Morgan Stanley Sees 'Biggest Drop In History' For Used-Car Prices

Here's another crisis to worry about: the biggest price drop for used cars in history.

If the prediction pans out, it could do serious damage to new-car pricing, the automobile finance sector and the asset-backed securities market, Morgan Stanley's Adam Jones said in a note Tuesday.

New and used-car dealer Lithia Motors Inc LAD opened down 20 percent Tuesday after the company cut its outlook. CarMax, Inc KMX also warned recently.

Jones thinks that could be "just the beginning," and sees an alignment of forces "that could drive the largest decline in used-car prices in U.S. history."

Worst case scenario: Used-car prices drop more than 25 percent within three years. Jones thinks it more likely a drop of 10 percent to 15 percent, but the worst case "could be just as realistic."

Jones figures there's too much supply. Dealers have successfully lowered monthly payments and credit standards to boost new car sales to unsustainable levels, effectively drawing current demand from the future.

While car makers can control supply by simply shutting off production, "you can't unmake a car," Jones said, noting that used-car inventory continues to mount on dealers' lots 36 months after new-car demand hits a typical downturn.

But it's not just the stereotyped used-car salesmen that need worry.

The potential impact on Ford Motor Company F and General Motors Company GM "hasn't been appropriately considered," according to Jones, who said lower used car prices could offer "formidable competition" to the market for new cars.