Prices of smaller cars expected to drop in fall

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 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," said Alec Gutierrez, manager of vehicle valuation for the Kelley Blue Book car pricing service.

Here are factors pushing down small-car prices:

* Small-car surplus: Carmakers such as Honda and Toyota are boosting production following 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, said 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 said. "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 said.

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. The average age of a car in the U.S. is now 10.6 years, up more than a full year from 2008, according to the Polk research firm.

* Lower gas prices: Gas prices are down 31 cents from their peak of $3.98 a gallon in May, and although small-car demand is still strong, buyers have started to shift to larger vehicles. Compact and subcompact sales fell to just under 195,000 last month, down from 238,000 in March, according to Autodata Corp.

There's now a shortage of cars at Pacific Honda near San Diego. But they'll be a surplus after July and buyers will see deals, said Wayne Meyer, president of the chain that owns the dealership. Pacific Honda has about 38 vehicles in stock instead of the usual 350.

"There's going to be so much car availability," Meyer said. Automakers "are going to be defending market share they gained or regaining market share they lost."