An important warning issued by KBB

Below you’ll find a warning for all dealers issued by KBB. I concur with their position.

KBB: Artificial Sales Boom Could Lead to Used-Vehicle Value Bubble

IRVINE, Calif. – Due to Cash for Clunkers, Kelley Blue Book analysts are forecasting a likely bubble in used-car values.

Basically, with more than 250,000 vehicles leaving the used-vehicle supply, company analysts said this equates to a 1.6-percent reduction in the overall supply of used vehicles (based on sales of 16 million used vehicles in 2008).

When the Senate approves an additional $2 billion in funding (expected Thursday) to continue CARS, it could lead to an additional 500,000 used cars being removed from the overall used-vehicle supply. This would mean a 4.7-percent reduction in used-vehicle supply this year alone, officials stressed.

In response to this, dealers are apparently stocking up on used inventory in anticipation of low supply and high demand, which is driving up used-car prices in the short term and ultimately causing a bubble in values that will “seriously impact used-vehicle values when the Cash for Clunkers program ends,” KBB analysts reported Thursday.

Alec Gutierrez, senior analyst of vehicle valuation for KBB, pointed out, “Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery. As a result, dealers are going to auction to restock inventory, driving up used-car values.

“However, the effect of a supply reduction of this magnitude could have an immense impact on these values in the short term, exacerbating the already limited supply at auction,” he continued. “If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer steep discounts to remove surplus inventory, driving values down.

“Ultimately, there will be the possibility of severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding,” he added.

So, in essence, KBB officials believe that over the next three months, used-car values will continue to show strength as the Cash for Clunkers stimulus money continues to work its way through the automotive marketplace.

“Once the Cash for Clunkers money is exhausted, we expect used-car values to drop, offsetting the gains that came as a result of the artificial boom created by the stimulus money. So if the Cash for Clunkers money is depleted prior to three months from now, values will drop, if not, values will continue to strengthen,” Gutierrez told Auto Remarketing Thursday.

Will Residual Values be Impacted?

According to Eric Ibara, director of residual management for KBB, ordinarily, placing $4,500 incentives on vehicles would hurt residual values.

However, in the case of CARS, it is different, in that the program is temporary and only about one customer in 10 can qualify.

“We don’t know how many may go into a showroom for a new car and have a qualifying vehicle to get this voucher. The fact that it’s (the incentive) diluted and temporary leads us to conclude that in two to five years from now, little impact will be seen on residual values,” Ibara told Auto Remarketing Thursday.

Now the real million-dollar question is, “What will happen to sales after funding for CARS runs out?”

Ibara said KBB analysts are debating this. While he said they believe there has been some “pull-ahead happening right now,” analysts just don’t know how much. Is it 50 percent or 10 percent? He quite simply said that it’s too soon to predict.

What company officials could say, however, is that a Kelley Blue Book Market Intelligence study on the Cash for Clunkers program found that one in 10 new-vehicle shoppers indicated they are likely to purchase sooner as a result of the government-sponsored program.

In addition, 45 percent of consumers likely to participate in the program own a sedan, followed by SUV and crossover owners at 25 percent. Of that group, 37 percent plan to trade in their clunker for a sedan and 28 percent plan to buy an SUV or crossover.

The top brands being considered among study participants are Toyota, Ford, Honda and Chevrolet.

The study was fielded among 517 in-market new-car shoppers on Kelley Blue Book’s kbb.com from July 10-17.