Declining used-vehicle prices this year will benefit retailers selling late-model SUVs and crossovers but could pinch dealerships' volumes and margins on new light trucks, analysts say.

More SUVs and crossovers are coming off lease in 2018 than in previous years. That means less of a glut of used cars and relief from years of sky-high prices on SUVs and crossovers in the used market.

The time lag in vehicles returning from three-year retail leases has created a mismatch in the used market in recent years as U.S. consumers' demand dramatically shifted to light trucks from cars. Until this year, returning used vehicles were far more car-heavy than the new-vehicle sales mix. As a result, used-truck prices held relatively firm while used-car prices slumped. But in 2018, half of off-lease vehicles are expected to be light trucks.

"It has been a tale of two markets but now it's a tale of one market," said Tom Kontos, chief economist for KAR Auction Services. With overall off-lease volume expected to top 3.9 million vehicles this year, he expects overall used prices to decline.

"We'll see more parity on car and light-truck prices than before," he said. "We've had a bifurcated market, but less so now. All segments will get some price pressure, but it'll be gradual. It'll take a long time to level off."

A well-equipped 2015 Nissan Rogue, above, could be a strong competitor on price to the 2018 Rogue, below and below left. That new-vs.-used competition will be seen across the crossover and SUV segments this year. Photo credit: AUTOMOTIVE NEWS ILLUSTRATION

Supply, demand

But the change could alter the long-standing price structure favoring automakers, Kontos said.

The 2008-09 U.S. auto sales crash produced a dearth of 2- to 4-year-old vehicles in 2010-13, even as demand rebounded. With supplies tight, used-vehicle prices were strong, which in turn helped dealers sell new vehicles two ways. First, used vehicles retailed for almost as much as new ones, and second, high trade-in values cut the down payment required for new-car loans.

Kontos sees pricing pressure on all vehicles as the used light-truck supply grows. "And that could hurt new-vehicle sales," he said. "Not just the direct trade-off of people choosing less expensive used deals, but even more that lower prices will reduce trade-in values."

Jonathan Smoke, Cox Automotive chief economist, agrees that used-vehicle price changes will be gradual in 2018, but he argues the U.S. auto market has flipped from a used-vehicle shortage to oversupply.

"There has been a disconnect between supply and demand in SUVs and crossovers that were vastly underrepresented in used inventory, but it's over," he said. "This is the year that we'll see that."

This calendar year, Smoke said, a third of lease returns will be SUVs and crossovers.

KAR's Kontos noted that those crossovers and SUVs, most of which are 3 years old, were built with efficient powertrains, so they are attractive to consumers.

"Many could be purchased by people who want a model with the latest technology but can't afford new," he said. "Used vehicles can cannibalize new-vehicle sales. That's even more true this year."

Compact vs. midsize

Kontos expects more pricing pressure this year in midsize SUVs, where plenty of models are coming off lease, but less downward pressure on prices in the compact and subcompact segments.

"Not all segments are under pressure from more supply because model proliferation lags," he said. "Some smaller SUV and crossover models only started selling last year so they aren't coming back yet."

Smoke expects a changing pocketbook crunch at dealerships for consumers who want a new vehicle such as the Nissan Rogue, but can't qualify for a monthly payment they can afford. Previously, with high prices and limited supplies of used crossovers, they might have substituted a smaller, less expensive new vehicle such as a Nissan Juke, Sentra or Versa. This year with more supply and lower prices, they might opt for a used 2015 Rogue.

For example, using data from Dealertrack, a Cox unit, Smoke compared February average prices and loan terms for new and used Rogues. Consider a new 2018 Rogue retailing for $28,000 with a 66-month loan at 5.5 percent, against a $20,000 2015 Rogue with a 69-month note at 9.3 percent. Monthly payments: $460 new vs. $380 used.

"The used one is $80 a month cheaper," Smoke said. "And one is above the $400 a month barrier, one below." That is critical. In previous comments, Smoke has said, "The payment on the used side is key, and it is amazingly sticky — it refuses to go over $400," meaning that used buyers won't agree to a monthly payment above that.

His conclusion: "For consumers struggling for affordability, now you have choices in vintage to get the vehicle you want."

Pinched margins

Kontos said more and cheaper SUVs and crossovers will add choice for consumers and may increase retailers' volume, but also will likely pinch margins.

"I'm getting clients who want to know how much prices will soften," he said. "Clients are worried about exposure. They enjoyed a good ride on the short supply of used vehicles in recent years."

Smoke said new-car dealerships are positioned better for a changing market than automakers, who derive hefty profits from large SUVs, or independent used-only dealerships because the franchised dealers sell new and used vehicles.

"It's an excellent time for franchised dealers," he said. "They can still sell new, but if the market shifts to used, they make more per unit."

Eric Ibara, director of residual value consulting for Kelley Blue Book, said the combination of 17.2 million U.S. light-vehicle sales in 2017 and strong leasing penetration guarantees that a high volume of returning off-lease vehicles "will continue through 2020 and beyond."

But the volume of those off-lease returns will gradually diminish as rising interest rates and tighter credit force automakers to ease up on leasing deals through their captive lenders.

Leasing penetration peaked as 33 percent of retail volume in 2016, Ibara said.

"That will fall to 27.5 percent this year," he predicted. "Some manufacturers are backing off on subsidies and some because the residual value risk is rising. But some decline is simply natural — that as used-vehicle values fall and lease payments rise, used vehicles become more attractive" as an alternative to leasing.