Black Book, a division of Hearst Business Media that provides new- and used-vehicle valuation services and custom data licensing solutions, made available today its latest joint depreciation report with Fitch Ratings. The report, accessible by clicking here, forecasts 2017 vehicle depreciation to reach 17.8%, slightly up from the 17.3% mark recorded in 2016. Average pre-recession annual depreciation trended between 16%-18%.

Between 2011-2016, average annual depreciation fell between 8.3%-13.2%, driven mostly by high demand for used vehicles followed by low supply levels of in-demand segments such as trucks, crossovers and sport utility vehicles. Black Book believes much of the pent-up demand fueling both new and used vehicle sales has been spent, resulting in a rising level of vehicle depreciation expected in 2017. What’s more, a continued increase in lease activity along with higher incentives that began in 2016 spell more pressure on residual values, which are also expected to continue falling in 2017.

Black Book Wholesale Value Index Dropped 6% in 2016

The Black Book Wholesale Value Index is designed to provide an accurate view of the strength of used vehicle wholesale market values. The index is calculated using Black Book’s published Wholesale Average value on 2- to 6- year old used vehicles, as percent of original typically-equipped MSRP. Black Book’s Wholesale Average is a benchmark value for used vehicles selling in the wholesale auctions with the vehicle quality in Average condition. The index is weighted based on registration volume and adjusted for seasonality, vehicle age, mileage, condition, segment mix and inflation (MSRP).

As more 2- to 6-year vehicles return to the market in the coming years, this index provides an overall measurement of strength/weakness in wholesale used vehicle value retention. The index lost 6% in 2016. The index is expected to continue its slow decline in 2017 as the used vehicle market loses strength.

Residual Values To Decline

Black Book forecasts a continual and gradual decline in residuals in the coming years. Currently, a 2-year-old vehicle is averaging 52% of its original MSRP, and this is expected to decline to 48% by 2020. Black Book expects the market to reach a gradual normalization over the next three years. The biggest concerns include continuously increasing lease penetration leading to residual losses on the returns due to excess supply, higher levels of incentives on new vehicles pushing down used values, and longer loan terms leading to sustained negative equity.

“As we continue to move into the new year, several trends will continue to evolve and reshape the landscape for used vehicles,” said Anil Goyal, Senior Vice President of Automotive Valuation and Analytics at Black Book. “Increased supplies from trade-ins and lease returns, coupled with a plateau in new sales activity will bring changes that can affect inventory strategies and profit potential.”

No Major Concerns for U.S. Auto Loan ABS Despite Weaker Asset Performance

“Fitch continues to have a positive rating outlook for prime auto loan asset-backed securities (ABS) in 2017, despite higher losses expected this year,” said Hylton Heard, Senior Director, Fitch Ratings. “Auto ABS asset performance will continue to slow in 2017 as losses slowly rise to normalized levels similar to 2004-2006. Additionally, depreciation rates will creep up and recovery rates dip which will drive loss severity and contribute to rising losses.

Fitch expects prime auto ABS annualized loss rates to move up to the 1.0% late in the year, but remain well within historical levels despite these negative trends. The historical average for the index is 0.91% going back to 2000, so current levels in early 2017 (December 2016: 0.73%) are comfortably tracking within our expectations.

Subprime auto ABS performance is pressured in 2017 due to softer performance in the 2013-2015 vintage securitizations, which have weaker credit quality pools. Fitch’s outlook for subprime asset performance is weakening/stable for 2017. “Our subprime annualized net loss index is predicted to range between 10%-12% during 2017, and could rise to peak levels recorded back in 2008-2009 of approximately 13% were the pace of losses to pick up beyond expectations.” Through January 2017, the ANL index stood at 10.30%.

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.

The Black Book-Fitch Vehicle Depreciation Report is available for download by clicking here.

About Fitch Ratings

Fitch Ratings is a leading provider of credit ratings, commentary and research. Dedicated to providing value beyond the rating through independent and prospective credit opinions, Fitch Ratings offers global perspectives shaped by strong local market experience and credit market expertise. Fitch Ratings is part of Fitch Group, a global leader in financial information services. Fitch Group is majority owned by Hearst Corporation.

About Black Book

Black Book® is best known in the automotive industry for providing timely, independent and accurate vehicle pricing information, and is available to industry-qualified users through online subscription products, mobile applications and licensing agreements. A leading provider since 1955, Black Book has continuously evolved to ensure that it achieves its goal of delivering mission-critical information to its customers, along with the insight necessary to successfully buy, sell, and lend. Black Book data is published daily by National Auto Research, a division of Hearst Business media, and the company maintains offices in Georgia, Florida, and Maryland as well as the Canadian Black Book in Toronto. For more information, please visit BlackBook.com or call 800.554.1026.