• by Karl Greenberg , May 5, 2008

New vehicle sales were off last month, and the reasons extend beyond the immediate effects of higher gas prices and less spending money. During April, the first month in decades in which cars outsold trucks and SUVs, new-vehicle sales were off nearly 7% versus last year. It was the worst month in over a decade.

Big three sales dropped 16.8%, with Chrysler's sales dropping 23.5%. As consumers fled guzzlers, demand for passenger cars rose 5.2%, while truck and SUV sales dropped 17.4%.

The problem is exacerbated by a glut of larger pre-owned vehicles at auction lots, where dealers go to buy and sell cars and trucks. High gasoline prices have lowered their values, says Paul Taylor, chief economist at the McLean, Va.-based National Automobile Dealers Association (NADA). "The market says those vehicles aren't worth as much as they normally would be in a healthy market," he says.

What's happened, says Taylor, is that the normal early-spring respite in which vehicles--particularly large ones--increase in value as energy costs take a breather isn't happening. It's the equivalent of a fused vertebra between winter and summer, eliminating the cushion the auto economy gets when fuel-oil heating prices ease and summer driving season is yet to come.

"For the past three spring seasons, we have seen moderation in gasoline prices. But this year, gasoline prices have stayed stubbornly high as global crude prices have risen," he explains.

Per AuctionNet--a wholesale data joint program of NADA and the National Auto Auction Association--when gasoline was around $1.75 a gallon three years ago, used truck prices at wholesale had peaked at an average of $16,500. Now, with gasoline over $3.50, the average is $14,000. By contrast, higher fuel prices help boost small-car values. Wholesale used passenger car prices have actually increased since January, to around $13,000.

"We see crossover utility vehicles--smaller ones that get good mileage--generally performing better than full-sized, body-on-frame SUVs, which are falling in price," says Taylor. "And this is new in the sense that generally the prices of SUVs have recovered by the end of March."

Diane Swonk, chief analyst at Mesirow Financial in Chicago, says those numbers are putting yet another set of brake pads on sales of new SUVs and trucks. "Lower used-car values are making it more expensive to buy a new car because of lower trade-in rates," she says. "It is primarily an SUV and truck problem, as demand for small cars is on the rise because of higher gas prices. What it is doing is trapping lower- and middle-income families in low-fuel-efficiency cars at a time they can afford it least."

Says Taylor: "It adds up to a couple of thousand dollars in trade-in equity a customer doesn't have, and with banks more cautious, less trade-in equity becomes problematic."

Used-vehicle values directly affect dealers in another way. While new-car sales--which made dealers an average of $250,000 per year in 1999--now cost dealers money, profit from used-car sales and service and parts means a lot more. They earn dealers on average $210,000 and $340,000 in net profit, respectively. And the service and parts business is suffering as new-vehicle quality has improved.

Taylor says the million-dollar question now is whether the market will at some point in the near future revert to its customary trend of lower gasoline prices in real dollars, or whether the party is over, permanently. "The question is whether this is the inflection point where what we have known for at least 40 years is going to essentially change."