Used-Car Prices Finally Starting to Shore Up

Used-vehicle residual values are improving after four bad years, says Raj Sundaram, president of Automotive Lease Guide (ALG).

“Residual values are starting to stabilize, at least,” he tells the National Remarketing Conference in Dearborn, MI.

That's good news for remarketers because it means used-vehicle prices should increase for the first time in five years, mostly because there will be fewer vehicles coming off lease, says Sundaram.

That trend should continue into 2006, when used-vehicle prices should be at their highest in years.

But the industry will continue to face new- and used-vehicle pricing challenges. Auto makers using fleet sales to prop sales will continue to experience residual problems, warns Sundaram.

ALG's data show that vehicles with lower fleet sales have higher residuals. That is because residual values are affected less by actual quality and more by consumers' perceived quality of brand, Sundaram says.

For example, Volkswagen of America has had quality problems, but still has strong residuals. Conversely, Buick has had poor residuals, despite better quality.

Hefty incentives may help sell new vehicles but hurt their residual values as used vehicles.

Sundaram sees a dip in incentive levels next year but says auto makers still need to move away from offering straight customer cash, the most damaging to residual values.

He says strong used-car prices ultimately help new-car prices. That's why auto makers in recent years have focused more attention on the used-car market.

“If you can get used-vehicle prices up, new-vehicle pricing becomes easier to manage,” he says.