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Market Madness Hits Used Cars.

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Market Madness Hits Used Cars.

New-car shoppers, turning away from big SUVs in favor of fuel-efficient models, aren't the only ones affected by the escalating cost of gasoline. Zooming fuel prices in early 2008 also turned the used-car market topsy-turvy. Vehicles that were formerly good values began turning into pariahs. Previously unpopular models, seldom seen on shopping lists, abruptly sounded a lot more appealing.

Value Questions.

Which models now make the most sense? Which ones are best shunned? These questions were never easy to answer. Today, with fuel prices remaining uncertain, what the near future holds for used cars is even more mysterious. Big SUVs and pickups have been sagging fast in value, making them comparative bargains. But only if you're prepared to fill their tanks for the next few years, and withstand scornful glares from fuel-efficiency advocates.

However, that's only half of the story. Check any popular guidebook to used car valuations, and you'll find a growing number of year-old models that retail for nearly as much as-or even more than-when they were new. Even two-year-olds sometimes approach their initial new-car price.

Investigate late-model MINI Coopers, for example, and you're likely to find that they're right around the Manufacturers Suggested Retail Price (MSRP) for a brand-new one-and quite possibly higher. That's because the MINI has one of the highest residual values in the industry. Residual values estimate what a vehicle is likely to be worth at the end of a lease term. But they're also valuable indicators of resale value: how much a secondhand version of a given model is likely to cost now.

Interested in an xB from Scion (Toyota's youth division)? Even the first-generation (2004-06) models are commanding lofty prices. Because of its delirious resale value, a 2006 xB can actually cost almost as much as it did when new. Valuations of second-generation xBs also defy logic.

Close-to-new prices may be asked for late-model examples of Honda's subcompact Fit, Subaru's Impreza, and the Toyota Prius hybrid. BMW's 3 Series depreciates slowly, and the recently launched 1 Series coupe and convertible cling even closer to their new-car prices. So do the Infiniti G370 coupe, Volkswagen's R32, and certain Jeep Wranglers.

How can this be? Elementary economics informs us that except under unusual circumstances, the value of a commodity declines, not increases, as time goes by. As a vehicle ages, its perceived worth diminishes on a steady, though not necessarily straight, course.

Popularity and Demand.

Not always, though. Initial popularity and "supply and demand" dictate valuations that veer away from the norm. Those MINIs cost outlandish sums because they're in high demand, and the supply is limited. Therefore, the person who absolutely must have a MINI or an xB can either wait for a new one to become available, or pay just about as much to drive home a used example right now.

Remember, too, that published new-car prices, provided for comparison purposes, may be misleading. Basic accessories, such as an automatic transmission, may have cost extra when the car was new, but aren't always reflected in the guidebook prices for secondhand models.

Ordinarily, automobiles have followed the economic rules. As was first described decades ago, the moment you drive a new vehicle away from the dealer's lot, it takes the first big hit of depreciation. A massive chunk of value disappears as it's transformed into a used car. After that initial jolt, depreciation proceeds at a more consistent pace. Except for collectible vehicles, which often gain value over the years, most automobiles depreciate in a normal pattern.

At the other end of today's spectrum, rising fuel prices have made big SUVs-especially domestic models-sink fast in value. So, secondhand prices are far below what they would have been under more normal conditions.

Through the summer of 2008, guidebooks have been adjusting their figures up for small cars and way down for full-size SUVs. Automotive Lease Guide (ALG), considered by many to be the final word in residual values, announced dramatic shifts for their next edition. Anticipated worth of a Honda Fit at age 3, for instance, escalated from 46 to 56 percent of its initial price. Chevrolet's subcompact Aveo rose more than 9 percentage points, and the Hyundai Accent gained 8.5 points in ALG's assessment. Ford's Expedition, on the other hand, declined by more than 12 percent in the late-summer ALG guide, followed closely by the Chevrolet Tahoe and Suburban.

Big and Small Surprises.

No one expected the consumer shift away from trucks to be so strong, said Tom Webb, chief economist for Manheim, a wholesale auction chain. Webb predicts that losses will continue into 2009. Because change is so rapid, Webb notes that real-world used-car prices are "ahead of the guidebook." For a careful shopper, that "can be advantageous;" but risky. No one knows how long the current trends will last.

Rapidly fluctuating values reflect "everything that's been happening," said Tom Kontos, chief economist for ADESA, another major auction chain. "Everybody's very gas-conscious." Declines for full-size SUV had been happening "for quite some time now, as gas priced have been rising," Kontos said: as far back as 2005, when gasoline was just over $2 a gallon. SUV price hikes occur "almost inversely to the rise in gas prices."

Kontos believes there's "still room for further deterioration," adding that "there is a limit that can be reached.... eventually, you reach a new equilibrium price." "Small cars are the bright spot," Kontos said. "Anything that has the aura of fuel economy" is doing better, price-wise. "Dealers are scrambling to restock their inventories" with small cars.

As summer began, Ricky Beggs, executive editor of the Black Book valuation guide, saw nothing to indicate a slowdown in price declines for big vehicles. Small cars "either held their value or were going up," he said. Even when 10 or 15 years old, small cars were suddenly commanding substantial prices.

Automotive News reported in August 2008 that some Toyota dealers had contacted Prius owners, offering to buy back the hybrids at their original sticker price. The Power Information Network noted that used Priuses sold for more than new ones in June. Now, that's resale value!

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