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Morgan Stanley: Used-Car Values Could Fall by 50%

April 10, 2017

An alarming new report from Morgan Stanley warns a combination of factors could drive used-car values down by up to 50% in the next four to five years. Photo by Zelda Richardson
An alarming new report from Morgan Stanley warns a combination of factors could drive used-car values down by up to 50% in the next four to five years. Photo by Zelda Richardson

NEW YORK — A new report from Morgan Stanley warns that used-car values could fall by 25% to 50% in the next four to five years. It was prepared by a team of researchers led by Adam Jonas, a CFA and equity analyst for the firm.

“Anatomy of a Used Car Downturn (in Charts)” examines key factors affecting used-vehicle pricing, including a growing supply of off-lease units, stretching credit terms, and the growing representation of subprime credit customers in auto finance portfolios. Rising interest rates, spurred by a series of Federal Reserve-ordered hikes, could combine with a high number of negative-equity trade-ins to restrict the availability of credit to used-car buyers, the report concluded.

“Eight years into a strong auto credit cycle, all eyes are focused on the signs of vulnerability in the used-car market,” the report states, in part. “How does it all start and how bad could it get?”

The report points first to an abundance of new-car inventory — up 10% and trending higher at the end of 2016 — and then to price competition: Having capacitized to a seasonally adjusted annual rate (SAAR) of up to 20 million units, OEMs and dealers will have to price to sell in a market that is expected to hew closer to the 17 million-unit mark this year.

“As new-car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance,” the report warns.

Among the lesser-discussed factors that could drive down used-car values, Morgan Stanley’s analysts included new “active” safety technology, including autonomous and semiautonomous systems designed to avoid rear-end collisions and unintended lane departures. After years of steady decline, U.S. traffic fatalities have jumped by 20% over the past two years, the report noted, casting the blame on distracted drivers — the same group that stands to gain the most from collision avoidance technology.

“We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock,” the analysts wrote. “Rising insurance premiums on older cars could accelerate this shift.”


  1. 1. Jim Chandler [ April 12, 2017 @ 06:26AM ]

    Is it possible that as used car prices lower that the three year old, low mileage car, will become a more attractive option to first time car buyers?

  2. 2. H Gray [ April 15, 2017 @ 01:10PM ]

    The OEMs have a strong incentive to support the values of 3 year old used cars, as the price performance of this group in the wholesale market determines the residual values that ALG and others will permit the OEMs to use in pricing leases for the coming glut of new vehicles. And leasing is the key marketing tool that OEMs use to dissolve oversupply of new vehicles.
    Expect to see a spread of "360* programs" where the OEMs incentivize dealers to buy used vehicles coming off lease for relatively high prices, before they hit the auction block. They will offer cheap or free CPO warranties, and OEM captives will "buy deeper" on used cars, thereby keeping the continuity of dealer purchases and sales of off lease used at a pace that will keep a "lift" in used prices of off lease cars.
    This "closed system" between OEMs and its dealers has long been used to perpetuate high residuals among foreign luxuries. Expect to see it spread "downprice" in the next few years, to artificially prop up prices of 3 year old cars.

  3. 3. Steve Rosenberg [ April 15, 2017 @ 01:11PM ]

    Three year old, low mileage cars are already attractive to first time car buyers.

  4. 4. Dean Capps [ April 16, 2017 @ 11:48AM ]

    Are these analysts,"industry" experts even IN the car retail business? The average age of the us car on the road is what again? and what is the average credit score in the U.S.? and the interest rates are subject to do what? yeah I should shrink my inventory down to 2 or 3 cars and hope for the best...

  5. 5. Don Rice [ April 29, 2017 @ 08:28AM ]

    B.S. Evidently the people who wrote this article are not in the auto business and know little of how it works. reading charts and making projections is like picking the lotto numbers. That is what this article is doing. Cars are a necessity , no longer a luxury item and almost everyone has to have them. As long as there are poor people or cash strapped people in America who suffer from poor credit used cars will boom. These people seldom ask the price, only how much down and how much a month or week! Being said the dealers will continue to ask high prices, and offering financing for this group of people. The main influence of used car prices are tied to the higher mark up of new cars which makes the profit margin much larger and allows the used care to enter the market at far lower prices than normal. So much for this article, but it did fill space.


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