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BLUE BOOK Market Report MARCH 2011 $3.30

BLUE BOOK Market Report MARCH 2011 $3.30

www.kbb.com In This Issue: MARKET ANALYSIS Gas Prices Spark Demand for Fuel-Efficient Vehicles; High-End BLUE BOOK Luxury Takes a Backseat; More MARCH RESIDUAL ANALYSIS 2011 Peak Fuel Prices Are Not Market Report Sustainable Analysis from Kelley Blue Book’s Analytic Insights Team LATEST HOT USED- REPORT Annual Subscription Value: $500 Kelley Blue Book Public Relations Contacts: Robyn Eagles | Director, Public Relations Joanna Pinkham | Senior Public Relations Manager Brenna Robinson | Public Relations Manager 949.268.3049 | [email protected] 949.268.3079 | [email protected] 949.267.4781 | [email protected]

MARKET ANALYSIS: Lack of Good-Condition Vehicle Supply Continues to Drive Market Strength - Alec Gutierrez, manager of vehicle valuation, Kelley Blue Book long with the New Year came increased sales and strength in the marketplace, providing the automotive industry with hope as the market moves toward a slow recovery. This strength continued into February with supply remaining a concern A among dealers. Overall used-car values rose 0.8 percent for the month, building upon the solid gains reported in January. Since the beginning of the year, values have increased 1.4 percent, driven predominantly by an overall lack of supply in good- condition, late-model vehicles.

As dealers returned to auction in January after a seasonal fourth- YTD Change by Segment quarter lull, they bid up auction values in an effort to stock up (MY08-10) inventory with vehicles consumers’ desire most. In the past, dealers Hybrid 6.0% went to auction with plans to fully replenish their inventory, buying Hybrid 4.7% large quantities of vehicles to ensure a full lot. Dealers were less Compact Crossover 4.5% concerned with days to turn and focused only on having a variety 4.3% Mid-Size Crossover 4.3% of vehicles in inventory to satisfy consumer preferences. In today’s Subcompact Car 3.4% environment, dealers are reluctant to buy vehicles that they won’t be Mid-Size Car 3.3% able to sell within 30-45 days. In recent conversations with dealers, Hybrid Sport Utility 3.0% Kelley Blue Book increasingly is hearing that dealers are only buying Hybrid Car 2.5% vehicles that they have customers lined up to buy. With so much Full-Size Car 2.2% information available online, consumers are able to scour the Web Luxury Crossover 2.0% to find a vehicle that best fits their needs. With this in mind, dealers Luxury Sport Utility 2.0% need to be cognizant of changing consumer demands, ensuring they Full-Size Crossover 1.9% are buying the right at the right time. Mid-Size Sport Utility 1.8% Full-Size Pickup Truck 1.6% A dealer that offers affordable, fuel-efficient vehicles do well with Full-Size Sport Utility 1.5% today’s rising gas prices. The dealers that will be most successful are 0.0% those who purchased fuel-efficient vehicles during the first month Mid-Size Pickup Truck -0.1% of this year, as well as those who educate consumers with the fact -0.5% -0.7% that you don’t need to give up interior space to get more miles per -1.1% gallon. Drivers do not need to move toward small, sub-compact models to achieve fuel efficiency, as there are several efficient full-size -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% car and crossover options. Moving forward, dealers must consider the changing economic conditions in their market and the potential impact they have on the purchasing habits of consumers. The information age can be a double-edged sword for dealers, providing them with market insights never before available, while simultaneously providing consumers with the information they need to be as informed as the most seasoned industry veterans. The dealers that will remain in business in the long run are those who are able to utilize all of the resources available so that they can better predict the future needs of consumers, as opposed to the current needs of today. MARKET ANALYSIS: continued Gas Prices Spark Demand for Fuel-Efficient Vehicles any are wondering just how high gas prices will rise, and how long they will remain inflated. Retail gasoline prices started the year at $3.07 and currently sit at $3.52 nationally. While gas prices have been on the rise around the United States, M depending on where you live it could be costing you more than in other parts of the country. Most notably, West Coast gas prices are significantly higher than the rest of the country. In fact, according to Kelley Blue Book field analysts, it has gotten to a point where fuel-efficient vehicles are being shipped to the West due to higher demand relative to other parts of the country. This could be a short-term phenomenon as gas prices in the rest of the country continue to creep up and demand spreads elsewhere.

Retail Gasoline Prices by Region Gas Prices by City as of 3/7/2011 $5.00 National East Coast Gulf Coast $4.00 $3.92 $3.89 Midwest West Coast $4.50 $3.90 $3.80 $4.00 $3.68 $3.70 $3.64 $3.65 $3.50 $3.60 $3.55 $3.48 $3.00 $3.50 $3.46 $3.38 $2.50 $3.40 $3.30 $3.30 $2.00 $3.20 $1.50 Gas Prices as of 3/07/2011 $3.10 National East Coast Gulf Coast Midwest West Coast $1.00 $3.52 $3.50 $3.40 $3.49 $3.77 $3.00 $2.90 San Los Chicago Seattle Miami New York Cleveland Boston Houston Denver Jul 11, 2005 Jul 24, 2006 Jul 12, 2010 Jan 03, 2005 Jan 16, 2006 Jan 29, 2007 Jan 04, 2010 Jan 17, 2011 Jun 04, 2007 Jun 16, 2008 Jun 29, 2009 Oct 08, 2007 Oct 20, 2008 Apr 02, 2007 Apr 14, 2008 Apr 27, 2009 Sep 12, 2005 Sep 25, 2006 Feb 11, 2008 Feb 23, 2009 Sep 13, 2010 Dec 10, 2007 Dec 22, 2008 Aug 06, 2007 Aug 18, 2008 Aug 31, 2009 Nov 14, 2005 Nov 27, 2006 Nov 02, 2009 Nov 15, 2010 Mar 07, 2005 Mar 20, 2006 Mar 08, 2010

May 09, 2005 May 22, 2006 May 10, 2010 Francisco Angeles City Source: EIA Source: EIA

Instability in the Middle East has sparked fears of production halts, contributing to the rapid rise in fuel prices. According to Libya’s National Oil Corporation Chairman Shokri Ghanem, the country’s oil production has been cut in half. Libya currently is the world’s 15th largest crude exporter, producing 1.2 million barrels per day. Although Libya’s oil production does not account for a significant portion of global production, we should not discount the impact of a prolonged decline in the country’s production. If there is a bright side to the situation, a decline in Libya’s production could be absorbed by Saudi Arabia. Saudi Arabia currently produces eight million barrels per day with a capacity of up to 12.5 million barrels of oil per day.

Unrest in Libya has not yet drastically impacted global supply; however, traders fear that the instability in the region could spread to Organization of the Petroleum Exporting Countries (OPEC) heavyweights such as Iran and Saudi Arabia. This is the key

to rising gas prices. If this unrest does not spread into Saudi Arabia or Iran, then the current rise in gas pricesGas Pricesmay as of 3/07/2011be short- National East Coast Gulf Coast Midwest West Coast lived. Global supply and demand remain relatively balanced, so in the long run fuel prices could come down.$3.52 In$3.50 the short$3.40 $3.49 $3.77 run, consumers should prepare to continue to pay a premium at the pump, at least through 2011. The Energy Information Administration’s (EIA) long-term forecast projects gas prices to remain around $3.56 per gallon nationally through 2011, with a 25 percent chance of gas hitting $4.00 per gallon in the summer. Until the uncertainty in the Middle East begins to subside, consumers should expect to continue to live with high gas prices.

2 BLUE BOOK Market Report MARCH 2011 $3.30

MARKET ANALYSIS: continued Gas Prices Spark Demand for Fuel-Efficient Vehicles (Continued)

U.S. Imports of Crude Oil vs. Ending Stocks 1,200,000 16,000

14,000 1,000,000 12,000 800,000 10,000

600,000 8,000

6,000 400,000 4,000 Gas Prices as of 3/07/2011 200,000 National East Coast Gulf Coast Midwest West Coast 2,000 $3.52 $3.50 $3.40 $3.49 $3.77 Weekly U.S. Ending Stocks of Crude Oil U.S. Ending Stocks of Crude Oil (thousands of barrels)of (thousands Oil Crude of Stocks Ending U.S.

Weekly U.S. Net Crude Oil Imports per day) barrelsof (thousands Imports Crude Oil Net U.S. 0 0 Jul 26, 1996 Jul 10, 1998 Jan 03, 1992 Jan 31, 2003 Jan 14, 2005 Jun 23, 2000 Jun 07, 2002 Oct 29, 1999 Oct 12, 2001 Apr 23, 1993 Apr 07, 1995 Apr 18, 2008 Apr 02, 2010 Feb 16, 2001 Sep 26, 2003 Sep 09, 2005 Dec 17, 1993 Dec 01, 1995 Dec 29, 2006 Dec 12, 2008 Aug 28, 1992 Aug 12, 1994 Aug 24, 2007 Aug 07, 2009 Nov 14, 1997 Nov 26, 2010 Mar 21, 1997 Mar 05, 1999 May 21, 2004 May 05, 2006 Source: EIA

t this time, Kelley Blue Book recommends that consumers who do not absolutely need to replace a vehicle wait for gas prices to come back down. With gas prices on the rise, we anticipate fuel-efficient vehicle values to increase, while values for A trucks and SUVs are expected to decline. The rate of gas price appreciation will strongly correlate with the degree to which used-car values fluctuate. Kelley Blue Book suggests that dealers use this time to stock up on trucks and SUVs if this is what they traditionally sell. Once gas prices drop, they can expect consumers to return to these spacious family haulers.

In 2008, gas prices hit $4.00 per gallon and many consumers behaved irrationally by selling their trucks and SUVs in a panic, taking a significant loss only to spend a premium for a new or used fuel-efficient car. After it became apparent that this appreciation was largely driven by speculation rather than market fundamentals, gas prices came down sharply and values eventually leveled off. Consumers should be cautious as they decide whether or not to sell a vehicle for something more fuel efficient. Gas prices will remain high until the situation in the Middle East is resolved, but consumers should only sell if their budget forces them to do so.

The trouble is that many consumers are in difficult financial situations. According to a recent Consumer Sentiment Survey of new- and used-car shoppers on kbb.com conducted by Kelley Blue Book Market Intelligence, 23 percent of respondents with a poor economic situation planned to buy a vehicle within one month. Of those respondents, 21 percent reported purchasing a vehicle with better fuel economy as the main reason for needing to purchase a new vehicle. If possible, shoppers should wait until after Summer, when gas prices typically drop. Hopefully, the troubles in the Middle East will have subsided by then.

MARCH 2011 BLUE BOOK Market Report 3 MARKET ANALYSIS: continued Affordable, Gas-Sipping Models Resurge from Relatively Flat 2010 ising fuel prices and uncertain economic conditions drive values of gas-sipping, affordable vehicles higher. While values have been strong for nearly all segments tracked by Kelley Blue Book, values for fuel-efficient models have truly outperformed R them all. Gas prices rose a substantial 13.3 percent during the fourth quarter of 2010 and already have climbed 15.3 percent since the beginning of the year.

Retail Gas Price Trend by Quarter Values for hybrid vehicles were relatively flat through much 18% of 2010; however, as gas prices have increased aggressively 16% 15.3% during the past several months, we started to see values for 14% 13.3% hybrids increase. Hybrid crossover values are up 5 percent 12% year-to-date. The top performers for this segment include 10% Tribute Hybrid (+9.6 percent), Mariner 8% 7.3% Hybrid (+8.3 percent), Highlander Hybrid (+7.4 6% percent) and Hybrid (+5.4 percent). Hybrid 4% cars also increased by 1.7 percent since the beginning of the 2% year with support from Civic Hybrid (+5.1 percent) 0% and (+4.6 percent). -2% -1.5% -2.3% -4% In addition to strength in hybrid vehicles, more traditional Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 * *Q1 2011 covers January - March 7, 2011 Source: EIA fuel-efficient models also have performed well, likely due to their low cost of entry. According to the aforementioned Consumer Sentiment Survey conducted by Kelley Blue Book Market Intelligence, 27 percent of all respondents indicated that their economic situation is ‘poor.’ This is a 7 percentage point increase from January. Rising gas prices have added to consumers’ financial concerns, and as a result, they have turned to the most affordable, gas-sipping vehicles on the road. For this reason, vehicles traditionally seen mostly in rental car fleets such as PT Cruiser, Aveo and Rio currently are performing very well.

The compact car segment is up 3.5 percent year-to-date with strength in the Chrysler PT Cruiser (+9.3 percent), Caliber (+8.5 percent) and (+6.3 percent). Subcompact cars increased 2.3 percent with help from the (+8.6 percent), G3 (+7.3 percent), (+6.3 percent) and (+4.2 percent). Gas Prices as of 3/07/2011 National East Coast Gulf Coast Midwest West Coast $3.52 $3.50 $3.40 $3.49 $3.77 Crossovers also have performed well. Now that America’s love affair with the SUV has long since passed, crossovers seem to have stepped up to fill this void in the market. Today, the most fuel-efficient crossovers are reporting the best numbers, given today’s increased gas prices. Compact crossovers rose 4.7 percent since the beginning of the year, with up 12.5 percent, followed by at 9.7 percent, Ford Escape at 8.2 percent and Jeep Patriot at 7.1 percent. Kelley Blue Book expects values for fuel-efficient cars and crossovers to continue to rise as gas prices remain high. For consumers in the market for one of these vehicles, it may be best to wait until the third quarter of the year or later, assuming gas prices will become steadier at some point.

4 BLUE BOOK Market Report MARCH 2011 MARKET ANALYSIS: continued High-End Luxury Takes a Backseat ccording to Housing Pulse, distressed sales accounted for 49.6 percent of all U.S. home sales in January 2011. Foreclosures A remain high among both prime and subprime loans. Past-due payments also remain high. % of Loans in Foreclosure Remain a Concern % of Past Due Mortgages Still High 18 30 All Loans in Foreclosure All Loans Past Due Subprime Loans Past Due 16 Subprime Loans in Foreclosure 25 14 20 12

10 15 8 10 6

4 5

2 0 0 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 Source: Economy.com (Mortgage Banker's Association Survey) 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 Source: Economy.com (Mortgage Banker's Association Survey)

In addition, employment remains challenged. The unemployment rate is down to 8.9 percent; however, average duration of unemployment is historically high. With this as a primary factor, consumer confidence remains low, although it has rebounded some in the past few months.

Average Duration of Unemployment Moves Up Again Consumer Confidence Improving Slightly 40 160

35 140

30 120

25 100

20 80

15 60 10 40 5 20 0 0 82 99 70 79 87 96 04 72 81 89 98 06 84 85 01 02 78 95 71 88 05 74 91 08 75 77 92 94 09 11 ------90 93 96 99 02 05 08 91 94 97 00 03 06 09 92 95 98 01 04 07 10 90 93 96 99 02 05 08 11 ------Jul Jul Jan Jan Jan Jun Jun Jun Oct Oct Apr Apr Apr Sep Feb Sep Feb Sep Feb Dec Dec Aug Aug Nov Nov Nov Mar Mar May May Jul Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr Source: Economy.com (The Conference Board) Source: Economy.com (BCI)

Challenges on the homefront limit the strength of high-end luxury vehicles. With many homeowners facing foreclosure and many other Americans struggling to find work, purchases of luxury goods remain low. The housing boom allowed many homeowners to cash out equity of their homes to finance the purchase of expensive, impractical luxury vehicles. Now that the housing bubble has long since burst, demand for this segment has waned.

Used luxury car values have lagged the overall market, down 1.1 percent year-to-date, with the most expensive luxury vehicles struggling more than others, while the rest of the market strengthened. In the last month, Cadillac DTS is down 8.2 percent, Lexus LS dropped 3.5 percent and Audi A8 slumped 3 percent. With so much uncertainty in employment and the housing market, luxury vehicles will continue to lag the market.

This commentary focuses on model years 2008-2010. The statements set forth in this publication are the opinions of the authors and are subject to change without notice. This publication has been prepared for informational purposes only. Kelley Blue Book assumes no responsibility for errors or omissions.

MARCH 2011 BLUE BOOK Market Report 5 RESIDUAL ANALYSIS: Peak Fuel Prices Are Not Sustainable - Eric Ibara, director of residual value consulting, Kelley Blue Book ith fuel prices back in the headlines, it is easy to become lost in the hysteria over the pinch to our pocketbooks. After all, it was only three years ago when prices shot up unexpectedly, and we remember the pain that followed. However, like W most commodities sold in the free world, the price of fuel is subject to the law of supply and demand and therefore is self- correcting. As demand for fuel rises, prices go up. As profits rise, technology can be brought in to extract hard-to-reach oil that only becomes feasible once payoffs are greater. This increases the supply of oil causing prices to ease. Simultaneously, the run-up in fuel price causes consumers to cut back on discretionary spending and the economy swoons. This reduces the demand for fuel, causing oil inventories to build, and eventually prices drop. In fact, this is what happened in 2008 as demand for gas dropped after prices topped $4 per gallon, causing prices to subsequently fall by 50 percent.

Developments since the last fuel spike have brought more fuel-efficient vehicles to market. Manufacturers diligently developed new vehicles to meet the more stringent CAFE requirements proposed for 2016. Early examples include muscle cars that achieve 30 miles per gallon, while delivering more than 300 horsepower and also are fun to drive. A number of compact sedans with conventional gas engines now boast 40 miles per gallon, a feat that was only possible with expensive hybrid technology just a few years ago. Electric vehicles (EVs) and plug-in hybrids promise even greater fuel efficiencies. At the commercial level, many buses and trucks in urban areas are powered by (of which we have an abundant supply in the United States). Over time, these developments will contribute to a reduction of the amount of gasoline consumed in this country. As the demand for fuel decreases, the ability of gas suppliers to raise prices should decline. This is a day we surely all welcome.

What does all of this mean for residual values? Higher gas prices are not sustainable in the long run in a weak economy. Kelley Blue Book also recognizes that manufacturers are ...CONSUMER APPETITES introducing new and refreshed vehicles into the subcompact, compact and hybrid categories. FOR THESE FUEL- A large number of EVs and plug-in hybrids also are scheduled to hit the market during the next few years. With gas prices currently under $4 per gallon, Kelley Blue Book projects EFFICIENT VEHICLES WILL that consumer appetites for these fuel-efficient vehicles will not match the greater supply of NOT MATCH THE GREATER vehicles entering the market. This means intense competition in pricing, potentially greater volume in rental service and more generous incentives to consumers. With all of these SUPPLY OF VEHICLES factors, it should be a buyers’ market for small, fuel-sipping vehicles, which generally means ENTERING THE MARKET. lower resale values. - ERIC IBARA

It also is important to examine the cost-benefit analysis that will be applied to these new technologies. Today, EVs cost thousands of dollars more than a comparable conventional gas-powered vehicle, even after a $7,500 federal tax credit. Early adopters either feel strongly against driving a vehicle that emits carbon emissions or want to be the first on the block to drive an EV. In order for these vehicles to become mainstream products, they also will have to appeal to buyers from a financial perspective. However, it could be possible that the fall-off in demand for gasoline in the future will be significant enough to cause gas prices to drop. In this environment, EVs may have to survive a cost-benefit analysis with gas priced at $3 per gallon rather than $5 per gallon. That will be a tall order.

6 BLUE BOOK Market Report MARCH 2011 HOT USED-CAR REPORT: Minivan, Full-Size Car Segments Spur Consumer Interest as Values Drops Kelley Blue Book’s Hot Used-Car Report captures monthly used-car shopper activity on kbb.com, including a list of the top and bottom movers in the same time period. Results are provided by the Kelley Blue Book Market Intelligence Team, in an effort to help dealers better understand which used vehicles consumers are looking at most each month.

he top-performing segment in used-car traffic for February was , with a 7.7 percent month-over-month jump in kbb.com share of shopper interest. This rise is attributed to softening market values and increasing interest in the 2008 T Dodge Caravan, which experienced an upward shift in share of 27.9 percent. Another segment that has gained in popularity this past month is full-size cars. This segment’s increase is spurred by the 2006 Lincoln Town Car, which increased 40.3 percent in traffic share. “The Town Car’s popularity could have to do with March 2011 being the final production month for the Town Car L trim, while the overall Town Car is expected to cease production in August 2011,” said Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book. “With this increase in trade-in traffic, perhaps owners of the current Town Car are thinking about trading in their vehicle to purchase one of the final Town Cars that will ever be produced.” These two segments typically do not generate a lot of demand; however, because they currently are the top-performing used-car segments on kbb.com, it could bode well for any inventory of these vehicles currently on the dealership lot.

Monthly Used-Car Shopping Activity Growth Monthly Used-Car Shopping Activity Growth Top/Bottom 10 Models Segments

2006 LINCOLN TOWN CAR Minivan 7.7% 40.3% 2006 DODGE DAKOTA CLUB CAB Full-Size Car 4.3% 37.7%

Subcompact Car 2.8% 2008 NEW BEETLE 34.8%

Sports Car 2.5% 2007 33.9%

Van 2.3% 2008 REGULAR CAB 32.1%

Mid-Size Pickup Truck 2.0% 2007 30.7%

Mid-Size Car 1.2% 2008 SATURN OUTLOOK 30.1%

Compact Car 0.9% 2008 DODGE GRAND CARAVAN PASSENGER 27.9%

Mid-Size Sport Utility 0.4% 2005 MAZDA TRIBUTE 27.7%

Luxury Car -1.2% 2008 27.6%

Mid-Size Crossover -1.3% 2006 2500 HD CREW CAB -20.0%

Full-Size Sport Utility -2.6% 2008 -20.5%

Full-Size Pickup Truck -2.8% 2009 MAZDA MAZDA5 -20.7%

Compact Crossover -2.8% 2006 -20.7%

Full-Size Crossover -3.8% 2007 LINCOLN NAVIGATOR -21.7%

Hybrid Crossover -4.7% 2005 DOUBLE CAB -22.5%

Hybrid Sport Utility -4.9% 2007 LEXUS RX -23.1%

Luxury Sport Utility -5.1% 2007 JEEP PATRIOT -23.3%

Luxury Crossover -5.5% 2007 VOLVO XC90 -23.9%

Hybrid Car -6.2% 2009 1500 -25.4%

-20% -15% -10% -5% 0% 5% 10% -60% -30% 0% 30% 60% % Change in Share Month-Over-Month % Change in Share Month-Over-Month Information based on 2009 to 2005 model-year vehicles Information based on 2009 to 2005 model-year vehicles

About Kelley Blue Book (www.kbb.com) Founded in 1926, Kelley Blue Book, The Trusted Resource®, is the only vehicle valuation and information source trusted and relied upon by both consum- ers and the industry. Each week the company provides the most market-reflective values in the industry on its top-rated website www.kbb.com, including its famous Blue Book® Trade-In and Retail Values, and Fair Purchase Price, which reports what others are paying for new cars this week. The company also provides vehicle pricing and values through various products and services available to car dealers, auto manufacturers, finance and insurance com- panies, as well as governmental agencies. Kbb.com is a leading provider of new car prices, used car values, car reviews, new cars for sale, used cars for sale and car dealer locations. Kelley Blue Book Co., Inc., is a wholly owned subsidiary of AutoTrader.com.

MARCH 2011 BLUE BOOK Market Report 7

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