LAWRENCEVILLE, Ga.—Vehicle depreciation for two- to six-year old vehicles is expected to rise noticeably this year, increasing to 15% from 13.2% in 2015, according to a new report.
The rise is particularly significant in that if the projected level of depreciation is reached, it will mark the first time in the previous five years that annual depreciation crests above 14%.
Despite the increase, the depreciation rate will still remain below average pre-recession levels. Fitch and Black Book—which released the data in their latest joint vehicle depreciation report—believe the increase will be driven by several factors.
Black Book forecasts new-car sales to grow slightly to 17.6 million units in 2016. “This level of sales activity, which brings a high volume of trade activity, coupled with a large amount of lease returns, will contribute to the continued increase in depreciation rates,” the company said.
Fitch expects U.S. prime and subprime auto loan and lease asset-backed securities (ABS) performance will be stable and within historical loss levels, although annualized net losses will creep up in conjunction with higher vehicle depreciation in 2016.
The strength shown last year in used values was largely driven by truck segments. The truck segments as a whole experienced half the depreciation rate of the car segments, with annual depreciation of trucks at 9.2% and cars at 18.2%.
The variability in depreciation across the segments increased during 2015, Black Book explained. Among the trucks, the depreciation ranged from 2%-23% across the segments, while among the car segments, the depreciation rates ranged from 14%-22%.
“Given the spread and volatility across various segments, it becomes important for a lender to have a diversified portfolio,” Black Book stated. “Portfolios concentrated in smaller segments experienced the steepest decline in equity. With longer terms and softening used vehicle values, portfolio equity will experience higher risk as it would take longer for a loan to enter into a positive equity position.”
Pressure on residual performance will trend higher in 2016 due to expectations of elevated new vehicle sales, and higher fleet and rental volumes entering the secondary market during the year. Despite this, Fitch believes auto loan and lease ABS ratings performance will not be impacted by the negative asset performance trends in 2016. The agency has a positive rating outlook for loan ABS in 2016, with the pace of upgrades expected to continue and be consistent with 2015, albeit at a slightly slower pace.
“The focus in 2016 will be in the depreciation disparity between car and truck segments, which showed a widening spread toward the end of last year,” said Anil Goyal, senior vice president of automotive valuation and analytics for Black Book. “We expect this spread to remain, however there is growing belief that cars are nearing their floor in terms of depreciation changes.”
“All eyes will remain on the health of the economy and state of the wholesale vehicle market this year” said Hylton Heard, senior director of Fitch Ratings. “Additionally, rising off-lease returns will result in overall higher used vehicle volumes hitting the market and will pressure auto lease residual performance in 2016.”