Think of it like you would the daily ebb-and-flow of the stock market.
The “initial shock” to news late last month that Ford would be discontinuing its sedan lineup could have could have some “kneejerk reaction” implications on the immediate impact to residual values for these cars, says Ivan Drury of Edmunds.
But a year or more down the road, “it will be completely insignificant in that sense,” Drury said.
“No one will remember what happened here,” he said in a phone interview. “So, it really is just in the near-term, that real gut reaction to this kind of news … I really liken it to the stock market.”
For example, news breaks and then stocks become a bit “volatile,” only to get back to equilibrium, says Drury, who is senior manager of industry analysis at Edmunds.
He sees the same impact here with Ford’s move to trim its North America car-model portfolio to the Mustang and Focus Active crossover in coming years. The residual value impact for these Ford sedans up for elimination is “a short-term effect, if anything,” Drury said.
However, there’s some case law, if you will, that offers a different take: the June 2016 news that FCA would discontinue the Chrysler 200 and Dodge Dart.
Similar impact that FCA cars saw?
According to an analysis by Cox Automotive, actual transaction prices on these FCA models dropped about 4 percent to 5 percent a year later, while the overall compact car segment was up 2 percent.
“The ATP declines meant that the 200 and Dart lost approximately 2.5 percent of MSRP on the new side,” Cox Automotive chief economist Jonathan Smoke wrote in commentary provided via email. “In other words, the most immediate change was in the prices discontinued models were able to achieve in the new-vehicle market.”
There was roughly a 10-percent drop in forecasted 3-year residual values for the 200 and Dart, which Smoke called a “clear reflection that forecasters expected price performance would deteriorate.”
When the FCA announcement was made two springs ago, 2014 and 2015 model-year Darts and 200s depreciated an average of 1.6 percent each month, Smoke said. Meanwhile, the aggregate depreciation for 2014-2015 vehicles ranged from 0.7 percent to 0.9 percent
“The higher depreciation trend lasted about a year,” Smoke said of the 2014 and 2015 model-year Darts and 200s. “This would be consistent with a gradual recognition in the used-vehicle market that the models have a lower market value.”
As for the 2016 model-year editions, “depreciation was more normal for the more discounted 2016 models, but the 2016 resale values were only about 11 percent higher than the 2015s due to the lower new sale prices,” he said.
“The model year directly impacted lost its value on the new vehicle lot, and that lower value is what drove prior year models lower,” Smoke said. “But used 2016’s did not perform differently than their model year peers on resale values.”
Smoke acknowledges the multitude of influences on how vehicle prices actually behave. But he said the Cox analysis of the 200 and Dart suggests that the Ford cars could meet a “similar” fate.
“If the discontinued Ford models follow a similar pattern, the new models will have to be discounted. The resale market will immediately recognize the lower starting prices and expected lower residual values,” Smoke said.
“Older models will see higher deprecation as a result, until the difference in model years is better aligned,” he said. “But as these vehicles still offer utility, a gradual decline in wholesale value is likely to occur over many months instead of an immediate discount like we are likely to see in the new vehicle market.
“I do acknowledge that this time could be different and so result in less of an observed decline in prices. The best case would be little to no impact on prices, which would be the outcome if Ford is able to sell the models without heavy discounting or relying heavily on targeted incentives,” Smoke added.
“Given these vehicles are being discontinued for reasons including Ford’s weak competitive positioning within these segments, it is not likely that consumers will rush to buy them without a new reason like a tremendous value. The industry adage goes ‘There is no bad car, just a bad price.’”
Prior to this analysis, Cox Automotive senior economist Charlie Chesbrough said during a conference call with reporters that he “would suspect that one of the reasons why we would see residual values weaken for discontinued vehicles (is that) it’s just no longer being publicized out there in the marketplace.”
After all, it’s a discontinued product.
“I always see an Oldsmobile out on the road here every once in a while, but I don’t know that that would be the first thing that popped in my mind if I was looking to buy a used vehicle,” Chesbrough said. “So, I think there probably is some loss out there, out of consumer awareness once the vehicle is no longer in production.”
And, generally speaking, from an overall brand perspective (beyond used), the impact could be larger than that of FCA’s cuts.
Ford’s Fiesta, Focus, Fusion and Taurus all made the top five for new-vehicle consumer interest for their respective segments on Jumpstart Automotive Media websites in 2017, said Libby Murad-Patel, who is Jumpstart’s vice president of marketing and strategic insights.
“I would see this as a bigger impact than when Chrysler moved away (from the 200 and Dart), because from a brand standpoint, Ford is already larger and it has more presence among multiple car segments,” she said.
‘Moving towards parity’ in wholesale
But some say Ford’s decision to end production of “traditional” sedans in North America could actually end up helping the used-car market for the to-be-discontinued models, says KAR Auction Services chief economist Tom Kontos.
“The supply of used cars that are already out there from past years of producing these vehicles will probably receive a benefit from this, because to the extent someone is looking for those types of vehicles, they’ll be able to find them in the used-car market, and that will probably help the used-car values for those models,” Kontos said by phone.
And it could help even out the disparity in pricing impact between wholesale car and truck segments, he said.
Kontos has noticed that until recently, the slowdown in used-vehicle prices has “disproportionately” angled towards car segments versus trucks, due to greater supply.
“And my belief is that we’re moving towards parity between the two segments — the two broad segments, cars and trucks — because in recent years, trucks have been so popular as new vehicles,” Kontos said. “So those vehicles will start coming home to roost, and we’ll see more supply of those vehicles rather than cars.
“So, the market will equalize, pretty much, between cars and trucks, whereas up until now, or up until recently, cars have had a tougher go than trucks have,” he said.
For more analysis, see Part II of this series.