Residual Values

Land Rover, Subaru continue residual value win streaks

SANTA MONICA, Calif.  - 

Land Rover is taking home ALG’s premium brand Residual Value Award for the fourth straight year, while Subaru achieved top honors among mainstream brands for the third straight time.

ALG, which is the analytics subsidiary of TrueCar, announced its 2018 Residual Value Awards on Monday morning, and will present them at this week’s Automobility LA.

In addition to the brand winners, the awards recognize the 2018 model-year vehicles in 26 segments that are forecasted to retain the highest percentage of original MSRP after three years.

Subaru earned top honors in five segments and Land Rover was tops in four.

“Strong residual values are the bedrock of successful brands. A vehicle’s ability to retain its value over time is an important consideration for consumers looking to purchase or lease a vehicle,” ALG president Jim Nguyen said in a news release.

“With vehicle leasing at near-record levels and headwinds for used-vehicle values on the horizon, consumers can have confidence in their choice of a Residual Value Award winner for their next vehicle,” he said.

The full list of winners is below:

Overall
Premium: Land Rover
Mainstream: Subaru

Segment Awards

Mainstream Cars
Alt-Fuel: Kia Niro
Subcompact: Honda FIT
Compact: Subaru Impreza
Midsize: Honda Accord
Fullsize: Dodge Charger
Sportscar: Subaru WRX

Mainstream Utility
Subcompact Utility: Subaru Crosstrek
Compact Utility: Subaru Forester
Midsize Utility 2nd Row Seating: Subaru Outback
Midsize Utility 3rd Row Seating: Toyota Highlander
Fullsize Utility: Toyota Sequioa
Off-Road Utility: Jeep Wrangler

Trucks
Fullsize Pickup: Toyota Tundra
Midsize Pickup: Toyota Tacoma

Premium Cars
Premium Compact: Mercedes-Benz CLA Class
Premium Midsize: Audi Allroad
Premium Fullsize: Genesis G80
Premium Executive: Lexus LS
Premium Sportscar: Porsche 718 Cayman

Premium Utility
Premium Compact Utility Land Rover Discovery Sport
Premium Midsize Utility 2nd Row Seating: Land Rover Range Rover Sport
Premium Midsize Utility 3rd Row Seating: Land Rover Discovery
Premium Fullsize Utility: Land Rover Range Rover

Vans
Minivan: Honda Odyssey
Midsize Commercial: Mercedes-Benz Metris
Fullsize Commercial: Mercedes-Benz Sprinter


RVI Group sees mixed May price movement

STAMFORD, Conn. - 

Along with taking a closer look at how volume will impact compact cars’ residual values, RVI Group’s Risk Outlook for June indicated that used-vehicle prices in May softened on a year-over-year comparison but ticked slightly higher on a sequential basis.

The report indicated that real used-vehicle prices for 2- to 5-year-old units on a seasonally adjusted base fell by 4.7 percent year-over-year in May, after adjusting for MSRP. Looking month-over-month, RVI Group determined real used-vehicle prices increased by 1.3 percent.

In the compact cars segment, analysts determined prices fell by 6.9 percent in May on a year-over-year basis.

“The increasing supply of used vehicles and steady growth of incentive activity will continue to put downward pressure on used-car prices,” analysts said in the report. “Lease penetration is expected to remain near historical highs through 2020.

“As the increased supply of off-leased vehicles re-enter the market, we expect to see further declines in used-car prices,” analysts continued, while projecting that real used-vehicle prices are expected to decline 12.7 percent from current levels by 2020.

Residual outlook

RVI Group mentioned the lease penetration rate for first quarter came in at 22.7 percent of total new-vehicle sales.

In May, the firm’s lease supply index rose 22.3 percent when compared to May of last year.

“Given the high leasing rates over the past two years, we expect off-lease supply to continue growing through 2021,” analysts said in the report.

RVI Group continued its residual value discussion by taking a deeper look at compact cars. The firm reiterated that prices for these units softened by 6.9 percent year-over-year in May.

“The supply of used compact cars has grown over the past two years. Looking forward, we expect the supply of used vehicles in this segment to continue to grow through 2020,” analysts added.

More notes on new cars

RVI Group pointed out that light new-vehicle sales declined slightly to 16.7 million SAAR in May. On a year-over-year basis, light vehicle sales declined by 2.4 percent in May.

While the lease penetration rate for the first quarter remained steady on a sequential basis at 22.7 percent of total sales, analysts pointed out that market level incentive activity has continued to grow, increasing to 9.8 percent of MSRP in May from 9.6 percent of MSRP in April.

Also in May, the report noted the new vehicle CPI increased by 0.4 percent on a year-over-year basis but decreased by 0.2 percent on a month-over-month basis.

Economic thoughts

Looking more broadly, RVI Group declared in the report that key economic indicators signal that the U.S. economy is “softening.”

In the first quarter, analysts recapped that GDP grew at an annual rate of 1.2 percent, down from 2.1 percent in the fourth quarter of 2016.

“The slowdown was caused by a decrease in federal government spending, private inventory investment, and state and local government spending that offset positive contributions coming from personal consumption expenditure, exports and residential and nonresidential fixed investment,” RVI Group said in the report.

In May, the report mentioned the U.S. unemployment rate came in at 4.3 percent, a slight decline from 4.4 percent from the previous month, while the labor participation rate showed little change from April to May. Inflation came in at 1.9 percent for May.


April seems to be positive sign for used-car market

CARY, N.C. - 

When it comes to used-car prices, the sky might not be falling after all, if indications from a Manheim report bear out. 

The auction company’s index measuring used-car prices increased for the first time all year, and the used retail market buzzes along at a solid clip.

The Manheim Used Vehicle Value Index came in at 124.7 in April, which was up 1.6 percent year-over-year. According to a report accompanying the index, wholesale prices climbed 0.5 percent from March on a mix-, mileage- and seasonally adjusted basis.

In an analysis accompanying the index, Cox Automotive chief economist Tom Webb downplayed the concern many analysts have expressed about used-car price declines. 

“Although the Manheim Used Vehicle Value Index increased for the first time this year on a month-over-month basis, used-vehicle values have not collapsed the way many analysts have warned of for more than a year due to expected increases in wholesale supplies,” Webb said. “And in fact, what weakness we have seen is probably more a result of excessive new-vehicle inventory, not used.” 

Edmunds executive director of industry analysis Jessica Caldwell echoed some of that new-car inventory concern in monthly sales day comments provided by the company.

“We’re seeing a dramatic lag in the 2016 model-year selldown. In April, 8 percent of vehicles sold were 2016 models, up from only 3 percent five years ago,” Caldwell said. “Inventory buildup is a top concern of automakers and all eyes are on whether cuts in production are enough to offset expected dips in sales.” 

Black Book index shows rare gain, too

Another one of the indices measuring wholesale vehicle values has seen its first increase in 27 months.

While the April reading of Black Book’s Used Vehicle Retention Index (113.1) was just a hair above March’s (113.0), it’s at least a temporary pause to the gradual downturn that has been ongoing since January 2015.

The index, which is based on Black Book wholesale average values on 2- to 6-year-old vehicles, was at 126.8 that month before sliding for more than two years.

“April saw stronger seasonality trends than what we had been seeing during the last few spring seasons,” Black Book’s Anil Goyal said in a news release accompanying the monthly Used Vehicle Retention Index.  

“There certainly remains a growing concern over rising supply levels, which typically leads to higher depreciation, but with prices on some segments seeing better value, consumers may be more willing to consider used vehicles in some key car segments.”

Spring has been more robust than anticipated, and the strength in car retention has been encouraging, says a spokesperson for the company via email when asked for Goyal's take on whether April was temporary relief or an encouraging sign.

However, prices are likely to move back into the usual summer depreciation, the spokesperson said. 

Used-car retail appears strong

Moving over to retail, Webb — citing data from NADA — said that used-vehicle retail sales (including private sales) climbed 3.6 percent in the first quarter, with dealer sales up even more (5 percent for franchised, 5 percent for independents).

It appears April continued the momentum, based on Cox Automotive’s “channel checks.”

In late April, Edmunds was forecasting 3.6 million used-car sales for the month, up from 3.4 million in March, with a SAAR of 38.4 million for both months.

Meanwhile, ALG was forecasting 3.32 million used-car sales for April, which would have been off 0.8 percent year-over-year. 


Group 1's Rickel talks trucks, residuals & more

CARY, N.C. - 

Consumers' increased interest in both trucks and SUV’s over sedans is a shift the industry will have to wrestle with even more this year, says John Rickel, senior vice president and chief financial officer of Group 1 Automotive.

“The overall industry, if you go back two years ago, had a 50/50 split between cars and trucks. Last year it got to 60/40 and this year could be 65/35 — that is a massive, massive shift in consumer preference,” Rickel said during  Group 1’s presentation at the Bank of America Merrill Lynch 2017 Auto Summit in New York last week, a webcast of which  AuSM viewed.

“Trucks and SUV’s are continuing to go from strength to strength. There’s a lot of customer demand there.”

He points to lower and affordable gas prices as the primary driver of the shift.

“If you can have the optionality of a bigger package — basically what a truck or SUV offers of you — most consumers are opting for that and the industry is struggling to catch up with that switch,” he said.

Used-car sourcing

During the presentation, Rickel said his group’s top source for used-cars are customers’ trade-ins.

“When we’re under pressure on the new vehicle sales, we’re not selling as many units — we’re not getting as many trades, and we have to go out to auction to supplement,” he said.

One downside,  Rickel said, is that going to the auction to buy inventory can be more costly over time, after factoring in all of the added expenditures dealers incur.

“You’re going to pay a little bit more, you’re bidding against other dealers, you pay an auction fee and you’ve got transportation costs,” he said.

Residual trends in segments 

In regards to sedans, within the used-car market in particular, there’s currently some pressure on residuals, according to Rickel.

“A lot of leases were written three years ago and that’s were a lot of volume is coming back,” he said. “We’re seeing a number of our OEM partners that have had to warn on residuals. You’re seeing them pull back somewhat on leasing.”

Rickel said he isn’t too strained about the residual values of trucks and SUVs.

Compared to sedans, trucks have a longer life and a number of consumers of have second order uses for them, he said.

In his 30 years of experience and the lease cycle he has seen, it has been rare that “you get a big, big falloff in truck residuals, so I’m less concerned about that,” Rickel said.

Specifically, if the rebound of the housing industry continues, he said it’s likely that construction workers use of trucks will increasingly secure their current standing in the market.

Rickel also added that if an infrastructure program comes from the Trump administration, it will presumably solidify truck sales as well.


Toyota reclaims KBB resale value crown

IRVINE, Calif. - 

Toyota has claimed the title of Kelley Blue Book’s Best Resale Value Brand for the first time since 2014, and Porsche celebrates its first time earning the Best Resale Value Luxury Brand belt.

KBB announced its 2017 Best Resale Value Awards on Wednesday, revealing 22 vehicle category winners and a top 10 list in addition to the aforementioned brand leaders.

“Toyota and Porsche notably capture the top brand and luxury brand awards, delivering incredible resale value across their lineup of vehicles,” Eric Ibara, KBB’s director of residual values, said in a news release.

Interestingly enough, all of the luxury vehicle category winners — which recognize individual models — were from either Porsche or Lexus (which was the 2016 Best Resale Value Luxury Brand). 

Toyota vehicles, meanwhile, won three vehicle categories and Toyota had three models make the top 10 list for best resale value,

That top 10, which was compiled alphabetically, was dominated by the truck side of the market. 

“Reflective of the market overall, the majority of the Top 10 Best Resale Value vehicles this year are trucks and SUVs, with the exception of the Subaru WRX, which is further testament to the strength these segments will carry in the future,” Ibara said.

Looking at the entire lineup of awards, Toyota had the most overall with seven, followed by Chevrolet with five. 

The KBB awards are based on projected retained valued through the initial five-year ownership period and are calculated through the Kelley Blue Book Official Residual Value Guide.

The complete list from KBB is below:  

2017 BEST RESALE VALUE: BRAND
TOYOTA

2017 BEST RESALE VALUE: LUXURY BRAND
PORSCHE

2017 BEST RESALE VALUE: BY VEHICLE CATEGORY

SUBCOMPACT CAR:  Honda Fit

COMPACT CAR:  Subaru Impreza

SPORTY COMPACT CAR:  Subaru WRX

MID-SIZE CAR:  Subaru Legacy

FULL-SIZE CAR:  Nissan Maxima

ENTRY-LEVEL LUXURY CAR:  Lexus RC

LUXURY CAR:  Lexus GS

HIGH-END LUXURY CAR:  Porsche Panamera

SPORTS CAR:  Porsche 718 Cayman

HIGH PERFORMANCE CAR:  Ford Mustang Shelby

HYBRID/ALTERNATIVE ENERGY CAR:  Honda Accord Hybrid

ELECTRIC VEHICLE:  Chevrolet Bolt EV

SUBCOMPACT SUV/CROSSOVER:  Honda HR-V

COMPACT SUV/CROSSOVER:  Jeep Wrangler

MID-SIZE SUV/CROSSOVER:  Toyota 4Runner

FULL-SIZE SUV/CROSSOVER:  Chevrolet Suburban

LUXURY COMPACT SUV/CROSSOVER:  Porsche Macan

LUXURY MID-SIZE SUV/CROSSOVER:  Lexus RX

LUXURY FULL-SIZE SUV/CROSSOVER:  Lexus LX

MID-SIZE PICKUP TRUCK:  Toyota Tacoma

FULL-SIZE PICKUP TRUCK:  Chevrolet Silverado HD

MINIVAN:  Toyota Sienna

2017 BEST RESALE VALUE: TOP 10 CARS (in alphabetical order)

Chevrolet Colorado

Chevrolet Silverado

GMC Canyon

GMC Sierra

Honda Ridgeline

Jeep Wrangler

Subaru WRX

Toyota 4Runner

Toyota Tacoma

Toyota Tundra
 

KBB notes that the residual values it uses to determine the awards are based on 2017 model-year vehicles in the January/February edition of the KBB Residual Value Guide. 


J.D. Power outlines revamped residual value offering

COSTA MESA, Calif. - 

The evolution stemming from J.D. Power’s acquisition of NADA Used Car Guide from the National Automobile Dealers Association first announced nearly two years ago reached another major development on Wednesday.

What the company described as insightful analysis of its automotive retail and auction transactional data its customer survey data is serving as the foundation of J.D. Power Residual Values — a benchmark product debuting now officials say will bring a new perspective to vehicle residual values.

Designed as an information resource for vehicle manufacturers, captive finance companies and other institutions, officials explained their Residual Values incorporates sales transaction data gathered by:

—The Power Information Network (PIN) from J.D. Power, representing more than 40 percent of franchised dealer retail sales transactions in America.

—The J.D. Power/National Auto Auction Association AuctionNet service, accounting for more than 80 percent of automotive auction transactions.

—Proprietary J.D. Power Voice of the Customer data.

The company went on to emphasize the uniqueness of Residual Values is further complemented by data from J.D. Power’s Initial Quality Study (IQS); Vehicle Dependability Study (VDS); Automotive Performance, Execution and Layout (APEAL) Study; and Auto Avoider Study.

“We are launching this capability at a particularly important time for the industry as it deals with record levels of lease origination in an environment of declining used vehicle prices. Automakers — and their lenders — are looking for ways to accurately forecast and enhance the residual value of their vehicles because of its direct impact on both sales and profitability,” said Deirdre Borrego, senior vice president of data and analytics at J.D. Power.

The company noted residual values is the first all-new product introduced under the newly created Data & Analytics Division of J.D. Power. Under Borrego’s leadership, the division will include J.D. Power Valuation Services, formerly known as NADA Used Car Guide, joining the successfully established operations of PIN and Online-to-Offline (O2O) Digital Marketing Analytics.

J.D. Power Valuation Services will produce, manage and distribute residuals and related services. Mike Stanton, vice president of valuation services, will lead the team in McLean, Va., as it continues to market NADA Values until it fully transitions to the J.D. Power brand.

“Manufacturers rely on J.D. Power insights in so many other areas of their business, so it makes a lot of sense to support them in such a critically important function that has long-term financial implications,” said Jonathan Banks, vice president of vehicle valuation and analytics at J.D. Power and a staple presenter during .

“What OEMs and captives will find unique is the transparency of the valuation,” Banks continued. “Our product will provide clients with a viable third-party source as a challenger model to current processes, with an opportunity to expand into more predictive and prescriptive analytical solutions.”


Land Rover & Subaru top ALG's Residual Value Awards

SANTA MONICA, Calif. - 

On Monday, ALG announced that Land Rover and Subaru placed as the top brands overall in its 2017 Residual Value Awards, an annual honor for brands and individual models with the highest retained value.

Land Rover was recognized for the third consecutive year as the premium brand with the best overall residual values, while Subaru was acknowledged for the same metric out of all the mainstream brands.

“Residual values are a key indicator of the overall market success and health of a vehicle and brand. Whether a consumer is looking to purchase or lease a vehicle, the largest cost consideration is how much a vehicle will retain its value over time,” said Jim Nguyen, president of ALG. “And with vehicle leasing on the rise, resale values have never been more important to both consumers and automakers.”

ALG’s Residual Value Awards honor individual vehicles in 26 different segments that retain the highest percentage of their respective MSRPs after a three-year period.

Award recipients were chosen from all 2017 model year vehicles, both premium and mainstream.

Automakers will be presented with their awards this week at the Los Angeles Auto Show.

Following are the recipients of ALG’s 17th annual Residual Value Awards.

RVA Overall Brand

Premium — Land Rover

Mainstream — Subaru RVA Segment Model

Alt-Fuel

Toyota Prius V

Compact

Subaru Impreza

Compact Utility

Subaru Forester

Fullsize

Dodge Charger

Fullsize Commercial

Mercedes Sprinter

Fullsize Pickup

Toyota Tundra

Fullsize Utility

Chevrolet Tahoe

Midsize

Subaru Legacy

Midsize Commercial

Metris

Midsize Pickup

Toyota Tacoma

Midsize Utility 2nd Row Seating

Subaru Outback

Midsize Utility 3rd Row Seating

Honda Pilot

Minivan

Toyota Sienna

Off-Road Utility

Toyota 4Runner

Premium Compact

Mercedes CLA Class

Premium Compact Utility

Land Rover Discovery Sport

Premium Executive

Lexus LS

Premium Fullsize

Audi A7

Premium Fullsize Utility

Land Rover Range Rover

Premium Midsize

Jaguar XE

Premium Midsize Utility 2nd Row Seating

Land Rover Range Rover Sport

Premium Midsize Utility 3rd Row Seating

Audi Q7

Premium Sportscar

Nissan GT-R

Sportscar

Subaru WRX

Subcompact

Honda FIT

Subcompact Utility

Subaru Crosstrek


Top & bottom 5 models in NADA UCG’s latest 3-year-old value retention report

McLEAN, Va. - 

In their most recent Perspective report, NADA Used Car Guide analysts detailed the value performance of used 2013 model-year passenger cars and light-duty trucks.

Turns out, the top-performing vehicle isn’t even manufactured by that automaker any longer, but the unit still rose to the top of NADA Used Car Guide’s rankings for the second year in a row.

“There were several 3-year-old models that jumped up the rankings in their respective segments,” said Jonathan Banks, vice president of analysis and vehicle analytics at NADA Used Car Guide.

Banks’ coworker Larry Dixon, director of market intelligence, added, “Some models predictably did better than others, with one mainstream model outperforming luxury models as well.”

That mainstream model Dixon refers to is the 2013 Toyota FJ Cruiser. For the second consecutive year, Toyota’s discontinued off-roader took the top retention value spot among all makes, models and segments.

David Paris, senior automotive analyst at NADA Used Car Guide, said, “The FJ Cruiser has a cult-like following in the used market. Along with other factors, high enthusiast demand for the 4x4 managed to increase its retention score by 1 percentage point over last year’s report to 92.5 percent.”

The top five highest and lowest ranked 3-year-old vehicles by segment are as follows:

5 highest ranked 2013 model year value retention performers by vehicle segment:

1. Toyota FJ Cruiser: non-luxury SUV/truck — 92.5 percent of value retained

2. Land Rover Range Rover: luxury SUV/truck — 67.8 percent of value retained

3. Subaru XV Crosstrek: non-luxury car — 63.3 percent of value retained

4. Ford Mustang: non-luxury sports car — 60.7 percent of value retained

5. Porsche 911 (997): luxury sports car — 57.9 percent of value retained

5 lowest ranked 2013 model year value retention performers by vehicle segment

1. Smart FORTWO: subcompact car — 24.8 percent of value retained

2. Suzuki Kizashi: midsize car: 26.7 percent of value retained

3. Suzuki SX4: compact car — 29.5 percent of value retained

4. Suzuki Grand Vitara: compact utility — 30.1 percent of value retained

5. Chevrolet Impala: large car — 30.6 percent of value retained

Top non-luxury nameplate

NADA UCG highlighted that Toyota vehicles dominated pickup truck, SUV and van segment value retention in this year’s report. As a result, the brand ranked highest in its respective segments six times.

The brand was also the top non-luxury nameplate in NADA Used Car Guide’s 2015 Used Vehicle Retained Value Report: 3-Year-Old Models with an equal share of highest segment rankings.

Top luxury nameplate

Analysts indicated Land Rover replaced Audi in this year’s value retention standings, according to the Perspective report. The off-road capable brand managed three highest rankings, which include the Range Rover Evoque (luxury subcompact utility), LR4 (luxury midsize utility) and Range Rover (luxury large utility).

How retention values are determined

When asked about the method NADA Used Car Guide analysts used to determine 3-year value retention, Dixon explained, “The retention calculation is a function of a three-month average of NADA Used Car Guide’s most recent average trade-in value, divided by a vehicle’s average typically equipped manufacturer suggested retail price (MSRP).

“A vehicle’s rate of depreciation, and ultimately retention, is in part a product of the level of discounting at the time of new. For this reason, MSRPs did not include any incentives or rebates available at the time of purchase,” continued Dixon, who along with Banks and Paris will be part of the stable of experts on hand for , which runs from Nov. 14-18 at the Red Rock Resort and Casino in Las Vegas.

To download the complete rankings from the Perspective report, .


RVI sees used prices softening 7.2% by 2019

STAMFORD, Conn. - 

An increase in supply growing incentive activity will push used-car prices down 7.2 percent from current levels over the next three years, RVI Group said in its September Risk Outlook report.

RVI’s lease supply index — a measure of off-lease vehicles in the market — rose 24.9 percent in August compared to the same month last year. Used-vehicle prices, after adjusting for MSRP, decreased by 4 percent year-over-year. And incentive activity increased to 9.2 percent of MSRP for the month.

Lease penetration for the second quarter was 23.2 percent of total sales — the highest level RVI has on record dating back to 1992 — and RVI expects leasing activity will continue to rise.  

Most brands saw a positive change in their lease penetration rate for the quarter. Volkswagen and Land Rover saw the biggest increases while Infiniti and Volvo saw the greatest declines versus a year ago.

Used-vehicle prices (seasonally adjusted, 2- to 5-year-old vehicles) continue to decline on a year-over-year-basis. Real used-vehicle prices (after adjusting for MSRP) decreased by 4 percent when compared to the same month a year ago, and by 1.1 percent on a sequential basis.

All 19 segments RVI tracks saw declines in residual values in August compared to a year ago, and 14 saw sequential declines. Subcompact cars and full-size vans saw the biggest year-over-year drop in residual values at 10.5 percent and 10.3 percent, respectively, while midsize SUVs and luxury coupes saw the biggest monthly declines at 3.8 percent and 2.5 percent, respectively.

The report put a focus on full-size SUV residual values, noting that prices in this segment fell by 3.3 percent year-over-year in August (slightly better than the market average) and 0.4 percent sequentially. The supply of full-size SUVs has been flat over the past two years, but in August supply increased by 3.9 percent year-over-year.

Partly due to a predicted ongoing supply increase, RVI expects used vehicle prices in the segment to fall 8.9 percent below current levels by 2019.

 


Gauging whether a leasing bubble is inflating

LAWRENCEVILLE, Ga. - 

A couple of years ago when pundits and naysayers wanted to discuss auto financing, often they gravitated toward how the industry’s recovery stemmed from subprime activity, resulting in a possible bubble similar to what created the Great Recession.

While analysts and experts eventually extinguished that line of thinking by showing performance data, these same industry folks could soon be refuting notions that another auto bubble is inflating — but this time because of leasing.

Earlier this month, Experian’s latest State of the Automotive Finance Market report highlighted leasing volume as a share of all new models financed set another record during the second quarter. Analysts indicated leasing continued its strong growth as the share of new vehicles leased jumped from 26.92 percent in Q2 2015 to a record high of 31.44 percent in Q2 2016.

Then this week, J.D. Power and LMC Automotive indicated that they have never seen franchised dealers slap as much cash on the hood as they are seeing this month to keep new metal turning.

Analysts reported on Monday that incentive spending thus far in September is at a record level of $3,923 per unit. That figure surpassed the previous high of $3,753 set in December 2008.

To gauge whether these trends should be triggering alarms, we visited again with Anil Goyal, senior vice president of automotive valuation and analytics at Black Book, which pushed out online survey results involving more than 500 auto finance company executives. The survey released this week showed a large number of auto finance companies say they don’t leverage residual data for their portfolio despite the majority of finance companies admitting that portfolio risk assessment and remarketing remain at the top of their portfolio strategy for a growing number of used vehicles.

“The environment we are in is more volatile with trends that are very different than what we’ve seen in the last five years, with more supply coming back, with more incentives on the new vehicle sales and leases, with increased use of leasing,” Goyal said.

“There is increased risk around residuals in both loan and lease portfolios in trying to understand what that vehicle might be worth when it’s returned or repossessed,” he continued.

Goyal recapped that projecting residual values certainly is challenging for automakers and their captives since there are “a lot of moving parts.” The OEM must coordinate production schedule, work with suppliers and forecast how much demand for a particular model there might be.

And if their projections are off, Goyal pointed out automakers can join forces with captives to incentivize their customers to take delivery. They can simply reduce the vehicle price; that's the cash on the hood. They can reduce the APR, especially since captives originate leases mostly with prime and super-prime customers.

Also, they can offer a subvented residual enhancement. For example, if the residual value projection for a vehicle is 55 percent of its worth as a new model after three years, the OEM and captive can bump up the level to 60 percent in order to make the customer’s lease payment more manageable.

“There’s a lot of those levers that the OEM and the captives have to play around with to ensure that they are making the sales on their existing vehicles and keeping their pricing competitive with others and monitoring that scenario to make the lease payment work,” Goyal said.

But off-lease vehicles are increasing in the wholesale space. Certified pre-owned sales continue to set records, but what if retail demand for those units diminishes?

“Definitely the risks in the leasing scenario are increasing. Essentially, the captive and manufacturers sometimes when they share the risk, you’re essentially pushing the losses to the back end. You’re making the sale, but you’re going to have a loss,” said Goyal, who is one of the experts coming to at the Red Rock Resort and Casino in Las Vegas Nov. 14-18.

“In the last few years, used-car values have been very strong, so in many cases the vehicle that got returned there was not a loss,” he continued. “In fact, in many cases there was a profit to be made because the values were higher than the residuals, especially on SUVs and trucks. But that has really propelled lease penetration.

“The forecast is lower now for where the values are going to be,” Goyal went on to say. “If more and more leases are essentially made feasible to keep that payment lower through subvented residuals, you’re now going to have a situation where the losses will start to appear on the returns.”

So does leasing bubble talk have merit? Goyal didn’t go to that degree during our conversation on Wednesday. He reiterated how leasing is primarily in the prime and super-prime credit tiers. He added rating agencies often make conservative forecasts when making their analysis of securitizations filled with leases.

“We don’t see it as a bubble, but I do think there is an increased risk developing,” Goyal told AuSM. “That essentially limits how long leasing can grow.

“If we have higher and higher incentives to make the leasing work, you’re essentially moving from selling that vehicle to really just providing the vehicle on a three-year lease and pushing out your losses as a captive and manufacturer,” he continued. “That’s a trend that could be disturbing if it continues to grow by increasing the risk in the system.”

To help mitigate that risk, Black Book’s latest white paper, “How To Grow a Profitable Used Leasing Portfolio,” can help finance companies identify which vehicles make good used leasing candidates for their portfolio. It is available for download .

“You don’t want to have unexpected surprises,” Goyal said. “What we promote to our lenders is not a one-and-done kind of analysis. Rather it’s something that’s ongoing, a refresh of the forecast because the trends are changing.”


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