More used, fewer new sales could improve negative-equity levels

Experts have mixed views on the future of negative-equity levels, but most agree that it largely will depend on used-vehicle values and the new-vehicle sales rate.

The factors that drive negative equity are interwoven, said Melinda Zabritski, Experian's senior director of automotive finance.

Declining used-vehicle values, for example, yield positive and negative results for consumers. "With declining values, the knee-jerk reaction is, 'Oh, it's great. It's going to make used vehicles more affordable.' But it impacts your trade-in," Zabritski said.

If the used-vehicle market becomes more appealing with low prices, manufacturers may respond by increasing incentives to make new vehicles more affordable, she said.

Negative-equity increases are in line with rising transaction prices, but "it's still a lot of money to roll over," said Ivan Drury, senior manager, analytics development at Edmunds.

With new-vehicle sales flattening or declining, he said, "I think we can start to see some of this taper off or maybe buoy a little bit and not just keep climbing at the same rate."

A new-vehicle sales decline with a used-vehicle sales increase would improve negative-equity levels, said Cheryl Miller, vice president of lender solutions at Dealertrack.

She expects loan terms to continue to extend, as customers seek affordability, and average transaction prices to rise, which could increase negative equity.

"It's the lengthening of the loan term that allows the customer to buy the more expensive vehicle," Miller said.

"The consumer is really thinking about payment, and if they can afford $350, oftentimes you get to that $350 payment with a 72-month loan versus a 60-month loan."

Lou Loquasto, auto finance leader at Equifax, expects the rising negative-equity situation to continue for now. "I think it will result in consumers staying in the car longer," he said.

Otherwise, manufacturers would have to offer incentives appealing enough to bring customers into the dealership, and lenders would have to be willing to take on additional loan-to-value risk, he said.

"I don't see that happening in the near term."