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Far fewer barebones models in rental fleets to negatively impact used valuations Getty Images
<p><strong>Far fewer bare-bones models in rental fleets to negatively impact used valuations.</strong></p>

Vehicle Resale Values Declining But Still Healthy, Black Book Says

Trucks are holding their value at about twice the rate of cars, but some softening in used-pickup prices can be seen, the data firm says.

Analysts say the U.S. market is nearing the current cycle’s peak, and executives at used-vehicle-pricing tracker Black Book do not disagree, pointing to signposts already beginning to appear.

Interviewed at the National Automobile Dealers Assn. Convention & Exposition in Las Vegas earlier this year, Black Book’s Anil Goyal, senior vice president-operations, and Jared Kalfus, senior vice president-sales, say several trends point to softening U.S. new-vehicle sales in coming months, including the bottoming out of gasoline prices, tightening credit availability and a used-vehicle market that is starting to see supply outpace demand.

In a wide-ranging discussion with WardsAuto, Goyal and Kalfus talk about used-vehicle valuations, what options hold their value best, the impact of daily rental and more. Following is an edited transcript.

WardsAuto: Some 3.1 million leased vehicles will be returning to inventory this year. What effect will that have on used-vehicle valuations?

Goyal: The last five years have been very, very strong. As we came out of the recession, there’s been a lot of strength in the market. The supply has been lower than demand, as the economy has been chugging along. Gas prices have been low, so vehicle miles traveled has gone up. Credit availability has come back all the way, in some cases more. (Now) we are in a situation where we are plateauing. We’re not going to see a lot more of credit expansion; we’re going to see a little contraction, in fact. We’re not going to see gas prices drop any more. We’re entering a situation where supply is going to exceed demand. So naturally we expect the values to be softer.

It’s that old saying, “It’s the economy, stupid.” That’s the only X-factor here that we don’t know how it’s going to pan out. Everything else we know is plateauing. So if the economy continues to do well, the used values won’t decline as much. Our prediction is it’s going to be about 3% growth rate from a GDP perspective, and we’re projecting 15% (average vehicle) depreciation this year. The last five years it’s been between 8% and 13.5%.

Kalfus: One of the side effects we’re seeing (from the glut of returning lease vehicles) is that the auctions in some cases are turning away business because they don’t have the ability to process those vehicles.

WardsAuto: So the cars are there, they just can’t get them into the pipeline?

Goyal: At some auctions, there’s just so many cars parked out there; they just don’t have capacity. And the supply is not just from leases; it’s rental cars as well. There’s more de-fleeting of rental cars as that volume picked up. There’s more subprime (loans), which means on a volume basis there will be more repos as well. So it’s just supplies overall increasing. With leasing, the good thing is you can tell when the supply is coming back. On the others, it’s harder to tell. You have this issue where you have a lot of supply coming into the auction. You don’t want all those cars to come through the lane at one time, because that’s going to depress the values. The remarketer is making sure they are going to ease that volume through. So the auctions have to park those cars, and in some cases they have to turn that new business away.

Trucks Holding Value Twice Rate of Cars

WardsAuto: How’s the vehicle depreciation compare with the 2009 recession or when we had the last big leasing glut in 1990s?

Goyal: Pre-recession we saw 16%-18% (annual depreciation rates). That was kind of the norm. It’s just been very strong. One thing we saw last year was a very distinct market between cars and trucks. That pattern where supply is exceeding demand? That’s only happening for cars. Small cars, midsize cars, there’s more supply than demand. We saw a pretty good correction last year in that segment. In small and midsize cars there was 20% depreciation.

Whereas if you look at fullsize crossovers and pickup trucks, there was only 5% depreciation. So there’s a huge disparity in the vehicle-depreciation patterns. That’s why we say using data is becoming paramount now. You just can’t rely on older trends. You have to look at what’s the latest right now and where the demand is picking up. For the dealer, for the lender, it just becomes very important to understand their portfolio trends.

WardsAuto: So has pent-up demand finally been squelched?

Goyal: The way I would describe pent-up demand is you have a lot of uncertainty, a lot of anxiety about the future…so you delay your purchase. And when the economy starts to come back around, you say, “OK, I’m good.” We’ve had a long period of that growth, and from that perspective pent-up demand is done. So it’s just normal growth in the economy that is going to keep us going forward, which is still pretty healthy.

WardsAuto: What’s the sweet spot on depreciation?

Kalfus: Historically it’s been about 1.5% per month, or about 18% a year.

WardsAuto: So that 13% we had was pretty healthy.

Goyal: Thirteen has been good overall. If I break it down among segments, cars were 18.2% and trucks 9.2%, so the average came out pretty good.

WardsAuto: Pickup residuals have been particularly strong then?

Goyal: Pickups have been very strong the last two years. Less than 5% depreciation. Pickups are highly correlated to the housing market (which has been strong), but we’ve also seen more pickups bought for luxury or just a family vehicle. There’s been a good replacement demand. (But) we do see some softening in the pickup segment as well.

WardsAuto: It seems like there’s more leasing of pickups, too.

Goyal: Yes, leasing has gone up across the board. In pickups leasing is 11%-12% of the volume, so it’s not like the 1990s when everyone was happy to lease a pickup truck. We’re not seeing that.

WardsAuto: When it comes to options, what holds its value and what does not?

Goyal: The thing about options is there’s no consistency (across manufacturers). There’s a lot of cloudiness in understanding that market. What we have seen is the middle trim that is reasonably packaged up…performs the best. The highest trims perform the worst.

Some safety features have a 70% take rate, so those are the features that will be more in demand on used side as well. Softer leather or higher-end (things) won’t retain as much value.

Kalfus: Manufacturers are getting much smarter about packaging. (Features that) are standard today were options yesterday.

WardsAuto: Is navigation holding value?

Goyal: If you look at a luxury car, I have to have navigation or it’s not going to sell. So navigation does bring value (depending on the brand). In lower brands, we don’t see that holding value as much.

WardsAuto: Is there less impact on the used-vehicle market from daily rental?

Goyal: It’s a balancing act. The manufacturers have done a really good job of (controlling production, post-recession). They don’t have as much capacity to churn out. As a result of that, the rental cars have a mix of trims, it’s not just the rental trim (anymore).

Kalfus: The rental-car companies are getting smarter also. They (are looking ahead) to remarketing those 12 or 18 months down the road (and don’t want to have to move de-contented models). And their customers are used to those creature comforts, and when they get into a stripped-down rental (they’re not as happy). So it’s a win-win. There’s better customer satisfaction and vehicle value retention.

Goyal: The downside of rental is (the car) is going to come back to market quicker and with higher mileage, so it sets the value in the marketplace of that vehicle. If you’re highly penetrated into the rental market, you’ll have a lot more vehicles coming back in a slightly rougher condition (that will be) setting a precedent for that (vehicle’s resale) value. That’s where the balancing act is for the manufacturer.

[email protected] @DavidZoia

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