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NADA Guide Analyst: Car Shoppers Will Benefit from High Trade-in Values in 2011

February 08, 2011

SAN FRANCISCO – Rising consumer confidence, an aging fleet and greater access to credit are key factors that will increase consumer demand for used cars and trucks in 2011, said Jonathan Banks, executive automotive analyst for NADA Used Car Guide.

“The used-car market is providing clear signs that the auto industry has entered a new phase,” Banks said Sunday at the NADA Convention and Expo in San Francisco.

Banks highlighted five factors that will boost used-vehicle sales this year:

1. Short Supply Leads to Higher Prices

Banks said he expects to see a 4 percent reduction in the overall supply of used vehicles in 2011. Used-vehicle auction prices will increase 5 to 10 percent in 2011, he said.

“The supply of used vehicles will continue to be tight because of the pull-back in leasing that began in 2007. And fewer new vehicles sold in 2008 and 2009 resulted in fewer trade-ins,” he said. “A lower supply of used vehicles supports higher prices.”

AuctionNet, an auction transaction database that represents about 80 percent of the wholesale market, reported year-over-year increases of about 10 percent on used-vehicle prices for two- to five-year-old trucks and sport utility vehicles and an 8 percent increase for cars.
 
From a brand perspective in 2010, Banks said Ford, Chrysler and General Motors all showed positive growth in used-car prices with gains averaging between 15 to 20 percent for two- to five-year-old models, while import brands improved on average by about 10 percent.

“Just like the mainstream brands, luxury brands showed improvement in 2010 year-over-year with high volume manufacturers like Audi, BMW, Cadillac, Lexus and Mercedes-Benz posting wholesale price increases at or above 10 percent,” Banks said.

Banks noted that the increase in wholesale prices in 2010 were on top of dramatic wholesale vehicle price increases of 30 to 38 percent for trucks and 19 percent for cars from 2008 to 2009.

“Looking at where auction prices are in January 2011, it appears these trends will continue at least in the short-term,” he said. 

2. Rising Trade-In Equity

“Consumers will benefit from high trade-in values in 2011, which will help facilitate a new-vehicle purchase,” Banks added. “This should have a positive impact on consumers with trade-ins of all ages, conditions and types and aligns well with pent-up demand to replace vehicles.”

3. Aging Fleet Needs to be Replaced

Data on vehicle demand, U.S. scrappage rates and the median age of cars and trucks on the road “all point to consumers wanting and needing to replace their aging vehicles, which now average more than 10 years old,” he said.

“Consumers are not only replacing vehicles out of necessity but are also replacing vehicles purely from the desire to upgrade their current models,” Banks said.
 
4. Increasing Flow of Credit

According to a Federal Reserve Board survey in the fourth quarter of 2010, about 20 percent of participating lenders reported an increased willingness to lend while none reported a decreased willingness to make auto and other consumer loans.

“We expect consumer lending to continue to improve in 2011,” Banks said. “Better rates, higher loan-to-value ratios and higher approval rates for most credit classes will help facilitate an increase in lending. On the used-vehicle side specifically, lenders will offer car shoppers attractive financing rates as they scramble to increase their market share.”

5. Dealers, Automakers Managing Inventory More Effectively

Dealer investments in staffing, technology and improved inventory management on the used-vehicle side of operations resulted in an 11 percent sales increase in 2010, he said.

“The restructuring of the auto industry over the past three years has created many positive effects on how consumers, dealers and automakers view the used-vehicle market,” Banks said. “We are now in an age of a more efficient, more intelligent and a more sustainable business model for the used-vehicle market.”

Banks said easy access to used-vehicle information from independent Web sites, such as AutoTrader.com and Cars.com, that provide consumers with pricing, content and condition information creates an environment with complete transparency.

“Comparative online shopping enables consumers to create an expectation of a price for virtually any used vehicle,” he said. “This information also aligns car shoppers with used vehicles that closely match their actual wants and needs.”

To improve resale values and brand perception, manufacturers are managing incentives on new vehicles more effectively, Banks said. Incentives are down on a year-over-year basis by 10 percent for cars and 26 percent for trucks, according to CNW Research.

“This is part of a comprehensive brand management strategy that we are seeing with many manufacturers to improve the perception of value for their used-vehicle models,” he said.

“Better analysis of data and improving technologies, supportive automaker strategies, a price-favorable supply and demand relationship, the increased flow of credit and a reasonable spread between new- and used-vehicle prices support prices increases 5 to 10 percent in 2011,” Banks said.

 

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