Prices on small cars expected to decline

Photo by: Lenny Ignelzi

ASSOCIATED PRESS

Photo

In this July 11, 2011 photo, Wayne B. Meyer, President of Sunroad Automotive in San Diego, leans on a car at his Chula Vista, Calif. dealership where a diminished inventory for small cars is evident in his near empty lot. (AP Photo/Lenny Ignelzi)

Associated Press

ANN ARBOR, Mich.

Thinking of trading in the clunker in your garage for something that gets better gas mileage? Wait a little longer.

Small-car prices, which have set record highs this year, are expected to come down this fall.

Lower gas prices will make people comfortable driving something bigger. Honda and Toyota, which were hurt by the Japan earthquake, will crank up production of small cars. And Japan and Detroit will offer big discounts on smaller models as their lots fill up.

The average new compact car, which cost a record $20,500 in June, should fall to about $19,300 by the end of the year. The average used compact car should fall from a record $11,300 to about $9,600 over the same time, according to figures compiled by the Kelley Blue Book auto- pricing service.

Small-car prices should start falling in September and accelerate through the end of the year.

“Values for these vehicles just rose too quickly and got to a level that was really unsustainable,” says Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book.

Here are factors pushing down small-car prices:

Small-car surplus: Carmakers such as Honda and Toyota are boosting production after Japan’s March 11 earthquake and tsunami. The disaster essentially shut down that nation’s auto industry and slowed Japanese-brand factories in North America. With factories returning to normal, American dealers will have more Civics, Corollas and Priuses. And they won’t have to put small-car buyers on waiting lists, like they did this spring.

In fact, some will have more small cars than they need says George Davis, general manager of a Honda dealership in Ann Arbor, Mich.

“One minute, they’re going to look out the window and see 50 cars. Two weeks later, they’ll see 300. Panic sets in,” he says. “They pay interest on these cars, and they’ll have to discount.”

Deals: Honda and Toyota dealers will increase rebates, low-interest financing and other promotions, Gutierrez predicts. “GM and Ford will be right behind them, and Hyundai as well,” he says.

Automakers say they won’t cut prices even if Toyota and Honda come out with bigger incentives. Instead, they want to sell cars on quality, styling and features.

Dealers and analysts are skeptical, though, saying that once Honda and Toyota restock, prices will fall as rivals try to win customers who have to replace their clunkers.