Lenders and dealers may want to consider that prices on small vehicles may be ending their incessant run-up by the end of summer if barrel prices stay at or below $100 per barrel, but expect vehicle prices through July to continue to rise in the auctions and on retail lots due to the reality of tighter inventory.