SANTA BARBARA, Calif. -

In an interview with Auto Remarketing, ALG said it believes a trio of economic factors — the housing market, used supply and gas prices — will combine to effect 36-month residuals between zero and 1 percentage point based on how vulnerable a segment is to the aforementioned factors.

“In total, the forecast changes if the economic factors have a residual value impact in 36 months ranging from plus 1 percentage point versus the previous edition, depending on a vehicle’s sensitivity to housing, supply and gas prices,” ALG noted in its recent market report.

“Vehicles with higher normal depreciation will show larger declines for this category. Overall, total declines (includes macroeconomic changes and normal depreciation) for the edition ranged from 0.5 to -2.5 percentage points,” it added.

Breaking the three factors down, ALG found that the luxury segment is the most vulnerable to housing market changes due to what the director of residual value solutions Eric Lyman referred to as the “wealth effect.”

“The housing market we see is very highly correlated with luxury (vehicles) because of what you would call the wealth effect,” he noted.

Lyman explained that if someone’s home value goes up, it gives that person a greater perception of wealth, thus giving the consumer “confidence to purchase more expensive goods,” like luxury cars.

He gave the example of a BMW 535. Because of the housing market forecast, the latest residual forecast for the model was bumped up $1,300.

Moving over to used supply, ALG indicated that: “For this edition, ALG updated its used supply outlook to include updated new vehicle sales projections. In general, new vehicle supply is projected to increase more than previous expectations; this has an overall negative impact on industry level residual projections though there is variation by segment.”

In what the company said most likely stems from anticipated production hikes amid high gas prices, the residuals for the entry compact and mid compacts have been cut by about 0.5 percentage points.

Meanwhile, ALG has bumped up residuals of segments expected to have lower supply, such as sporty/convertible and premium sporty/convertible vehicles — which were up in a range of 0.5 percentage points to 1 percentage point.

Premium full-size SUVs, full-size SUVs and full-size pickups were bumped up a percentage point, as well, Lyman shared.

Japanese Earthquake Impact

Moving on, ALG touched on an analysis released in April regarding the impact of the Japanese earthquake. The company noted that the “key driver” of any residual changes would be the production slowdown’s impact on used supply.

At the time the report was released, ALG indicated that the depth of the residual impact from the Japanese earthquake would vary based on two given scenarios: a 20-day production shutdown (which would have been a “best-case scenario” at the time of the analysis) or a 100-day shutdown.

The aforementioned analysis had indicated that a 100-day production halt would have a positive impact of 0.2 percentage points to 0.7 percentage points on the 36-month residuals for smaller segments.

However, a 20-day shutdown wouldn’t have any meaningful segmented impact.

“As a consequence of shorter supply, constraints on increasing production for Japanese as well as domestic brands and higher demand for more fuel efficient vehicles, new market pricing is being adjusted as a natural response to this demand and supply imbalance,” the firm stressed.

“ALG expects further price increases in the short term for particular vehicles as production interruptions and parts supply chains are still hindering OEM’s ability to produce at full capacity,” it added.

Lyman delved into more detail about how exactly Korean and Big 3 automakers would be affected. These brands, of course, depend on Japan a great deal for electronics and parts.

“It’s kind of two-fold,” Lyman told Auto Remarketing on Friday. “It depends on what kind of strategy they react with and how consumers react to that change.”

The situation could yield greater exposure to strong product offerings for domestic and Korean brands and boost demand. But conversely, Japanese brand owners could be fiercely loyal to their own brands.

With all the uncertainly, ALG is taking a “wait-and-see” approach.

“You just never know how all this stuff is going to shake out,” Lyman noted.