SUVs are becoming problem children for the used-vehicle industry as their residual values weaken rapidly.
Droves of SUVs are coming off lease with actual residual values well below values predicted at the start of the leases. The wide disparity of predicted and actual values has caught residual predictors and others off guard. It's pushed prices down. Worse, pickup trucks could be next.
“SUVs will present a serious problem,” says Ray Nichols, CEO of BSCAmerica and current president of the National Auto Auction Association.
Part of the problem is their sheer numbers.
“There's an SUV surplus in the marketplace,” Scott Zucco, vice president of Lee & Mason Of Maryland Inc., a residual value insurer, tells the Conference of Automotive Remarketing.
In 1991 SUVs comprised 7% of the nation's vehicle mix. Annual sales were about 1 million new units. Now they're nearly 20% of the mix with sales of about 3.7 million a year.
But their used-car popularity is waning as reflected by what they're fetching wholesale and retail.
“These vehicles in the early years retained tremendous residuals,” says Nichols. “A three-year-old Chevy Suburban retained 80% of its value.”
Those were the days.
In 1994, five million two- to five-year-old SUVs were on the road. That's expected to hit 14 million by 2004. “That dampens overall value and price,” says Zucco.
In 1995, a four-year-old SUV would fetch around $15,400. Today: $12,000.
“That's a significant drop,” says Zucco. “For someone in the residual value insurance business, this is very concerning.”
He predicts high SUV residual losses and continued bleeding in general for the leasing industry through 2005.
Across the board, residual leasing losses are expected to average $1,628 per vehicle this year, says Nichols.
“We're seeing SUVs coming back with $4,000-$6,000 losses,” says Craig Carrow, remarketing strategies director for Remarketing Services of America Inc. “But it's a cyclical business. We'll see the residuals rise again.”
Zucco says, “The SUV market will continue to deteriorate, but at some point it needs to find equilibrium.”
Nichols says, “The SUV market was heavily weighted, and a lot of principles were forgotten.”
Among them:
The used-vehicle industry is not designed to undo the wrongs committed at the onset of a lease when a customer takes temporary possession of a vehicle that's “unpopular, the wrong color, the wrong model and has a bad equipment package,” says Nichols.
“Lessors should think today who will want a particular three-year-old vehicle when it comes off lease.”
Meanwhile, the pickup truck market is showing similar signs of the market saturation that's besetting SUVs. That could be unsettling for the industry because 50% of new-unit sales are vehicles on truck platforms.
“We're starting to see there what we've seen with SUVs,” says Zucco. “Nearly four million more two- to five-year-old trucks are available, and we're seeing trends of (remarketers) getting less money for them.”
Americans bought nearly 3.2 million pickups last year. Those trucks captured 18.7% of the market in 2001.
