Since 2008, the used car market has struggled for a number of years as used car prices have steadily risen, causing consumers to shift a general preference towards leasing new cars.

Yesterday, Automotive News reported that ALG, a California-based analytical auto data provider, has observed that a 4 to 5 percent fall in average used-vehicle prices can be expected over the next 12 months. In fact, average used-vehicle prices are expected to fall by 8 to 10 percent from current levels in two to three years.

While falling prices are usually a positive sign for some car buyers, there's a little bit more to used-car prices than meets the eye. ALG vice president of residual value solutions Eric Lyman says that falling values may cause dealers to respond with higher monthly lease payments on vehicles. Lyman explains, "The bottom line is your lease payment is determined by the difference between your transaction price and your lease-end residual value."

Despite ALG's confident predictions of the expected price decline, exactly how big the decline may be remains to be determined. Severe used car shortages represent weak vehicle says from 2007-2009. In addition, a low supply might continue on longer still as Japan suffered earthquake and tsunami devastation during March 2011.

According to Lyman, "The supply right now is so low that it is controlling everything in the used-market values. There just aren't enough vehicles out there relative to used-car demand."

Despite the looming uncertainties, "We're seeing sort of a landing back to a normal used-car market environment. With the financial crisis of 2008, you see that huge decline in the used-car value index. Since that time, we've seen this huge recovery," Lyman said.

"What we're essentially saying is that this correction that we're expecting over the near term will be more in line with a more sustainable and steady used-car market."

[Source: AutoNews]