Fundamentally, used-vehicle values are up because the supply of late-model used vehicles is down. People are keeping their cars longer, which is why new-vehicle sales dropped so much in 2008 and 2009. U.S. light-vehicle sales fell by about 2.9 million units from 2007 to 2008, and another 2.8 million from 2008 to 2009.
While the number of trade-ins fell, automakers also slammed the brakes on new-vehicle production. So far, they are being conservative about adding back production.
Taken together, those factors make off-lease cars that are two or three years old more scarce and therefore more valuable. And because projected residual values are based on recent history, that's raising residuals on vehicles that will come back from leases two or three years from now.
For instance, Ford said recently that the projected resale value of 2010 Ford, Lincoln and Mercury vehicles after 36 months in service increased by an average of $1,310 per vehicle compared with 2009 models.
If the entire difference were passed along to the consumer, that would be about $36 per month off the monthly payment - without adding any extraordinary incentives, such as artificially inflating the residual value or buying down the customer's interest rate, which are the usual means of adding incentives to leases.
Inflating residual values backfired badly on auto lenders in 2008, when gasoline prices spiked and used-vehicle values fell, especially for pickups and SUVs. Automakers and their finance companies make it a practice to set aside reserves to cover losses on residuals, but if the losses are greater than expected, that can generate bigger problems.