Annual Depreciation Forecast for 17%; ABS Pressures Stem from Higher Supplies
LAWRENCEVILLE, GA (April 2, 2018) – Black Book, a division of Hearst Business Media that provides industry-leading used vehicle valuation and residual value forecast solutions, announced today its latest joint vehicle depreciation report with Fitch. Black Book forecasts an annual depreciation rate of 17% in 2018 as the supply of used cars and trucks increases, up from a lower-than-expected 13.2% experienced in 2017 due to strong sales activity stemming from hurricanes last fall. The latest joint vehicle depreciation report can be downloaded by clicking here.
Among the Report Highlights:
- New light vehicles sales volume decreased by 2% in 2017 to 17.14 million, below the record of 17.46 million in 2016.
- Light trucks, including SUVs, crossovers and pickups continue to increase in U.S. new sales, constituting 65% of the volume compared to 57% in 2016 and 55% in 2015.
- Incentive spending by auto manufacturers grew year-over-year in 2017, ending the year at nearly $4,000 in average incentive amount on new vehicles.
2017 Depreciation Trends
In 2017, the Prestige Luxury Car segment had the highest annual depreciation at 23.4%. On the other hand, full-size pickups retained their value well throughout the year as demand of used pickups remained high, ending the year with only 5.1% in depreciation. Full-Size Crossover/SUV, the largest of the SUVs, had the strongest retention with a depreciation rate of 9.4%. Their values held up well with nearly zero depreciation in the first two quarters of the year. Sub-Compact Cars, the smallest of sedans, experienced the highest depreciation rate among non-luxury car segments at 17.6% in 2017. On the other hand, the next level up in sedans, Compact Cars, performed much better than in previous years. Among the Crossover/ SUVs, the smallest of the luxury crossovers, Sub-Compact Luxury CUVs depreciated the most at 19.2%.
A Look Ahead at 2018 Trends
In January 2018, a 2015 model year vehicle on average was valued at 51% in wholesale, as percentage of typically-equipped MSRP. This three-year retention has dropped from 52% in January 2017, which at that time was for a 2014 model year vehicle. Black Book residual value forecasts show that values of 2018 model year vehicles in January 2021 are expected to be three percentage points lower than the current retention trends averaged across all vehicle models.
At the specific vehicle segment, brand and individual vehicle level, residual values offer a different look according to Black Book. When economic conditions and expectations are factored into Black Book’s Scenario-Based Residuals modeling, the trend shows a steeper drop in residual values when considering an economic downturn scenario. The company also expects to see a slight pullback in lease penetration, as rising interest rates, declining residuals, tighter credit criteria and rising availability of off-lease used vehicle options make leasing more expensive for auto manufacturers and their captive finance companies.
“We expect vehicle depreciation to increase and residual values to decline in 2018 as used vehicle supplies increase while overall demand stabilizes,” said Anil Goyal, Executive Vice President, Operations at Black Book. “Consumer demand at the vehicle segment level may see more volatility, and as such lenders should analyze and measure portfolio equity on a regular basis to assess risk within their portfolios.”
U.S. Auto ABS Outlook for 2018
Fitch’s prime asset performance is forecast to continue normalizing but remain well within recessionary
levels. Prime annualized net losses (ANL) will get closer to the 1% range in 2018. Loss severity is a focus in 2018 as high used vehicle supply and reduced used vehicle demand will constrain recoveries. Extended-term loans (loans over 60 months) , which comprise a large majority of all prime and subprime ABS pools securitized, remain a key risk next year, particularly if early defaults increase on these riskier loans and drive the pace of losses higher.
Subprime asset performance will be pressured in 2018 at or near prior recessionary levels, with the weakest performance attributed to the smaller and less seasoned lenders, whom ABS platforms Fitch does not rate. The risk to subprime lenders may accelerate as auto sales decline and competition ramps up, forcing them to further loosen credit standards to gain or hold market share.
Overall, Fitch expects severity to remain as the main factor impacting ABS performance, especially as more used supply puts pressure on recovery rates in auto ABS pools during 2018.
“Despite a relatively stable outlook for auto lease ABS asset performance in 2018, it is evident that increasing lease returns in 2018 will place more pressure on residual performance throughout the year,” said Hylton Heard, Senior Director, Fitch Ratings.
The Black Book-Fitch Vehicle Depreciation Report is available for download by clicking here.
About Fitch Ratings
Fitch Ratings is a leading provider of credit ratings, commentary and research. Dedicated to providing value beyond the rating through independent and prospective credit opinions, Fitch Ratings offers global perspectives shaped by strong local market experience and credit market expertise. Fitch Ratings is part of Fitch Group, a global leader in financial information services. Fitch Group is majority owned by Hearst Corporation.
About Black Book
Black Book® is best known in the automotive industry for providing timely, independent and accurate vehicle pricing information, and is available to industry-qualified users through online subscription products, mobile applications and licensing agreements. Since 1955 Black Book has continuously evolved to ensure that it achieves its goal of delivering mission-critical information to its customers, along with the insight necessary to successfully buy, sell, and lend. Black Book data is published daily by National Auto Research, a division of Hearst Business media, and the company maintains offices in Georgia, Florida, and Maryland as well as the Canadian Black Book in Toronto. For more information, please visit BlackBook.com or call 800.554.1026.
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