Small used-car prices rise unexpectedly

June 18, 2018 01:00 AM

Vehicles line up at a Manheim auction. Compact car pricing at Manheim's wholesale auctions climbed 5.7 percent in May, stronger than for pickups and SUVs.

Prices for small used cars are climbing to unexpected levels, a sign that demand is growing as price-sensitive consumers face dwindling new-car options.

Small used-car prices in the second quarter rose across the board, at retail and wholesale. While some analysts point to seasonal shifts as reason for the uptick, the development also follows moves by some major automakers to curb production of small cars.

The price hikes are creating headaches for dealers trying to maintain inventory of affordable used vehicles for customers even as the demand means it's easier for dealerships to sell the small used cars on their lots.

"The vehicles that retail under $15,000, and especially those you can retail under $12,000 — there's not enough of them," said Brandon Caldwell, retail operations manager at Friendship Ford in Bristol, Tenn., which sells 80 to 100 used vehicles per month. "Dealers know that, so when you go to the auction to buy these cars, dealers are paying much more than they were a year ago because of the demand."

Retail prices for 3-year-old compact cars at franchised dealerships have reached unexpected highs, with the average transaction price rising 3.9 percent in the first quarter to $13,464, according to Edmunds' latest used-car report. Overall, prices for all used vehicles regardless of age rose 2.2 percent to a record $19,657, Edmunds said. Meanwhile, at Manheim's wholesale auctions, compact car pricing rose 5.7 percent in May, stronger than for pickups and SUVs. Analysts say the price increase is notable.

"Those sedans, those coupes, all of those segments were really pounded by low gas prices," Edmunds senior analyst Ivan Drury told Automotive News. "It's been years since we've seen anybody look at used sedans as worth something."

The price hike in small used cars was no surprise to Zohaib Rahim, manager of economics and industry insights for Cox Automotive. Off-lease models from 2016 and off-rental units from 2017 are rebalancing the used market share of small cars, he said.

"You're in a part of the market where compact car pricing is stronger than the overall industry when just six months ago it was the opposite," Rahim said. "The level was surprising, but we did expect this to happen."

That said, the market share of used cars slid to 49 percent in 2018's first half from 51 percent in December, according to Manheim, a trend Rahim expects to continue through the year as more off-lease and off-rental units come back favoring light trucks.

Small-car spike

Small used cars are moving off dealer lots more quickly.
	Days-to-turn Q1 2018	Days-to-turn Q1 2017
3-year-old subcompact cars	40	44
3-year-old compact cars	36	39
All segments, all ages	42	43

The rise in prices comes after Fiat Chrysler Automobiles jettisoned small and midsize car production in the U.S. in 2016 to focus on its larger, more profitable vehicles. The company reaffirmed that commitment this month.

Then in April, Ford Motor Co. said it would cut nonluxury sedans from its lineup given its projection that light trucks would soon account for nearly 90 percent of its North American sales.

How quickly those decisions are being felt is a matter of debate. Some analysts say the effects should not appear for several years at least, while others believe the repercussions of cutting small-car supplies on the new-vehicle market are already here.

Cox Automotive's chief economist, Jonathan Smoke, says automakers may be curtailing small-car production too much. Consumers who might have bought a new sub-$20,000 small car are being pushed to the used-vehicle market.

"By not having the product at all, you're limiting the pool of buyers in the new-vehicle market to be buyers who buy expensive vehicles," Smoke told Automotive News.

On the other hand, Anil Goyal, executive vice president of operations at Black Book, said scaling back small-vehicle production makes perfect sense for the market.

"Demand from the new side is decreasing. When [customers] want to buy new vehicles, they want to buy a crossover or SUV," Goyal said. "We've been seeing sedan volume go down on the new side for a number of years. It makes sense for some of the manufacturers to drop their volume."

From Feb. 1 to May 1, Black Book's Wholesale Used Vehicle Retention Index recorded a 3 percent increase in wholesale prices for the industry's mainstream sedan segments. Because sedan value has decreased more significantly than light trucks, the market is experiencing a bounce in prices for small vehicles off those earlier lows, Goyal said. Used-vehicle shoppers are traditionally more value-oriented, he noted.

That presents another dilemma for dealers.

Can't pass it on

Even though small used cars cost more to acquire, dealers can't afford to pass that on to consumers, said Robert Sickel, vice president of Pine Belt Enterprises in Lakewood, N.J., a dealership group selling Chevrolet, Chrysler, Dodge, Jeep, Ram and Subaru vehicles.

"I'm not sure raising prices is the right move as we are getting more leads on the cheaper vehicles," Sickel said.

More than 60 percent of Pine Belt's 600 new- and used-vehicle sales per month are small cars and crossovers, he said. Low monthly payments for these vehicles are a main enticement advertised by the group.

Despite the boost for small used cars, the new-vehicle market is still dominated by light trucks. Only one in three new-vehicle buyers opts for a car, Manheim said.

Tom Kontos, chief economist at KAR Auction Services Inc., said consumers are still voting with their wallets for light trucks. He expressed doubt that the price bump indicates increased demand for small and midsize cars. That would defy what consumers are buying on the new side.

Kontos expects small-car prices to continue to decline and that any effects from FCA and Ford backing away from these segments won't appear for two years at least.

"There's a false read going on," Kontos said. "If anything, that movement towards parity might be going up where car prices might be going less dramatically down than they were relative to truck prices."