As Fuel Prices Rise, Residual Values Tumble For Trucks and SUVs
High gas prices and economic uncertainty have hurt sales of large vehicles that have long been the profit centers for the U.S. auto industry. Recent developments have also wreaked havoc on residual values for pickups and SUVs, which are worth far less than had been assumed just a few months ago.
Stuck holding the bag are dealerships and auto finance companies such as GMAC and CitiFinancial Auto – the auto finance unit of Citigroup. They’re trying to sell inventories of thousands of these vehicles as they come off leases, or are repossessed from owners unable to keep up with their car payments.
Dealerships must either cut prices on the used inventory or dump it on the wholesale market, cutting profit margins and pressuring the dealers to lower prices on new pickups and SUVs to pique the interest of consumers.
In recent months, GM and Ford significantly scaled back production plans for trucks and SUVs, while speeding efforts to introduce fuel-efficient models. The market, meantime, is being forced to absorb a large overhang of difficult-to-sell large vehicles.
At Chrysler, the declining residual values are among the factors prompting the auto maker to push more incentives on the slower selling trucks and SUVs.
With vehicle values falling and economic pressures on consumers rising, auto finance companies "are extremely vulnerable", says Matt Traylen, a senior director of economics and portfolio services at Automotive Lease Guide. The downward pressure on prices "increases loan-loss severity dramatically, and lenders need to be aware of the potential risks in their portfolio from the severity point of view," he says.
– By Ed Coury, senior editor and Midwest bureau chief for the Wall Street Journal Radio Network, Dow Jones & Co., and a reporter for WWJ Newsradio 950
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