The upward trend of wholesale used-vehicle prices beginning in January “will intensify” through the rest of the year, says Tom Webb, Manheim chief economist

Manheim, which released a mid-year version of its annual Used Car Market Report this week, says used-vehicle values increased 5.8% through the first six months compared with year ago. Ironically, certified-pre-owned vehicle sales fell 7.8% during the same period.

The continued decline of new-vehicle sales has pushed wholesale prices higher, as dealers rely on auctions rather than trade-ins to fill their used-vehicle inventories.

However, dealers are finding late-model used inventory scarce at auctions, says Webb. The dearth is due mostly to rental companies – which push used vehicles through auctions – turning their inventory over at a much slower rate. Rental firms are expected to purchase 1.1 million new vehicles this year, down 25% from 2008, Manheim’s report says.

The drop in auction inventory “certainly has helped our online business,” Webb says. Manheim reports online purchases account for more than 22% of the company’s total vehicle sales.

Overall, the increase in used-vehicle values ultimately could drive up new-vehicle transaction prices, several experts say.

“Wouldn’t it be funny if the increase of value in used-vehicles pushed down the need for incentives and consumer rebates in new cars?” says David Ruggles, longtime automotive consultant and former dealer, citing supply and demand issues.

Meanwhile, the popular Car Allowance Rebate System (CARS), also known as “Cash-for-Clunkers,” does not appear to have negatively impacted used vehicle prices, Webb says.

Michael Jackson, Chairman and CEO of AutoNation Inc., the nation’s top selling dealer group, says it’s “fascinating” the government’s automotive stimulus plan has had no impact on the used-car business.

“That may seem counter-intuitive except if you look at this customer, this frugal, conservative customer that has stayed in his car so long,” he says. “It (the customer) is not really actively out there trading in the business day-to-day, it is really something new to the market.

“You can only trade the clunker to get the incentive on a new vehicle. So, it is a unique transaction that at this point is not affecting the rest of the business and we saw no impact on our used vehicle business in July whatsoever.”

Alec Gutierrez, senior analyst of vehicle valuation for Kelley Blue Book, says “Cash-for-Clunkers” might create a bubble that could deflate used-vehicle values once the funding ends.

“Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery,” he says. “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.

“If this bubble comes to pass, dealerships will end up with excess inventory of both new and used-vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down. Ultimately, there will be the possibility of a severe contraction in auto sales as soon as the “Cash-for-Clunkers” program runs out of funding.”

Independent, non-franchised used-car dealers also are concerned the government incentive program will hurt their businesses by scrapping significant numbers of lower-priced used vehicles.

In an email to Ward’s, one independent dealer writes, “As a small businessman, I find the “Cash-for-Clunkers” program doing harm to my own used-vehicle business. Further, it is surely destined to drive up the cost of cheaper-transportation vehicles for those families who cannot afford new or even moderately expensive used-vehicles.”

cbanks@wardsauto.com