Black Book on Monday released its latest joint depreciation report with Fitch Ratings; an analysis that projected 2017 vehicle depreciation to reach 17.8 percent based on estimated new-model sales of 17.0 million.

That forecast is slightly up from the 17.3-percent mark recorded in 2016.

The firms point out that average pre-recession annual depreciation trended between 16 percent and 18 percent.

Between 2011 and 2015, Black Book recounted that average annual depreciation fell between 8.3 percent and 13.2 percent, 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. Editors contend 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, according to the report.

Black Book Used Vehicle Retention Index dropped 6 percent in 2016

Editors explained the Black Book Used Vehicle Retention 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.

As more 2- to 6-year-old vehicles return to the market in the coming years, this index is designed to provide an overall measurement of strength and weakness in wholesale used vehicle value retention.

Black Book said the index lost 6 percent in 2016 and is expected to continue its slow decline in 2017 as the used-vehicle market loses strength.

Residual values to decline

Black Book predicted a continual and gradual decline in residuals in the coming years. Currently, editors noted a 3-year-old vehicle is averaging 52 percent of its original typically-equipped MSRP, and this reading is expected to decline to 48 percent by 2020.

Black Book is expecting the market to reach a gradual normalization over the next three years. The company’s 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

—Longer installment contract terms leading to sustained negative equity

“As we continue to move into the New Year, several positive trends that drove market strength will continue to turn 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

Fitch is expecting prime auto loan asset-backed securities annualized loss rates to move up to the 1.0 percent late in the year, but remain well within historical levels despite these negative trends. The historical average for the index is 0.91 percent going back to 2000, so current levels reported so far in 2017 (as the December 2016 reading was 0.73 percent) are comfortably tracking within Fitch’s expectations.

Subprime auto ABS performance is pressured this year due to softer performance in the 2013 through 2015 vintage securitizations, which have weaker credit quality pools. Fitch’s outlook for subprime asset performance is weakening/stable for 2017.

“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 at Fitch Ratings. “Auto ABS asset performance will continue to slow in 2017 as losses slowly rise to normalized levels similar to 2004 through 2006.

“Additionally, depreciation rates will creep up and recovery rates dip which will drive loss severity and contribute to rising losses,” Heard continued.

“Our subprime annualized net loss index is predicted to range between 10 percent and 12 percent during 2017, and could rise to peak levels recorded back in 2008-2009 of approximately 13 percent were the pace of losses to pick up beyond expectations,” he went on to say.

Through January, the subprime annualized net loss index stood at 10.30 percent.

Report availability

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 going here.