The reason for all of this comes down to fairly basic economics: supply and demand. According to a newly released study by Black Book and Fitch Ratings, used car inventories and lease returns are expected to grow by 10 percent in 2015. With the market flooded, prices naturally fall. The research indicates the average vehicle depreciation rate increasing to 14.5 percent for the year, a return to pre-recession levels. In comparison, used vehicle lost just 12.1 percent of their value in 2014.
Anil Goyal, vice president of analytics and strategic partnerships for Black Book, said low gas prices could hurt smaller cars because fewer buyers will be focusing on buying fuel-efficient vehicles. But as the economy grows stronger - particularly the housing market and in the service economies - truck prices will stay stable. The car makers will likely moderate production of trucks to balance production with actual demand, he predicted.
Morgan Stanley predicted the trend towards lower used car prices last year. With new car sales growing in the US, it inevitably means more pre-owned vehicles eventually coming to market. Furthermore, longer-term loans with low monthly payments are reportedly enticing buyers towards new models.
Total new auto sales are still expected to tick up by Black Book from around 16.5 million in 2014 to more than 16.7 million in 2015. That figure falls in line with IHS' prediction of 16.9 million and 17 million from other analysts.
According to the report, 2014 new vehicle sales finished the year at 16.5 million units, and Black Book is forecasting new vehicle sales to finish north of 16.7 million units in 2015. The annual depreciation rate on used vehicles in 2014 was 12.1%, slightly lower than its initial forecast. Black Book believes annual depreciation levels on used vehicles will continue to trend toward pre-recession historical rates and climb to 14.5% in 2015.
"2014 depreciation was defined by pockets of volatility due to seasonality, harsh weather patterns and falling fuel prices impacting smaller cars and trucks of all sizes," said Anil Goyal, Vice President of Analytics and Strategic Partnerships for Black Book. "Looking ahead, lower consumer demand and CAFÉ-driven model competition will place higher depreciation pressure on smaller car segments particularly, but trucks should have stable retention in 2015 due to balanced production levels and strong housing and service economies."
Fitch believes higher vehicle depreciation in 2015 is not expected to have a significant impact on overall auto asset-backed securities (ABS) performance. Fitch expects U.S. auto loan ABS loss rates to rise in 2015 but not have a significant impact on overall performance.
Fitch's outlook continues to be stable for prime asset performance and positive for ratings performance, consistent with 2014.
According to Fitch, residual value (RV) performance of U.S. auto lease ABS transactions moderated in 2014 with lower gains ending December 2014 at a 3.87% gain, down from 7.23% a year earlier as vehicle values crept lower during the year while used volume rose.
Looking ahead, used vehicle inventory levels and lease vehicle returns will continue to increase in 2015 by over 10%, along with higher vehicle trade-in volumes. These trends will drive RV losses higher throughout the year, but not impact ratings performance. The outlook for asset and ratings performance for auto lease ABS is stable for 2015, despite these negative trends.
The Black Book-Fitch vehicle depreciation report is a joint venture by the two companies utilizing Black Book's used vehicle depreciation data, and Fitch's U.S. auto ABS indices data.
Black Book tracks used vehicle market depreciation rates providing an understanding of how vehicle prices impact automobile lenders and lessors, auto ABS transactions, consumers and other auto market constituents.
"Leveraging accurate and timely collateral data trends from Black Book are critical to auto lenders especially given the changing landscape for risk potential in 2015," said Hylton Heard, Senior director of Fitch Ratings.
The Black Book-Fitch Vehicle Depreciation Report is available for download by clicking here.