In January, a 2006 model of a Ford Explorer XLT fetched $13,000 to $14,000 in an auction of used cars. Today, the going rate is about $16,500, according to one dealership.
It is this bump-up in value that helped Ford Motor Credit's bottom line Thursday, when its parent, auto maker Ford Motor Co. (F), reported second-quarter results.
Used cars are rising in value as budget-conscious U.S. consumers flock to them amid the economic slump. Also playing a part is a shortage of second-hand cars as more people opt to stick it out longer in their existing cars, instead of turning them in for costlier trade-ups.
But further gains in used-car prices are unlikely in the coming quarters. Ford Credit said Thursday it doesn't expect gains from lease residual values to continue to boost its earnings. Other auto lenders, such as GMAC Inc., which finances General Motors Co. (GM) and Chrysler Group LLC vehicles, will also likely to have such gains level off.
Used-vehicle "values should start to level off about now after their sharp run-off," said Tom Webb, chief economist at Manheim, the largest U.S. wholesale auction company that sells and buys used cars to and from dealers.
Values on used cars matter a great deal to auto-finance lenders, such as Ford Credit and GMAC. This is because, after leases expire, lenders take the vehicles back and sell them at used-car auctions, hoping to make a profit. Falling resale values last year forced lenders - saddled with inventories of thousands of these vehicles as they came off leases or were repossessed from owners unable to keep up with payments - to sell them at a loss.
This year, that pattern changed. Improvements in used-car values significantly contributed to Ford Credit's pretax profit of $646 million in the second quarter. For the year earlier, Ford Credit posted a pre-tax loss of $294 million.
Excluding one-time gains, Ford Motor Co. would have reported a loss of $424 million for the second quarter, showing that Ford Credit's contribution was significant.
Prices on used vehicles rose more than 12% in June from January, according to the Manheim Used Vehicle Value Index.
Lower fuel prices are also helping. Falling used-vehicle prices fueled by $4-a-gallon gasoline and a weakening economy were responsible for substantial red ink in lenders' books last year, forcing them to scale back or eliminate leasing altogether. GMAC took a $1.2 billion impairment charge on its operating lease portfolio last year. Rival Ford Credit took a $2.1 billion write-down in 2008 related to unprofitable lease deals.
"In the last six-seven months, prices on most used cars have probably gone up by $2,000 to $2,500 across the board," said David Roat, sales manager at the Liccardi Ford dealership in Watchung, N.J. "People's buying habits have changed. They are saying, 'Maybe I don't need to spend on a new car in this economy.'"
But those gains may be over now. One factor: Purchases of new autos may pick up with the advent of the government's "cash for clunkers" incentives.
Ford Credit said Thursday it expected earnings from the second half of the year to be lower.