Small Used Cars Are a Tough Sell as Gas Remains Cheap

Even with all the hype over small vehicles, many used-car buyers are gravitating toward the think-big mentality that characterized the auto market a few years ago.

Pre-owned small vehicles have taken the most significant hits in resale value on the market according to Kelley Blue Book. KBB reports that even the once much-desired, diminutive Smart ForTwo is struggling.

"It's part of a larger trend that's been happening all year," explained KBB senior market analyst Alec Gutierrez. "Some of the weakest segments are subcompact, compact and hybrids."

The downward trend in part reflects the fact that fuel prices have remained fairly stable and cheap. One gallon of regular gas sold for an average of $2.55 in the United States last Thursday, which indicates a decrease of eight cents from $2.63 one month ago and $3.86 one year ago according to AAA.

The trend also underscores the fact that Americans might not be so eager to accept the smaller new cars mandated by the federal government if their prices are higher than those of larger vehicles.

Last Tuesday, the Obama administration proposed mandating an industry average fuel economy of 35.5 mpg for new vehicles by 2016, a target that will result in additional small vehicles with pricier technology.

The prices of trucks and SUVs dropped so dramatically when gas prices exploded that these vehicles are now in high demand because of their bargain status, even as their prices recover.

"We do see big stuff moving," explains Steve Bussjaeger, the owner of the Star SuperCenter used car dealership in Glendale, California. "They got cheap. ... People are more price conscious than gas (price) conscious."

Adesa, a wholesale car auction house, reports that truck prices dropped 18 percent from August 2007 to August 2008. Ever since, they have gone up by 23 percent.

Compact vehicles, on the other hand, did just the opposite, increasing in value by an average of 17 percent from August 2007 to August 2008 and declining by 15 percent since that point. "Everything did a flip-flop," concludes Adesa's chief economist, Tom Kontos.

The lilliputian Smart ForTwo vehicle declined in value by 3.9 percent from July to August of 2009. Mr. Gutierrez adds, however, that the long-term depreciation of the Smart car is fairly modest, with most vehicles keeping 85 percent of their value since the manufacturer started delivering them one year ago.

"The entire industry has suffered this year. ... The small-car segment has been affected by this as well," explains Ken Kettenbeil, Smart USA spokesman. "However, we know that in time both situations will change. For this, and many other reasons, the trend will transition toward smaller vehicles."