Stronger New Vehicle Sales to Weaken Used Prices?

The continued recovery of new US vehicle sales might result in some price cuts in used rides for the first time since 2008 when the Bush Administration’s Great Recession took hold. The economy is still hurting and the US labor force participation rate is disgraceful, no matter what the ‘no jobs’ Obama Administration claims.

There were strong economic fundamentals in play all through the global meltdown that hurt the auto market; particularly in the US, the world’s second largest and on a per unit basis arguably the most profitable.

Add in political meddling by the auto industry – buying off Federal politicians during the poor sales years from 2008-2012, that was a factor in 2009’s “Cash for Clunkers” program that took nearly 700,000 vehicles off U.S. roads, used-vehicle supplies have been limited.

Now ALG analysts, aka Automotive Lease Guide, the people who predict residual values of used vehicles say a wave of newer vehicles has started to “flood” the secondhand market and will gradually bring resale values in line with what they were before 2008’s economic downturn.

There is hardly room for rejoicing as new vehicle prices continue to escalate to record levels, but ALG estimates that June 2014 marked the lowest number of used vehicles available for sale, which also translated to the highest prices, but that the trend is shifting. (July used vehicle sales were 4.5 million compared to 1.4 million new light vehicle sales with franchised dealers capturing 37% of the market, the highest share for 2014.)

By 2017, ALG forecasts the average new vehicle will retain 49.4% of its value after three years, in contrast to the 54.6% retention rate recorded for vehicles through June 2014.

Furthermore, ALG forecasts the growing supply of used vehicles in the market should ease the industry back to a 46% residual average by 2019 – the same as it was before 2008.

“The lower residual values will create a greater gulf between used- and new-vehicle prices, which could steer more consumers to purchase used vehicles,” says Larry Dominique, president of ALG.

“Consequently, we expect automakers to increase new-car incentives to keep up their current sales pace.”

About Kenneth Zino

Ken Zino is an auto industry veteran with global experience in print, broadcast and electronic media. He has auto testing, marketing, public relations and communications expertise garnered while working in Asia, Europe and the U.S.
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