Residual values are simply predictions of future used-vehicle values. Anything that changes new-vehicles prices can change used-vehicle prices.
That gets complicated.
To keep that delicate relationship in balance, auto companies try to be disciplined in their use of incentives, which can damage brand image, render sticker prices meaningless and erode late-model used-vehicle values.
But as incentives go, subvented new-vehicle leases are less damaging to used-vehicle values than "dollars on the hood" of a new vehicle -- a cash rebate -- says Tom Kontos, executive vice president of customer strategies and analytics at ADESA Inc.
That's because a cash rebate is easily calculated as a reduction in the value of a used vehicle of the same make and model. For example, a $1,000 rebate on a new vehicle might reduce the value of a 2-year-old used vehicle of the same make and body style by $800, Kontos says.
Auto companies also are selling fewer vehicles to rental car fleets, which used to be a relief valve for excess production. Retired rental cars depress used-vehicle prices when too many of the same models return to the market at the same time.
For example, an August 2004 story in Automotive News detailed how the Ford Taurus, 20 years after its introduction, had become a "rental car cliche," with 60 percent of its volume sold to fleets.
"The huge supply of used Tauruses has torpedoed its residual values" the story noted. "Taurus residuals after 36 months have plunged from 46 percent of sticker price for 1996 models to 27 percent for 2004 models according to Automotive Lease Guide, which tracks values of used vehicles."
Manheim's 2013 Used Car Market Report says vehicle sales to rental car companies in 2012 rose 11 percent, to 1.55 million. That is the highest total since 2007, but well below the 2.1 million sold into rental in 2005 and 2006, the report states.
General Motors' decision to suspend production of its sluggish selling Chevy Malibu this year, and Nissan North America Inc.'s price cut on seven of its top-selling models are examples of that discipline, says Eric Lyman, vice president of editorial at ALG, which monitors and projects vehicle values. Lyman oversees ALG's residual values forecast.
Lyman adds: "These are two examples of how automakers have really revised their go-to-market strategies with their vehicles to limit incentive spending."