Falling SUV Residuals Mean Lower Profit and Higher Cost For Consumers

AUTOMOTIVE NEWS reported that Values of used sport-utilities are falling like high-tech stock portfolios. That brings a sobering reality: weaker sport-utility values will pinch automakers' profits. "The North American automotive industry may never be as profitable as it was in the 1990s," states a report by McDonald Investments Inc. "Near-term profitability will be significantly impaired." The popularity of sport-utilities in the 1990s made it possible for automakers, banks and lenders to offer affordable leases. Nearly one out of every two sport-utilities was leased last year, the investment report says. Lease payments are based on the difference between the purchase price and the residual value, or the projected value at the end of the lease. When residuals fall, lease payments rise. Now, residual values are dropping as growing numbers of used sport-utilities flood the market.