Automotive Trends in a Financial Melt Down

Gas Prices SpikeTruck / SUV market dies

Automobile manufacturers were already struggling earlier in the summer when oil prices peaked and automotive sales plummeted.  A sudden 30% decrease in sales due to market conditions will do that to even the best run of businesses.

Should Auto Makers have foreseen it?  In this case, we now see that oil prices were artificially spiking due to a number of different influences, including massive speculation.  Instead of the last drops of oil in the world being pumped out to feed hungry SUVs, as the Enviro-fanatics would have had you believe, we had normal greedy oil producers spiking prices.  With the reduced demand brought on by the financial meltdown, oil prices have bottomed out, and the oil producers are starting to panic.

I’ll trade my SUV for Anything with higher MPG

An exceptional uptrend during the oil crisis but before the financial meltdown was people fleeing large SUVs and low mpg cars to buy economy cars and gas-sipping hybrids.  In those cases demand may still be ahead of artificially limited supply.  New models like the Chevrolet Cobalt XFE are great examples of cars the are focused on getting every MPG possible but that are still very inexpensive.  Inexpensive matters when you are building a case for buying a car in order to save gas, since otherwise you spend all your gas savings on the price of the car!  A Cobalt XFE at $16,330 can be as much as US$10K less than a Toyota Prius Touring model at $27K for example depending on options.  That difference can pay for a lot of gas.

Financial Meltdown Consumers hold off on vehicle purchases

With the financial meltdown, Consumer demand for big ticket items (like new cars and trucks) is in free fall.  Meanwhile, credit availability is restricted somewhat; it is difficult to tell to what degree.  Yes, GMAC has said THEY are only lending money to people with a credit score above 700, but other banks and credit sources do not have as much exposure to the meltdown as GMAC does.  But making it difficult for people to buy things they were already reluctant to purchase due to financial market uncertainty does not help.

Keep Driving it ForeverUptick in Maintenance and Repairs, and Used Car Prices?

People are foregoing new cars and other large purchases for now, and continuing to drive their current vehicles.  What effect will that have on the markets?  Greater need for car maintenance and repairs.  Late model used cars for sale may become less plentiful as people continue to drive their cars, which will tend to move used car prices upward.

Lower New Vehicle Transaction Prices will have depressive effect on used car prices?

All the automotive manufacturers are shutting down production in an attempt to match flagging demand.  We should still expect to see incentives and ‘sales’ to try to bring in customers.  Generally, lower transaction prices in new cars tends to also lower used car pricing.  Why pay almost the same for a 3 year old model as I can buy a brand new car for?  So we have off-setting trends — used car values tending to push up as more people drive their cars longer and fewer sell them and get new cars tends to drive used car prices up.   Lowering demand and transaction prices for new cars tends to drive used car prices down.

Conclusion

What will happen?  I think serviceable used cars, especially economy models, will continue to hold their value strongly.  Models which have tended historically to have higher depreciation rates already will see worse depreciation and even lower used car values going forward.

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