The Automotive Lease Guide (ALG), a respected residual forecasting guidebook, predicts that average resale values in the 2003 calendar year will be five percent lower than those in 2002. “With only several months left, it will take a miracle to turn 2003 into a breakeven year,” said Raj Sundaram, president of ALG.

The primary reasons for the decline are the aggressive new-vehicle retail incentive programs offered by manufacturers and the high used-vehicle inventory. Recently resale values have improved month-over-month, but Sundaram cautions that it is important to temper this optimism. “What’s happening is positive, but it is misleading to say the market, as a whole, is better, especially since today’s resale values are at a three-year low.”

ALG forecasts that resale values, on average, will be flat or slightly lower in 2004 compared to 2003. The key reason is the anticipation that new-vehicle retail incentives will continue to be as aggressive in 2004 as they were in 2003. “If anything, we project that incentives will get slightly worse,” said Sundaram. “It is very likely that incentives will increase 10-15 percent over 2003. Of every dollar increase in incentives, almost 43 cents is passed on as a residual deduction for a three-year-old vehicle.” The used-vehicle inventory will be lower in 2004 because of the decrease in the number of retail off-lease cars, mitigating this downward pressure on resale values, added Sundaram.

ALG also forecasts declines in residual values for full-size pickups in 2004 and beyond. “We think this segment will become extremely competitive as the number of new models increases, which will cause unbelievable pressures on residuals,” said Sundaram.