U.S. Used-Car Prices to Drop as Supply Recovers, ALG Says

Aug 04, 2014 4:11 pm ET

(Updates with analyst’s comment in ninth paragraph.)

Aug. 4 (Bloomberg) -- Used-car prices in the U.S. are poised to fall as the supply increases because rebounding new- car sales are putting more trade-ins on dealer lots, TrueCar Inc.’s ALG division said.

The number of used vehicles available in June reached a low point because of poor sales of new cars and trucks from 2008 through 2012 and the federal government’s 2009 “cash for clunkers” program that took about 700,000 vehicles off U.S. roads, ALG said in a statement today. Greater supply will push prices down 5.2 percent by 2017, according to ALG.

“The continued strength of new-car sales is increasing the availability of high-quality used cars as shoppers continue to trade in their old vehicles,” Larry Dominique, president of the Santa Barbara, California-based division, said in the statement. “Additionally, because of the popularity of short 24- and 36- month leases, the drought of used-car supply is already starting to subside.”

Widely available credit, low interest rates and a rebounding U.S. economy have contributed to five straight months of U.S. new-vehicles sales at an annual rate of more than 16 million. Auto leasing at the highest rate in years also has boosted deliveries. Analysts predict 16.3 million total new- vehicle sales this year, the most since 2006.

ALG estimated that the average new vehicle will retain 49.4 percent of its value after three years by 2017, down from 54.6 percent in June. By 2019, the average residual value might dip to 46 percent, where it was before 2008, the TrueCar unit said.

‘Economics 101’

Lower residual values could draw drivers away from new cars and toward used vehicles, Dominique said in the statement.

“It’s really just economics 101,” said Kevin Tynan, auto analyst for Bloomberg Intelligence. “Greater supply of these used cars will inevitably create weaker prices in the used-car market, and that’ll expand the affordability gap between new and used.”

ALG expects automakers to boost incentives on new vehicles to maintain their sales pace, Dominique said.

Tynan said that “short of throwing loads of cash at the problem,” there’s not much carmakers can do.

“It’s just one of those cyclical things they’ll have to ride out,” Tynan said.

The Manheim Used Vehicle Index, which measures used-vehicle pricing, showed a June score of 124. That was down from 124.9 in April and from a high of 127.8 in May 2011. The index has stayed above 120 for all but three months since October 2010. Before the 2008 economic slump, the index had never topped 117.4.