High used-car values are lasting longer than ALG expected. So the company went back to the drawing board this year and raised residual forecasts over previous predictions, says Eric Lyman, ALG's director of residual solutions.
Why residuals are in a 'very good situation'
The company's residual forecasts appear every two months in its ALG guides. Three have been issued so far this year: January-February, March-April and May-June. The July-August guide will be published July 1.The changes started in the May-June guide.
Averaging out ALG figures this year through the upcoming July-August guide, the 36-month residual value for mainstream, nonluxury brands is 49.7 percent of sticker price, up from 46.7 percent in the period a year ago, Lyman says.
ALG still expects residuals to decline over the next few years, Lyman says, just not as fast as previously thought.
Higher residual values imply lower monthly payments, and that could help make leases an easier sell.
Lyman spoke about the changes last week with Automotive News Special Correspondent Jim Henry.
How are residual values doing year over year, as opposed to seasonal changes?
Residuals are up year over year. The [Detroit 3] domestics have improved significantly because they overhauled their products, and they're doing much better than they had done historically. They're so big, volumewise, they have an impact on the average.
Wasn't 2013 supposed to be the year in which the supply of 3-year-old cars would start recovering and used values would start declining?
We still have a few years of low used supply ahead of us. Three- to 4-year-old cars, you are starting to see a big increase. But one of the things we are investigating is the correlation between 3- to 4-year-old vs. 5- to-7-year-old values. Used cars are cross-shopped at a greater range than you might think. People look at a variety of model years and vehicles. Three-to-4-years are impacted by 5-to-7-years.
So if you look at cars up to 7 years old, the trough in older used cars is still offsetting the recent increase in newer used cars?
It's overall a 1-to-7-year range that's the relevant range. We see some stability there.
If you think about it, from '02 to '08 you were talking 24 million [used] cars in that range. We're still essentially in the trough at 18 to 19 million. When you're talking about a seven-year moving number, the tail is pretty long.
We haven't seen people who are coming out of a 3-to-4-year old car only looking at 3-to-4-year-old cars. They're looking at all sort of vehicles. Essentially, they're looking at price.
And used-car prices are still pretty high, right?
The used-car customer says, "I have this much money to spend." They are willing to be flexible on segmentation and model year, but price is the key thing holding them in place.
The financing offers aren't as beneficial to the consumer in used. There's essentially no leasing option. Pricing becomes an issue.
Why are cars up to 7 years old the relevant time frame?
We are focusing on three years because that's the typical lease term. And seven years is as far as we want to go out to measure the impact on 3-year-old value. We think that's the appropriate range where you're going to find an impact on 3-year-old value.
Loan terms seem to be getting irreversibly longer, but not lease terms?
Loan terms have definitely extended out, but leasing is squarely in the 36-month range. We have seen more 24-month leases lately.
Why the increase in shorter leases?
We are still expecting a decline in high used values as you get further out from the peak.
What we think is that 24-month forecasts have been disproportionately higher than 36-month forecasts, and some brands are leveraging that to create lower monthly payments.
Or for instance if you have a new car coming out in two years or 18 months, a 24-month lease program, an OEM is thinking, "This is the perfect way to get that person back on my lot," which is the most difficult thing for a manufacturer to do.
So higher values are hanging in there longer than you expected?
We have more confidence in the resiliency of the used-car market than we had last year. As I say, we still expect it to decline. But to the extent we expected those really high peaks to come down, it's taking a lot longer for the industry to come down than we expected.
And you're factoring in supply, too, right?
A lot of that has to do with the continued discipline by the OEMs. We have seen in this recovery they haven't gone crazy on the production side. They are adding more shifts here and there, but overall the production side is still contained.
That's a very good situation for residual values.
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