Al Root reports at Barron’s on the steep drop in used-car prices is doing to the auto industry. He writes:
As if things weren’t bad enough for the auto industry , now used-car prices are cratering. That creates more pressure in several areas of the automotive value chain .
The Manheim Used Vehicle Value Index—a key benchmark for industry pricing—has declined about 11% compared with March and is down roughly 10% year over year. The last time the Index dropped a similar magnitude was, unsurprisingly, during the 2008-09 financial crisis.
The problems falling used-car prices create are myriad. The U.S. used-car market is actually far larger than the new-car market. There are, after all, hundreds of millions of registered vehicles on U.S. roads. American consumers buy an average of 16 million or 17 million new cars each year. Used-car prices impact new-car prices, rental-car companies, and dealer profits, as well as lease residual values. Residual, in this instance, is the amount finance companies estimate the car is worth at the end of a leasing period.
Don’t forget the auto makers are also large auto lenders. “As of Dec. 31, 2019, GM Financial reported $30.4 billion of estimated residual values of leased vehicles and Ford Credit reported $27.6 billion,” wrote J.P. Morgan analyst Ryan Brinkman in a Monday research report. Ford Motor (ticker: F) and General Motors (GM) were expecting used-car prices to decline in 2020, but if prices drop more than expected, Brinkman sees almost $6 billion in incremental losses from leasing impairments.
Read more here.