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Set to Crash?

There’s a lot of consternation in the market right now, but one analysis suggests all is well.
67 Shelby GT500

note: this article first appeared in the February 2006 issue of Collector Car Market Review.  C) Copyright 2005, VMR International, Inc.  All rights reserved.

The market for postwar collector cars, particularly premium muscle cars, is soaring. Values for many have doubled or tripled what they were just two or three years ago. This last year and a half has seen some spectacular gains. Is the "muscle bubble" ready to burst, or are these values here to stay?
For those that have been around this hobby for a while, there is the inevitable comparison to the late eighties. The markets are eerily similar: a sharp rise in values, increased participation beyond core enthusiasts, and a generally accepted belief that prime vintage automobiles are a good investment. But there are differences, too. Some positive, some not.

On the upside, the wild speculation of the eighties is not nearly so wild today. The speculation is there, but it is more measured and more calculated. It's not the wild abandon of the eighties. For one thing, a higher percentage of people in the market are in it for the right reasons -- enjoyment. Simple demographics are another factor that suggests future stability. The baby boomers are in their forties and fifties now, and a good percentage of them have lots of money to spend. As a group, they have more disposable income, by far, than any previous generation. It's one of the big reasons why we're seeing such a run up in muscle car prices right now -- these cars bring them back to their youth, and to many, that's priceless. They don't even care about the investment aspect of the purchase.

300SL Gullwing

But all is not rosy. The economy is uncertain and there's a general sense that it may stay this way for a while. And for many middle and lower middle income families, the future looks downright scary. It's tough to ignore or discount the fact that we are losing stable, well-paying middle class jobs. If they lose that extra purchasing power to buy that GTO or Mustang, you'll see values fall. We don't believe that there are enough wealthier consumers to make up the difference, and they tend to be interested in more exclusive cars, anyway.

There is a wild card in this equation. Debt. It's the proverbial 600lb. gorilla. Increasingly, collector cars are bought on credit-- mostly from credit cards and home equity lines. There was little of this in the past -- you saved up your play money and then went out and bought your toy. Credit drives everything these days.

For the last several years, a rising real estate market (which virtually all the U.S. has enjoyed) and low interest rates have made it more attractive for people to borrow off their home’s equity. For one thing, there's more of it. And because of the strong gains they've seen year after year, their PERCEIVED wealth is high, a perception that makes that $30,000 muscle car seem manageable. Which, incidentally, they expect to rise in value, too. With the recent leveling off in home values, undoubtably that perception will diminish, and a at least a portion of collector car spending will slow, too.

Theory of Relative Worth
In reality, that's a catch-all phrase for a lot of variations of what is basically the value of one thing relative to another. One variation postulates that if established historical norms of the relationship are suddenly disturbed by a change in the value of one, there's a pretty good chance that, absent any permanent, external macro variable, eventually the other will follow, re-establishing the historical relationship.

Here we examine two data sets involving the 1967 Shelby GT500 and the 1955-57 Mercedes-Benz 300SL Gullwing. The Gullwing is an iconic collector car, and was one of the darlings of the eighties market, hitting the $1/2 million dollar mark at the peak. It dropped by half by the mid-nineties and has since been stuck there, though recent activity suggests a tick upward. The Shelby is iconic in its own right, and is one of the current market darlings. Although they go about it in different ways, both are high-value vintage performance cars that attract people by their performance, looks, aura, and exclusivity.

relative value GT500 and 300SL

Look at the first graph. We’re illustrating the relative worth of the GT500 to the Gullwing as they age. This is a comparison at a certain age, not a specific year. This shows that until the eighties explosion, the relative worth of the Shelby to the Gullwing was pretty stable. Then, around the 35th year, the Shelby's relative value dropped almost 50% compared to a 35 year old Gullwing. Of course, it's actual value rose a little, but nowhere near the rapid pace of the Gullwing. After the crash of the Gullwing market, and the current rise of the Shelby’s value, it’s right back to the traditional levels seen before the Gullwing's spike.

The second graph illustrates the relationship of value over time to the original purchase price. This time we compared market values for each at a particular point in time against their original price when new. At 15, 20 and 25yrs old, the cars were fairly consistent in how they related to their original purchase price. At 30 years, the Gullwing began to pull away, and at 35 years old the Gullwing went through the roof. Once through that, it settled at the 40 year mark (which was 1995 for the Gullwing) at exactly the same place the Shelby is today. Of course, the Shelby is actually 39 years old, but we've taken the liberty to call it 40. On it's 39th year, the Gullwing was entering it's final year of strong appreciation -- in two years values were plummeting.

Will the current market continue to rise, stagnate or fall? All markets fluctuate, and the collector car market is not exempt from this basic fact. No amount of hype, flash, or showmanship will change that.

Where are we now in the cycle? The GT500 represents the hottest segment of the market right now -- upper echelon muscle cars. The Gullwing was one of the key players driving the last boom market. Looking strictly at the data, the Shelby--and it’s market segment-- appears to be at about the point of the 1989 market. But there are two factors that suggest we will not see a market correction of the magnitude of the early nineties. First, there is an external factor at play -- the Baby Boomers. When their money became active, it migrated to the kinds of cars we now see enjoying the biggest price increases. There was a big jump in demand relative to supply, so naturally prices rose. But their value relative to other premium cars is actually only returning to the historical norms that had been skewed during the last bull market. As a result, for most premium muscle cars we'd have to conclude that while the market may be approaching a plateau, we don't see any significant decline in the near future. At least as long as that gorilla doesn't move.

Update November 2013: Well, as we now know the Gorilla most definately moved, eliminating a good portion of the money that was participating in the Shelby Mustang (and all muscle cars) market. Values have taken a strong hit, and have not begun to approach their former valuations on any regular basis.

Conversely, the money in the upper market segments of the hobby has come back stronger than ever, a reflection of the economic recovery as a whole. Cars such as the 300SL have enjoyed very strong value appreciation, with the best examples closing in on $2-million USD. Current relative values have returned to the point where there was the largest differention--the late 1980's. One way of reading this is that Shelby Mustangs and similar collector cars are poised for a run. Another way of reading it is that elite European cars are headed for a crash similar to 1990. What do we think? The 300SL is likely getting close to a plateau and the Shelby Mustangs will see little appreciation. So we'll bet that the current value differential will continue with minor fluctuations for the forseeable future.