Used Car Values Depreciated Fast in 2016, Expected to Continue

Via Promich/ Flickr

Via Promich/ Flickr

Used vehicle values depreciated at a faster pace in 2016 than any period since the great recession — driven in large part by off-lease volume, said Anil Goyal, senior vice president of operations at Black Book.

All vehicle models experienced an average 12-month depreciation rate of 17.3% for the 1-year period ending in January, up from 13.2% the year prior, according to Black Book’s report.

“This metric is relevant for auto lenders because that’s how their equity would be declining on their portfolio,” Goyal told Auto Finance News. Captives in particular should be concerned about how well their off-lease residual values will perform in the coming years, because many rely heavily on that revenue, he added.

Depreciation at the current rate is still considered normal for the post-recession period, but when that figure starts to creep above 18%, that’s when concern is more warranted, Goyal said.

More than three million vehicles were returned off lease in 2016, which is a year-over-year increase of 25% Goyal said. In 2017, he predicts that number will increase another 15% to nearly 3.5 million additional off-lease returns, which is likely to increase the rate of used vehicle value depreciation.  

“We are now over 30% in lease rates for retail sales, and as residual values come down — which we predict they will come down four points or more in the next three years — that would impact the growth in leasing as well,” Goyal said.

One effect of used car depreciation already reared its head in the fall. Ford Motor cut its pretax profit forecast by $300 million in November due to declining values, and Hertz Global Holdings Inc.’s third quarter earnings showed a $39 million decline in estimated residual values of its used car fleet.

Taken as a separate category, cars experienced a 20% depreciation rate compared to 18.2% for the year prior. Depreciation among trucks moved along at a rate of 15.5% for the period, compared to 9.2% the previous year.

There was some stabilization by year end, Goyal noted. In the third quarter, some trucks had been depreciating at higher rates than cars, which is opposite of typical trends. However, that trend normalized in December.

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