Used Car Prices are Plummeting

If you are thinking of trading in or selling your old ride you should hurry. Some analysts think that used car prices are heading into the toilet.

Used vehicle prices might fall by 50% over the next five years, experts at Morgan Stanley predicted. They based their prediction on a high level of trade-ins; and lease returns, and rising interest rates, Seeking Alpha’s Chuck Schultz wrote.

New tech and safety features in upcoming generations of vehicles are likely to lower the appeal of older vehicles, Morgan Stanley analyst Adam Jonas forecast. New tech that might damage vehicle prices includes electric vehicles; improved hybrids and self-driving cars.

Preowned vehicle prices have been falling for some time; the NADA Used Car Guide price index indicates that vehicle prices fell by about 4% during 2016, Bloomberg reported. A major cause of that is the number of leased vehicles returning to dealerships.

Leases coming back to Haunt Detroit and its Customers

The volume of lease returns is expected to increase by around nine percent in 2017, J.D. Power estimated. That means dealers will be flooded with clean late model vehicles in good condition. If this prophecy comes true, it’ll cut the value of trade-ins by around nine percent.

The used-car glut is already hurting car rental companies which depend heavily on vehicle sales as a source of revenue. Hertz Global Holdings (NYSE: HTZ); which has already been hurt badly by competition from Uber and Lyft, reported a net income of just $18 million – despite revenues of $10.67 billion on December 31, 2016.

Also feeling the heat are automakers like Ford (NYSE: F) that specialize in sales to middle and working class customers. Much of their sales boom in recent years has been generated by leases. Ford reported generating $7.458 billion in financing during fourth quarter 2016, much of that money came from leasing.

A big problem that companies like Ford will face is a flood of lower cost late model used cars on the market. That will give customers a strong incentive to buy used and lead to a lot of great deals.

Underwater Cars

A related problem is that a large percentage of the car trade-ins (32%) were “underwater data from Edmunds and Morgan Stanley Research uncovered by Zero Hedge indicates. That means the value of the vehicles was less than the amount owed on the loan.

That’s a big problem for finance companies, automakers, lenders and dealers because they often end up eating the loan to get the sale. It also means that some buyers might not be able to trade their vehicles. A final problem is that many dealers will not be able to make money off used cars.

It looks like it’s a lousy time to sell a used car, but it will soon be a good time to go shopping for preowned vehicles. A buyer’s market is just around the corner, and a lot of people are going to be able to pick some great older cars and trucks at terrific prices. So it might be a good idea to put off your used car shopping trip for a year or so.

 

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