LAWRENCEVILLE, Ga.—Black Book is forecasting 2017 vehicle depreciation rates will hit 17.8%, and new auto sales will come in at 17 million units.
The depreciation forecast is up slightly from the 17.3% mark recorded in 2016. Average pre-recession annual depreciation trended between 16%-18%, stated Black Book. The data can be found Black Book’s latest joint depreciation report with Fitch Ratings here.
Between 2011-2015, average annual depreciation fell between 8.3%-13.2%, driven mostly by high demand for used vehicles followed by low supply levels of in-demand segments such as trucks, crossovers and sport utility vehicles. Black Book believes much of the pent-up demand fueling both new and used vehicle sales has been spent, resulting in a rising level of vehicle depreciation expected in 2017. What’s more, a continued increase in lease activity along with higher incentives that began in 2016 spell more pressure on residual values, which are also expected to continue falling in 2017.
“The Black Book Used Vehicle Retention Index is designed to provide an accurate view of the strength of used vehicle wholesale market values. The index is calculated using Black Book’s published Wholesale Average value on 2- to 6- year old used vehicles, as percent of original typically-equipped MSRP,” Black Book stated. “As more two- to six-year-old vehicles return to the market in the coming years, this index provides an overall measurement of strength/weakness in wholesale used vehicle value retention. The index lost 6% in 2016. The index is expected to continue its slow decline in 2017 as the used vehicle market loses strength.”
Black Book forecasts a continual and gradual decline in residuals in the coming years. Currently, a three-year-old vehicle is averaging 52% of its original typically equipped MSRP, and this is expected to decline to 48% by 2020. Black Book expects the market to reach a gradual normalization over the next three years. The biggest concerns include continuously increasing lease penetration leading to residual losses on the returns due to excess supply, higher levels of incentives on new vehicles pushing down used values, and longer loan terms leading to sustained negative equity.
“As we continue to move into the new year, several positive trends that drove market strength will continue to turn and reshape the landscape for used vehicles,” said Anil Goyal, senior vice president of automotive valuation and analytics at Black Book. “Increased supplies from trade-ins and lease returns, coupled with a plateau in new sales activity will bring changes that can affect inventory strategies and profit potential.”