Vehicle residual values set to decline during 2017

Annual vehicle depreciation in 2017 is forecast to reach 17.8%, slightly up from the 17.3% mark recorded in 2016, according to the latest analysis from Black Book and Fitch Ratings.

Average pre-recession annual depreciation trended between 16-18%. Between 2011-2016, average annual depreciation fell between 8.3-13.2%, driven mostly by high demand for used vehicles and low supply levels of in-demand segments such as trucks, crossovers, and SUVs.

Pricing specialist Black Book says it now believes much of the pent-up demand fueling both new and used vehicle sales has been spent, resulting in a rising level of vehicle depreciation expected in 2017.

It also says a continued increase in lease activity along with higher incentives that began in 2016 will increase pressure on residual values.

Black Book forecasts a continual and gradual decline in residuals in the coming years. Currently, a two-year-old vehicle is averaging 52% of its original retail price. This is expected to decline to 48% by 2020.

Black Book expects the market to reach a gradual normalization over the next three years. Ongoing concerns include continuously increasing lease penetration, which leads to residual losses on the returns due to excess supply. Other factors that could affect the market include higher levels of incentives on new vehicles, which pushes down used values, and longer loan terms leading to sustained negative equity.

Anil Goyal, senior vice president of automotive valuation and analytics at Black Book, said: “Increased supplies from trade-ins and lease returns, coupled with a plateau in new sales activity will bring changes that can affect inventory strategies and profit potential.”

Fitch’s analysis of US auto loan asset-backed securities (ABS) shows few major concerns.

Hylton Heard, senior director of Fitch Ratings, said: “Fitch continues to have a positive rating outlook for prime auto loan asset-backed securities in 2017, despite higher losses expected this year.

“Auto ABS asset performance will continue to slow in 2017 as losses slowly rise to normalized levels similar to 2004-2006. Additionally, depreciation rates will creep up and recovery rates dip, which will drive loss severity and contribute to rising losses.”