It’s funny that $3.50 is a welcome sign of lower gas prices when at one time the industry talked about $3.00 gas as a tipping point for truck and SUV demand.  The decline in gas prices has been dramatic, falling from a high of $3.99 in May; however consumers are still paying over $.80 more per gallon compared to last year’s prices.  With the new perception that gas prices at or above $3.00 is an acceptable price, are we now in a situation where demand for small cars will continue to be strong, and consequently the used prices will remain well above historical levels?  The dramatic run up in prices for small cars clearly signals a shift towards smaller cars as prices are well above the expected trend.  Values on 2009 models for example have reached the highest point from a dollar perspective, and we have observed this on many other small cars.  The chart below portrays this for the Corolla with values on a 2009 Corolla now transacting at the highest point ever seen.

The consistent upward trend in gas prices shown above has a strong correlation with the increase in Corolla used prices, so we can expect increases in prices for small cars to continue to increase if gas prices continue to follow an upward trend.  Interestingly it appears as if the prices on small cars have jumped a bit more than expected.  This is likely prompted by the speculation that the supply of small cars will be tight, primarily from the disruption in new production from Japan, as well as low used supply driven from the dramatic decline in new car sales from the recession.

NADA did a quick correlation between the stalwart Honda Civic and gas prices to see if this confirmed our assumption that some speculation was incorporated in used prices and we found that our assumption held true.

When observing prices for 2-3 year old Civics relative to gas prices we found a very strong correlation between the two variables.  Interestingly we found that prices on 2009 are well above the historical relationship between gas prices and used prices, and calculated this amount to be $658.  We have witnessed this premium before and have consistently found that prices eventually regress to the mean and move closer to the historical relationship.  Recent auction data supports this assumption as prices on small cars have dropped during the second half of June by ~$150 (Average of 1-5 year old models).  The softening continued based on data from the first week of July where prices dropped slightly compared to the last week in June.

NADA does not expect a dramatic decline in small car prices but we do expect prices to show some depreciation during upcoming months if gas prices continue to decline.  In fact NADA’s values for July expected a 2-3.5% decline in values compared to the high point experienced in June.  NADA does not expect a dramatic drop-off in prices since consumers will remain attracted to this segment due to better product offerings, the psychological impact of the volatility in gas prices, and the aversion to US dependency on foreign oil.  However, we expect the heyday of small car price increases to stop and start to experience consistent depreciation during the remainder of the year.