Morgan Stanley thinks used automobile prices could fall 50% over the next five years as off-lease supply increases and higher interest rates factor in.
The market also faces a significant headwind from the high level of incentives being offered to consumers from major automakers. Incentive spending as a percentage of MSRP jumped 10% in February and is seen continuing to run high.
At CarMax (NYSE:KMX), charge-offs and risky loans are on the rise in an alarming trend. A chart from the Morgan note posted on Zero Hedge shows just how far underwater many consumers are with their trade-ins.
MS analyst Adam Jonas also notes that used cars are likely to lose some appeal as the wave of next-gen cars are introduced with engaging tech and safety features.
The shakeup in the used car market could have broad implications (PAG, AN, CRMT, SAH, LAD, ABG, CPRT, RUSHA, RUSHB, HTZ, CAR, UBER, F, GM, TM, OTCPK:NSANY, TSLA, FCAU, OTCPK:VLKAY, HMC) in the automobile industry. Somewhere in the mix there could be an interesting pair trade.
Previously: U.S. auto sales track higher as incentives jump (March 25)
Now read: There's A Reason Why GM Looks Cheap »