False Sense of Security

ORLANDO, Fla. — Used-car prices, strong throughout 2009, will likely maintain their momentum for the next couple years, industry experts said at AFSA’s Vehicle Finance Conference yesterday.

Low sales volume has translated to fewer trade-ins. Plus, as manufacturers keep production levels in line with demand and consumers shy away from big-ticket purchases, the supply of used cars will drop even further.

Combine that scenario with the fact that leasing is picking up — for the simple reasons that consumers don’t want to lock themselves into paying off a vehicle’s entire purchase price and used-car prices are unusually high.

So here’s the question: Will today’s strong used-vehicle values create a false sense of security for lessors setting residual values?

These days, lessors are easily recouping residual values set three and four years ago. But have they taken into consideration the inevitable decline — to historical levels — of used-vehicle values?

Tags: auction, lease, resale, residual, used-car

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Comment by David Ruggles on February 12, 2010 at 10:11am: In my mind it is mostly dependent on whether or not OEMs refrain from "push marketing" and excessive fleet sales. Subvented short term RBF (residual based financing) is a great way to generate high quality pre-owned vehicles and shorten the trading cycle to sell more new vehicles. This is much preferable to retail rebates and even dealer "trunk money." It's much better to subvent a short term RBF than to be perceived as paying folks to take vehicles off their hands.

Comment by JJ Hornblass on February 12, 2010 at 2:10pm: This is a great question. My suspicion is that, like other aspects of business/finance when "good times" continue for an extended period of time, eventually people forget the risks and business practice erodes. We've all seen it repeatedly in auto finance over the years. I would guess that two full years of strong used-vehicle values will result in tangible, short-term memory loss.