Auction prices on passenger cars this week continued to follow a gradual decline from the peak prices reached during early June.  The view from the peak has been amazing; wholesale prices on many passenger cars still hover at 25 – 30% over last year’s prices, which is great for stimulating new car sales.  Industry pundits, NADA included, are forecasting depreciation throughout the remainder of the year, but not at a rate that will significantly change the gains we have experienced year over year.  In fact, most consumers will remain with a strong equity position on their used trade ins during the next few months, so when incentives inevitably come in at full force, the new car market should present consumers with a strong value proposition for buying a new car. 

In fact, when analyzing payment differences between new and used vehicles, consumers will be hard pressed to pass up on buying new.   Year over year the gap between buying a new and used car has declined by about 6% for small cars and that doesn’t even take into account incentive spending!  With incentive spending expected to increase consumers will naturally move to the new car market thereby reducing demand for used models, which should result in a natural decline in prices on used models.

The tables below show the payment difference between a new vehicle and one year old vehicle in calendar year 2010 and 2011.  In 2010 the used purchased represented 77% of a new vehicle purchase while in 2011 the percentage went up to 83%.  This was driven by used prices increasing at a faster rate than new vehicle prices.  As incentives increase during the next few months we will see this gap decline even more, and when considering the lease and APR deals currently in the market consumers will naturally be drawn to a new vehicle purchase.

All in all used prices continue to show strength, which will help fuel a strong new vehicle market during the next few months.  When concerns about the economy subside and employed consumers feel more confident about their long-term employment status we should witness demand for new vehicles move closer to the 13M SAAR we experienced during the majority of the year.  Lower fuel prices should give consumers some solace that we aren’t going to jump to $5.00 per gallon gas and should improve demand for truck and SUV segments moving forward.