The Top 10 New Cars for Future Value

With today's car loans extending five years or even longer, a vehicle's residual value -- the retained value of the car as it grows older -- has become a more important factor in a new car purchase.

"People are paying more attention to it, and very rightly so," says Jack Nerad, executive editorial director and market analyst at Kelley Blue Book, which produces an annual list of the top 10 cars in terms of residual, or future, value.

Top 10 residual value -- Edmunds.com

• 2007 Lotus Elise
  53.86%*
  
• 2007 Lotus Exige
  53.85%*
  
• 2007 MINI Cooper
  52.71%*
  
• 2007 Jeep Wrangler
  49.25%*
  
• 2007 BMW M6
  48.11%*
  
• 2007 Honda S2000
  47.96%*
  
• 2008 Scion xB
  47.64%*
  
• 2007 Volkswagen Eos
  46.93%*
  
• 2007 Toyota RAV4
  46.92%*
  
• 2007 Chevrolet Corvette
  46.74%*
  
  *Percentage of original value expected to be retained after five years. Source: Edmunds.com
  

While most people are aware that a new car loses the biggest chunk of value as soon as it leaves the dealer's lot, depreciation doesn't stop there. In fact, it's the biggest cost of car ownership.

According to Kelley Blue Book research, an average vehicle retains only 35 percent of its original value after five years of ownership. So today's $20,000 new car will be worth in the neighborhood of $7,000 five years in the future.

But there are significant variations. In addition to its top 10 list, Kelley Blue Book also names top resale value brands. Honda and Acura tied for 2007. The average resale value for the manufacturers' vehicles hit an industry high of just shy of 56 percent of their original prices after five years of ownership.

"That's a pretty big spread," Nerad says of the 20 percentage point difference between average and high. "If you're not paying attention to resale value, it could cost you thousands of dollars in terms of transportation costs."

Edmunds.com industry analyst Jesse Toprak agrees.

"It used to be consumers did not have a full understanding of what residual value is," he says. Edmunds.com also produces a top 10 residual value list, and calculates that the average vehicle holds 38.5 percent of its value after five years.

Many consumers learn that the hard way, Toprak says, when they try to trade in a car after two or three years and learn that it's worth less than what they owe, a situation known as negative equity or being "upside-down" in the loan.

Top 10 residual value -- Kelley Blue Book

• 2007 Acura TSX
  
• 2007BMW 5 series
  
• 2007 Honda Civic
  
• 2007 Lexus IS
  
• 2007 MINI Cooper
  
• 2007 Pontiac Solstice
  
• 2008 Scion tC
  
• 2007 Toyota Prius
  
• 2007 Volkswagen GTI
  
• 2007 Volkswagen Eos
  

List in alphabetical order. List released 11/29/06 for 2007 cars. Source: Kelley Blue Book

"You have to pay to get out of your loan," Toprak explains. Edmunds.com research indicates 28 percent of buyers who traded in a vehicle in May 2007 found themselves in a negative equity situation -- averaging a painful $4,000 each.

"Those consumers are a lot more conscious about what they want to buy next," Toprak says.

Nerad says buying based on resale value can also lead to a better ownership experience, since there's good reasons some cars hold their value better than others, like reliability.

"It steers you to cars that are better, more desirable cars," he says.

Some highlights from the Kelley Blue Book and Edmunds.com Top 10 picks for 2007:

Residual value breakdown

• Two vehicles made both lists, the MINI Cooper and the Volkswagen Eos.
  
• Both list a BMW, Honda and Scion, but different models. Kelley lists the BMW 5 series, the Honda Civic and Scion tC. Edmunds.com lists the BMW M6, Honda S2000 and 2008 Scion xB.
  
• The Toyota Prius made Kelley's list for the second year in a row, the only hybrid on it, but Nerad sees the market for used hybrids softening, as buyers face the significant expense of replacing the battery pack. "It'll be interesting, as they age beyond the five years, what the value does," he says. "There's a realization from some people that there are other ways to accomplish the same thing. The way to fuel economy is not only through hybrids."
  
• Edmunds.com lists the five-year resale value ranging from 54 percent for its No. 1 pick, the Lotus Elise, to 47 percent for its No. 10, the Corvette. Kelley does not rank order but lists the top 10 alphabetically.
  
• Imports dominate. Kelley named just one domestic, the Pontiac Solstice. Edmunds.com chose two, the Jeep Wrangler and the Chevy Corvette (which made Kelley's list in 2006).
  
  "Imports sell, they sure do," says Ron McNutt, owner and president of Kentucky-based McNutt Motor Sales, a large-volume wholesale buyer in the mid south that resells to dealers in Kentucky, Indiana, Illinois, Tennessee and Missouri. He estimates his inventory is divided between domestics and imports.

  Domestic car manufacturers are trying to move away from the production-driven philosophy that has led to too many cars being sold in fleet and rental markets, both Nerad and Toprak say, resulting in an over abundance of these cars languishing in the resale market two years later.

  "If you have way too many cars in service, they're going to flood the marketplace," Toprak says. That over supply drives prices down, lowers residual value and ultimately effects the salability of newer models.

  "Essentially there weren't retail customers for them in the first place, and so there aren't likely to be customers on the secondary market," Nerad says. "The domestics are getting away from that, and are making a concerted effort to do that as little as possible these days."

  Quality concerns and the reputation of domestic manufacturers have also factored into their cars' lower resale value, Toprak says, although that's changing.

  "In the last few years, domestics are in the process of closing the gap," he says. "The way they're pricing their vehicles enable them to at least close the gap between the Japanese brand and themselves."

  Domestic manufacturers could boost their resale values by weaning themselves off incentives, too, Toprak says. Hefty incentives reduce a vehicle's initial starting value, and at resale they also have a direct pricing impact.

  Industry wide, incentives averaged $2,391 in May 2007, barely changed from $2,374 in May 2006, Toprak says. But the domestics outspend the Japanese almost three to one, with American manufacturers' incentives averaging $3,139 per vehicle while Japanese spend just $1,321.

  Beyond choosing specific brands and models, consumers can do other things to increase their cars resale value.

  Kelley advises the following:
  

• Choose popular exterior colors, like black, white or silver.
  
• Select sought-after equipment including antilock brakes, alloy wheels, a CD player, parking sensors, navigation system, sensing cruise control and leather seats.
  
• Avoid ultra customization.
  

  "The key to selling a car, either retail or wholesale, is to have something the public wants," says McNutt.