May 14, 2008

Prices of Used Luxury Cars Slump

Prices for used luxury cars are down this year in the wake of a weakening economy, and this has put a crimp in the profits of luxury-car manufacturers.  BMW took a $372 million charge-off from its earnings recently to reflect losses it had taken in the used-vehicle market in the United States. Like many luxury-car makers, BMW relies on leasing for a lot of its “sales,” and it, through a so-called “captive” financing company, finances many of the leases. When the vehicles coming off lease sell for a lower price than was originally predicted -- the “residual price” -- the leasing company ends up eating that loss.

According to a report in the trade publication Automotive News, 2005 model-year BMWs coming off lease are selling for some $3,000 less than the value projected when they were delivered to customers initially. Mercedes-Benz models from the 2005 model year are faring even worse -- commanding $4,700 less than initially projected -- and Lexus models from the same year are falling $1,400 short of their projected residual mark.

All this means a big hurt for the luxury manufacturers. CNW Marketing Research, an industry observer of lease activities, says the auto industry might be facing a $6 billion loss stemming from errant predictions of future vehicle value this year alone. The industry’s biggest predicament of this kind came in 2001, when finance companies were $10 billion upside down on off-lease vehicles.