Used Vehicle Supply Hurting Residual Values

Residual values for three-year-old vehicles are flattening as a result of a record level of volume in the second quarter of 2018, according to a report from Edmunds.

This flattening has increased the gap in price that exists between new and used vehicles by an average of $13,339. As new-vehicle prices continue to rise, this gap has only gotten larger, back in 2013 the difference between a new vehicle and a three-year-old vehicle was $10,632.

The biggest gap between new and used car pricing appears to be in the luxury segment, as depreciation for these vehicles has been steadily growing in the past few years. A three-year-old used midsize luxury car is about 48% cheaper than a new model, meaning that in the span of three years, a midsize luxury car has lost nearly half of its value.

Meanwhile, the price difference between a 3-year-old truck and a new model is noticeably slimmer. A used three-year-old midsize truck nets about 27% savings, compared to a new model.

One reason cited for the higher depreciation from the luxury segment is its high lease penetration. These vehicles are often some of the most often-leased models, meaning that there is a constant supply of off-lease vehicles returning to market. Trucks, on the other hand, have much smaller lease penetrations, meaning that demand for these used vehicles often outweighs supply.

Leasing rates have steadily risen in recent years, should they continue to rise, pricing for segments that have high lease penetrations could continue to fall.