U.S. gasoline prices recently topped $3 a gallon for the first time since October 2008. That’s up almost 45 cents from a year ago. If this trend continues and history repeats itself, this could mean a drop in SUV sales and reduced trade-in values at dealerships.
I was still working as Internet Manager for a major car dealer the last time we went through this. It was the beginning of 2008 and gas prices were about what they are now. Through the first half of that year, retail prices rose to just over $4 a gallon. The increase was so fast and dramatic, it had a devastating effect on the economy in general and on the auto industry in particular.
New and used vehicle sales were hit hard. However, sales of large SUVs were affected more than any other vehicle, and their resale values dropped like a rock. Values went down so fast that many car dealers didn’t react quickly enough. I saw cases where dealers thought they were playing it safe by massively discounting the trade-in value offered to their customers for large SUVs. But by the time traded-in vehicles made it to wholesale auctions, prices fell so much that the dealers ended up losing thousands of dollars on each vehicle.
What the Future Holds
At the moment, I don’t expect a large drop in price for SUVs in the short term, as long as gas prices don’t shoot up too sharply. The recent rise in retail gasoline prices has been slow and steady and has not induced panic as it did a few years ago. I’ve asked a few friends who continue to work in the used car industry, and although they are concerned about gas prices affecting SUV values, it hasn’t happened yet. They cautioned me, however, that they expect SUV prices—especially prices for the larger vehicles—to begin to go down if gas prices increase from their current level.
One reason all used car prices continue to remain steady is the overall tight market. Cash for Clunkers pulled 700,000 used cars out of the market. Then the economic downturn reduced new car sales, which limited the number of cars traded in. Trade-ins account for a sizeable number of vehicles that dealerships offer for resale.
A used car manager recently told me, “It’s supply and demand. There is no supply, and demand continues to be high.” He went on to say, “In this market, any vehicle that’s in decent condition will fetch a very good price, including trucks and SUVs.”
My experience tells me that if gas prices continue to increase there will probably be, at a minimum, a natural shift in how consumers select the SUVs they want to purchase. For example, a Ford buyer may decide to buy a Ford Escape instead of the larger Explorer or Expedition. A Toyota buyer may choose the more fuel-efficient RAV4 rather than the Highlander or Sequoia. And so on.
What does this mean for your situation? If you’re holding onto an older, large SUV, expect its value to go down as gas prices increase. However, smaller SUVs like the Ford Escape, RAV4, Honda’s CR-V, or the Nissan Rogue will see an increase in demand that, at a minimum, should put the brakes on any decrease in value within this size range. SUVs are here to stay. They provide a functionality that sedans or hatchbacks can’t match. When the price of gas rises, smaller SUVs become the rage.
If the average retail price of gasoline in the U.S. drops back below $3 a gallon, forget everything I just said; I wouldn’t expect a negative impact on SUV sales—until the next time gas prices do a steep climb. Choose accordingly and good luck.