Small-car prices sink at resale

In May, the average price of 2010-14 used subcompact cars in the U.S. plunged 26 percent from year-earlier levels, to $6,683.

That was the sharpest drop of any segment of 2010-14 used vehicles and notably more than the industrywide decline of almost 17 percent, according to Black Book.

Small cars are the canaries in the pricing coal mine. The weakness in prices of small used cars is starting to spill over into the new-car lot, too.

After years of new-vehicle lease growth, a widely forecast surge in off-lease vehicles has started. Because all segments eventually will be affected, automakers are taking steps to soften the blow to prices by finding new ways to encourage sales of those off-lease used vehicles.

Small-car prices already were soft, due to weak demand and cheap gasoline.

Jessica Caldwell, director of industry analysis at Edmunds.com, said a favorable economy is helping consumers buy the exact new and used vehicles they want and generally speaking, they just don't want subcompact cars.

"I think we're seeing the true demand of America being reflected right now," she said. "Gas prices are low, the job market is good and the economy is pretty good. When left to our own devices, we want big vehicles. People are going larger and as a result we have high inventory and low pricing of these small cars."

Dug Dugger, general manager of Ourisman Rockmont Chevrolet in Rockville, Md., agrees. He said the weighted sales rate at his dealership should be 60 percent passenger cars and 40 percent trucks, but in reality those numbers are the opposite. Pickups and SUVs are the "mainstays" at his store, he said.

Indeed, most Chevrolet dealers are happy to talk about Silverado or Colorado pickup sales. But ask about subcompact car sales, and they're likely to pause as they try to remember what's going on at that end of the lot.

Meanwhile, small cars leased to budget-conscious buyers coming out of the recession are starting to flow into the used-car market, whether buyers want them or not. Think more supply, little demand.

Including vehicles in all segments, according to Manheim, about 3.1 million off-lease vehicles are expected to return to the market in 2016, up from almost 2.6 million in 2015. That pool of vehicles is expected to grow to almost 3.6 million in 2017 and almost 4 million in 2018, putting downward pressure on used-vehicle prices across the board.

To cope with that wave, Lexus and BMW this year unveiled leasing programs for certified used vehicles. Ally Financial jumped into used-vehicle leasing as well.

Last week, BMW's finance arm said that it has made its online remarketing channel that sells off-lease vehicles accessible to non-BMW franchised dealers as well as independent used-only dealers.

"Given the challenging dynamics facing the grounding dealer and with more off-lease inventory entering the market, we needed to take our upstream remarketing program to the next level," said Nina Englert, vice president of sales and marketing for BMW Financial Services, in a statement.

BMWGroupDirect.com previously was open exclusively to BMW franchised dealers.

As independent used-only dealers start bidding for off-lease used BMWs, excess off-lease vehicles from other, less-prestigious brands also are likely to spill out from those brands' franchised dealers' lots.

In fact, some used late-model subcompacts may be perfect candidates for buy-here, pay-here, used-only lots, said Anil Goyal, Black Book senior vice president of automotive valuation and analytics.

"Typically, buy-here, pay-here looks at five- or six-year-old cars in that sweet spot of $5,000 or $6,000," said Goyal. "But with the amount of depreciation this segment has seen and the newer off-lease and off-rental vehicles that continue to come into the market, we're going to get increased looks and buyers for buy-here, pay-here, given how much their prices have dropped."

Goyal said an abundance of off-lease and retired rental subcompacts has been "sitting at auctions" this year. The average price of 2010-14 used subcompact cars fell 2.4 percent in May from April.

When used subcompacts are that cheap, it's tough for new small cars to compete. In the wake of dismal May sales, General Motors on June 1 offered discounts of 20 percent off the sticker prices of high-end models of 2016 Chevrolet Sonic subcompact and Spark minicar through June 15. The discounts also applied to the 2016 Impala, Chevy's entry in the shrinking segment of large sedans.

But those hefty incentives didn't speed those small cars out the door, dealers said.

Dugger, of Ourisman Rockmont Chevrolet, said he believes the incentive helped with Impala sales, "but I haven't seen a lot of action with Spark or the Sonic."

Arnaldo Bomnin, owner of Bomnin Chevrolet in Miami, said trucks are hot sellers. For example, in May he sold 90 Silverados.

But even with the 20 percent discount, he had sold just three Sonics and five Sparks as of June 12, vs. no Sonics and six Sparks in the first 12 days of May. And that's in a Miami market in which he says passenger cars are popular.

Bomnin believes that had he had more time to implement his marketing strategy, he could have moved more of those vehicles.

He added: "If they extend that 20 percent, we should be able to sell more this month."