New- and Used-Car Prices Remain Surprisingly Strong

Used-car sales and prices remain unexpectedly strong despite a weak U.S. economy, says Tom Webb, chief economist for Manheim Consulting.

“I am really surprise at the strength of retail used-car demand, even new-car demand, given the dismal economic environment,” he says, citing high unemployment rates and low domestic-product growth. “The demand really is noteworthy in light of that.”

Helping spur vehicle sales is a greater availability of car loans, he says during a conference call with analysts and journalists. “Securitization is back open. The cost of doing deals is reasonable. There are profits for lenders and attractive rates for consumers.”

Led by strong prices for compact cars, September's Manheim Used-Vehicle Value is 122.9, a 3.4% increase from a year ago. Prices remain strong because of high demand and relatively low supplies.

“What appears today to be abnormal pricing, is, in fact normal,” Webb says. “And what was once considered normal, was, in fact, a period of abnormality.”

A restructured auto industry that streamlined operations and reduced production now enjoys greater profits, he says. “I don't think we'll go back to the ways of the past.”

Auto makers are expected to sell 13 million units in the U.S. this year compared with 17 million about a decade ago. But that higher volume came at a price.

Comparing today with previous years, Webb says, “Is it better for dealers to have a 50-day stock or a 70-day? Is it better to sell 13 million cars at a profit or 17 million with losses?”

He adds, “Is it better to make high-quality cars at a profit or produce cheap ones just to meet CAFE (corporate average fuel economy) standards?”

Some analysts predict higher new-vehicle incentives in the coming months, but Webb doesn't anticipate a price war that will lower margins and residuals. Auto makers “are a lot smarter than before,” he says. “And I don't think big incentives will boost the sales rate, given the economic climate.”

Nor does he foresee used-car demand suffering from a potential wave of new-car incentives. “New-car and used-car sales are complementary.”