ALG predicts used-car prices will drop 4-5% over 12 months
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DETROIT -- Average used-vehicle prices will fall 4 to 5 percent over the next 12 months, according to ALG’s Industry Report released today.
In two to three years, average used-vehicle values will be 8 to 10 percent below current levels, the company, formerly known as Automotive Lease Guide, predicts.
ALG specializes in forecasting residual values for specific brands and nameplates. For instance, ALG might predict that a specific car will have a residual value of 45 percent of its new-car sticker price after three years. Finance institutions use that forecast to determine how much to charge for a three-year lease for that vehicle.
Falling residual values will challenge dealers because they’ll have to ask consumers to make higher monthly lease payments on vehicles, said Eric Lyman, ALG’s vice president of residual value solutions.
“The bottom line is your lease payment is determined by the difference between your transaction price and your lease-end residual value,” he said.
Drop expected
A drop in used-vehicle prices has been expected, but the size of the decline is in question.
Used-vehicle prices have softened slightly since they peaked, depending on the nameplate, at record levels around May 2011. Prices rose on a severe shortage of used vehicles, reflecting weak vehicle sales and almost nonexistent leases in 2007-09, the 2009 cash-for-clunkers program that eliminated many older used cars and a shortage of competing new cars after the earthquake and tsunami in Japan in March 2011.
Low used-car supplies are dictating how the used market behaves, Lyman said, and an increase in supplies won’t come for another year or two.
“The supply right now is so low, that is controlling everything in the used-market values. There just aren’t enough vehicles out there relative to used-car demand,” Lyman said.
When the recession began in late 2007, ALG’s Used Vehicle Value Index for 1- to 5-year-old vehicles declined from 118 points to 95 points in late 2008. The index started at 100 points as a base year in 1998.
Back to 'normal'
Since late 2008, used-market values have rebounded to nearly 140 points.
“We’re seeing sort of a landing back to a normal used-car market environment. With the financial crisis of 2008, you see that huge decline in the used-car value index. Since that time, we’ve seen this huge recovery,” Lyman said.
“What we’re essentially saying is that this correction that we’re expecting over the near term will be more in line with a more sustainable and steady used-car market.”
You can reach Vince Bond Jr. at vbond@crain.com. -- Follow Vince on 
