Analysis
12 Mar 19

US fleets braced for weaker used car values in 2019

Following a bumper year for used car values in 2018, fleet vendors face an uncertain future this year.

Last month the Federal Reserve Bank of New York revealed a deteriorating performance in auto debt, with an increasing number of defaults on loans.

Subprime fears

Joelle Scally, administrator of the Center for Microeconomic Data at the New York Fed, said, “Growing delinquencies among subprime borrowers are responsible for this deteriorating performance, and younger borrowers are struggling most acutely to afford their auto loans.”

The percentage of loan defaults is still low, at 2.4%, but over 7 million Americans were at least 90 days overdue with their auto loan repayments, 1 million more than in 2010 in the wake of the financial crisis.

The New York Fed insists that the quality of the loans within the $584 billion owed in auto debts is the highest it has observed since it started recording this data in 2000. But it added that, “The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market and warrants continued monitoring and analysis of this sector.”

Supply-demand balance in jeopardy

The question for residual value setters and fleet vendors is whether the increasing delinquencies among subprime auto loans is a ‘canary in the coal mine’ warning of a sharp decline in demand. The Fed calculates that subprime borrowers account for 22% of auto loans, and if more than one-fifth of the used car market were unable to afford loans it could upset the demand side of the supply-demand balance that dictates used car values.

On the other side of the equation, the supply of used vehicles is rising, according to Cox Automotive. It said the number of off-lease, ‘gently used’ (up to four-years-old) vehicles is increasing, driven by the high leasing share of new vehicle sales during the record years of 2015 and 2016.

Values to weaken in 2019

At the heart of the fleet sector, leasing and fleet management specialist Wheels anticipates a weakening of used vehicle prices this year.

“The resale market was very strong in the last year, and we expect to see a softening in 2019, which we are factoring into our advice to clients,” said Ahsan Rahim, chief operating officer, Wheels.

This is primarily a problem for end-user fleets rather than leasing companies because ‘open-end leasing’ products dominate the US market. These are similar to finance lease arrangements, with customers responsible for meeting balloon payments at the end of a contract. As a result, the residual value risk is carried by the customer, rather than the leasing company.

Grounds for optimism

Fleet management specialist ARI, which operates a fleet of 1.7 million vehicles in the US and Europe, has a more optimistic view of used vehicle prices in 2019, continuing last year’s upward momentum.

Ted Davis, vice president, North American Supply Chain, ARI, said, “Low fuel prices continue to drive sustained demand for quality fleet crossovers and SUVs with consumers on the secondary markets. Vocational vans and trucks also continue to retain exceptional value as the economy remains strong across key commercial segments, especially the construction sector.”

He warned, however, that demand is weak in the saloon car sector as used vehicle buyers gravitate towards SUVs and crossovers.

“As more manufacturers slow production of sedans – or in some cases, eliminate production entirely – there may be a slight boost to this segment of the market due to product scarcity but we’ve yet to see any momentum for this scenario,” said Davis.

Tariffs to impact resale values

ARI is also closely monitoring how any automotive tariffs and trade agreements might impact resale values in the used vehicle market.

“How they all align will ultimately determine the combined effect on the used vehicle market,” said Davis.

 

 

 

Authored by: Jonathan Manning
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