Kbb.com: Fuel-Efficient Vehicle Values Likely To Fall Fifteen Percent By Year-End

Kelley Blue Book (www.kbb.com) reported on July 11 that fuel-efficient vehicle values are likely to fall fifteen percent by year-end in response to stabilizing gas prices and a return to normal production levels for Japanese manufacturers, as covered in the company's Blue Book Market Report for July 2011.

After twenty weeks of consecutive gains, values for gas-sipping vehicles peaked in May in response to a decline in fuel prices. During the last four-to-six weeks, values of compacts and subcompacts declined approximately one-to-two percent, along with the overall market; however, Kelley Blue Book's valuation team expects the overall used-vehicle market to decline no more than an additional three-to-five percent between now and the end of the year. With fuel-efficient used vehicles reaching their peak in demand and price, larger drops are expected in this segment.

During 2011, Kelley Blue Book reported strength among values of fuel-efficient subcompact, compact, and hybrid cars. From January through May of this year, fuel-efficient vehicle values increased a noteworthy twenty-to-twenty-five percent, far surpassing the overall used-car market average increase of five percent during the same time period. This steep increase can be attributed to the following:

Gas prices increasing from $3.00 on January 1 to $3.97 per gallon on May 15
Supply constraints of new fuel-efficient vehicles resulting from the earthquake in Japan
Continued supply constraints of good-condition vehicles due to reduced leasing and trade-ins

In addition to some much-needed relief at the pump, it appears as though Japanese manufacturers are expected to have their production facilities back to one hundred percent capacity by September, which is earlier than originally anticipated. With gas prices continuing to decline and Japanese vehicle and part production recovering, demand for fuel-efficient vehicles is waning, and as a result, dealers are becoming more reluctant to pay premium prices for these vehicles at auction.

Performance during the first half of the year in both 2008 and 2011 are trending very similarly, increasing twenty-one percent in response to rising gas prices. In addition, values of three-year-old fuel-efficient vehicles are significantly more expensive today than they were in 2008.

Reduced leasing and trade-ins since 2008 also have shrunk supply of these vehicles, while a weaker than expected economic recovery has kept demand strong for these budget-friendly vehicles. Finally and most importantly, there was a severe forty percent decline that occurred from July through December 2008. As gas prices dropped from $4.10 per gallon nationally in July 2008 to $1.60 by year-end, demand for gas-sipping vehicles evaporated.

While there are many similarities between today's market and that of 2008, there also are key differences that have caused KBB.com to determine that there will be little need to panic during the latter half of 2011:

The level of economic uncertainty in 2008 was significantly higher than it is today. The unemployment rate was climbing fast into the end of the year, and the financial sector was in a free-fall with seemingly no end in sight.
Fuel prices declined significantly in the latter half of 2008, ending the year at $1.60 per gallon, while oil fell from a high of $140 per barrel down to $30 by year-end. Today, oil has only dropped from a high of $115 down to around $95, while fuel prices remain at $3.50 per gallon today.
Used vehicles were in abundant supply in 2008, while today we face a shortage of good-condition used vehicles due to the severe downturn in new-vehicle sales, leases and ultimately trade-ins. This should act to limit the downside potential for fuel-efficient vehicle values.

Kelley Blue Book does not expect to see a repeat of the forty percent decline in values that took place during the second half of 2008. Rather, Kelley Blue Book predicts that the correction will be more like fifteen-to-twenty percent. In 2009 and 2010, values declined between six-to-eleven percent. With values inflated twenty percent since the beginning of the year, drops are likely to surpass both 2009 and 2010, although the heavy drops of 2008 are not expected. The key factor determining the July to December drop in fuel-efficient vehicle values will be fuel prices and where they finally stabilize.

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