Falling used-vehicle values threaten recovery

The long-awaited decline in used-vehicle prices has finally arrived, only it may turn out to be steeper drop and a bigger threat to the overall market than almost anyone expected.

Prices have slipped for three straight months due to an influx of off-lease vehicles, just as analysts predicted. But other factors have led to new warnings that are substantially gloomier.

“We see an alignment of forces that could drive the largest decline in used-car prices in history,” said Morgan Stanley analyst Adam Jonas.

Others disagree — strongly — saying the decline will be within the traditional seasonal range.

Either way a lot is at stake.

“Used-car prices are probably the single most important metric analyzed when judging the health and well-being of the U.S. auto cycle,” said Jonas.

Strong used-vehicle prices make it more likely new-vehicle shoppers will get a high price for their trade-in and won’t be underwater on their current vehicle’s loan. If used prices tank that will make car buying significantly more expensive for many Americans.

Jonas cited several reasons for his dire forecast.

• The Manheim Used Vehicle Value Index declined in July from the previous month for the third month in a row, with prices of used full-sized cars down for 35 straight months.

• The decline came despite what Jonas called a “relatively tight” used-vehicle market, at around 45 days supply.

• Amid widespread offers of 0 percent, 72-month new-car loans, declining new-vehicle transaction prices are putting pressure on used-vehicle margins.

• Jonas’ discussions with rental-car companies “suggest a shift back towards program cars,” with automakers guaranteeing they will buy back vehicles that are retired from the rental fleet, as opposed to “risk cars,” for which the rental companies assume the risk of price depreciation. Jonas called that “a complete U-turn from the direction they were headed just six months ago.”

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