Trade-in equity rising, but used values likely to drop in next year

Trade-in equity rising, but used values likely to drop in next year

The recent rise in trade-in equity should help release pent-up demand for new cars, says a new report by the NADA Used Car Guide. As the pricing gap between new and used vehicles narrows, demand for used is softening. As a result, ALG (formerly Automotive Lease Guide) expects used market values to decrease by 4 to 5 percent in the next year.

Used Car Guide executive automotive analyst Jonathan Banks gives an example of the rise in trade-in equity: In 2006 it took a consumer who bought a new Ford Explorer XLT 4WD with a 6-cylinder engine 41 months to reach positive equity. But in 2009, it took just 26 months.

NADA estimates that used-vehicle depreciation averaged just 13.1 percent from 2009 through 2011, nine percentage points better than the 22 percent average over the past 10 years.

The percentage of dealership transactions nationwide attributed to used-vehicle sales has been declining since their peak of nearly 65 percent in 2010, according to ALG. The percentage of new-vehicle sales passed 50 percent in August 2012.

ALG predicts that in two to three years, thanks to lower demand and rising supply, used-vehicle prices will be 8 to 10 percent lower than now. Long term, the company expects residuals to drop.