Black Book and Fitch Ratings, Inc. released their latest joint vehicle depreciation report, showing that overall vehicle depreciation is expected to reach between 14-14.5 percent by the end of 2015, and the main factor driving depreciation rates will be rising used vehicle supply, varying by vehicle segments.
According to Fitch, marginally rising depreciation rates will not have much impact on Auto ABS asset performance. Despite this prediction, the agency believes loss rates will rise due to marginal declines used-vehicle values in the latter half of 2015, according to the report. Primarily, this is because trade-in and lease return volumes will continue to pressure wholesale values.
Black Book analysis in the report shows that the supply of used vehicles will continue to increase, ultimately leading to larger depreciation. Annual depreciation on two to six-year-old vehicles was 12.1 percent in 2014, similar to the levels seen in 2012 and 2013. The annual depreciation in 2011 was unbelievably strong at 7.7 percent, given limited manufacturer vehicle production and low inventory levels, combined with strong pick-up in demand for both new and used vehicles after the recession.
Annual depreciation in pre-recession years ranged from 14 percent to 18 percent, which will put the expected depreciation of 14.5 percent in 2015 at the lower end of the range in peak depreciation periods.
Auto loan and lease ABS asset performance is stable for the prime sector even with loss rates likely to rise marginally for the remainder of the year. The outlook for ratings performance is positive, with Fitch likely to continue issuing rating upgrades this year on par with the number issued in 2014.
Fitch believes that pools of loans and leases securitized will be susceptible to vehicle segment concentrations present. This is due to various factors that drive used values by vehicle segment, including gas prices, interest rates, and industries. For example, with the building industry picking up demand for trucks has improved and so have values in 2015.
Several factors have contributed to the strength of the used-vehicle market since the recession, including employment growth, a strengthening economy, and healthy credit availability.
Truck segments have continued to show higher volatility in recent years, according to the report. Some truck segments are showing unusual strength. The prime models are the full-size vans and wagons with a refreshed design, driving higher used demand for the “old” style.
Overall, yearly depreciation in 2014 was much better than volumes suggested and better than 2013. The average age of vehicles on the road more than 11 years old continues to support replacement with new and slightly newer used vehicles.
“Demand has remained strong over the last few years, but at this point the attention will turn toward overall supply in the market,” said Anil Goyal, VP of Automotive Valuation and Analytics for Black Book. “With off-lease vehicles approaching all-time highs in the coming years, we expect that supply will be a primary driver for the accelerating depreciation over the next few years.”
The Black Book-Fitch vehicle depreciation report is a joint venture by the two companies utilizing Black Book’s used vehicle depreciation data, and Fitch’s U.S. Auto ABS indices data.
Black Book tracks used vehicle market depreciation rates providing an understanding of how vehicle prices impact automobile lenders and lessors, auto ABS transactions, consumers, and other auto market constituents.
“There remains talk of increased interest rates in the near term, and auto lenders are expected to rely more heavily on collateral trends in order to analyze and assess their portfolio to identify continued opportunities for growth,” said Hylton Heard, sedirector of Fitch Ratings.
The Black Book-Fitch Vehicle Depreciation Report is available for download by clicking here.