Midsize cars remain popular in at least one place: the used-car auction. But even there, demand has begun to fade for the segment that dominated the industry for decades.
Midsize cars were the only used-vehicle category in which wholesale prices fell in the second half of 2017 — down 0.7 percent. Unlike other segments, whose gains ranged from 2.9 to 10 percent in the fourth quarter alone, midsize car prices have been under pressure.
It's easy to see why: aggressively priced, subvented leases adopted two and three years ago to clear out sedans as consumer preferences shifted to crossovers and SUVs have begun to ripple through the used-car market.
Midsize "cars underperformed all year in terms of pricing, and they'll probably continue to struggle because of demand," said Zohaib Rahim, manager of economics and industry insights for Cox Automotive.
Still, midsize cars continue to be popular at Manheim auctions. In December, the base 2015 Nissan Altima midsize sedan was the No. 1 off-lease vehicle and off-rental vehicle bought at the auctions, Rahim said.
But cars' dominant position in the used-vehicle wholesale market is declining. Rahim said a third of off-lease vehicles in 2018 will be crossovers, up from 30 percent in 2017, while cars coming off lease will decline from 54 percent in 2017 to less than 50 percent in 2018.
"Midsize and compact cars will continue to see weaker price performance as they are most in supply but least in demand, but the flip side is that trucks will see pricing strength," Rahim told analysts last week.
A good example: FCA US' Chrysler 200. The automaker spent more than $1 billion in 2013 retooling its Sterling Heights, Mich., assembly plant to build a redesigned 200 on a new platform. The plan was to compete in the midsize car segment, in which FCA had traditionally lagged.
With aggressive incentives — especially subvented leasing deals and dealer cash through FCA's stair-step Volume Growth Program — sales of the Chrysler 200 climbed to 167,368 in 2015, up 43 percent from the previous year. But in early 2016, FCA concluded it would never make money with the 200 and announced the vehicle would be discontinued. As a result, FCA sold just 57,294 200s in 2016 and just 18,457 in 2017.
Of the 15 midsize car nameplates recording sales in 2017, none had more sales last year than in 2016, and the segment itself was down 16 percent last year.
According to ALG, residual values for 3-year-old nonluxury midsize cars coming off lease late last year were as much as 6 percent lower than had been forecast when they were leased. While that pricing has improved slightly, the residual forecast was still off, said Eric Lyman, ALG's chief industry analyst.
"There's more negative equity coming back for those vehicles, even more than we're seeing in our data," Lyman said. "People don't turn in as many vehicles [at the end of a lease] when they're in a positive equity situation, but they turn in virtually all of the vehicles that are in a negative equity situation."
Thus consumers are returning midsize cars off-lease that are worth less than they were supposed to be, and lenders who leased those vehicles are having to eat the difference.
"This should not come as a major surprise to anyone that there's going to be some losses on midsize lease returns in 2018," Lyman said. "The real question is what have lenders done to prepare for that exposure. I hope this year will be the worst of it. We're three years past where this [consumer shift to utility vehicles] occurred."
