The resale value of Toyota (NYSE: TM) cars is usually pretty good. They are admired for their quality and durability. So when the big Japanese company says it will have to write down the value of many of its leased vehicles, it is an indication that the auto industry's troubles in the U.S. are getting worse.
According to The Wall Street Journal, "the company will set aside major reserves for its first quarter to cover losses from vehicle leases in the U.S." Toyota's first quarter ended June 30.
The news is a signal that a severe problem within the car industry is widening. Leased vehicles are often coming back to car companies with so little value that they cannot be resold for enough money to reclaim a reasonable part of their original prices. The difference has to be written off. The trouble is especially acute with SUVs and pick-ups because their fuel-efficiency makes them unattractive.
The problem has a domino effect. The leased cars coming back are sold as used. Their prices have been undermined by the current U.S. economy and gas prices, and the vehicles are marketed at deep discounts. That often makes them attractive alternatives to new cars. And, since the auto companies are already having trouble selling new cars, their problems are compounded.
Toyota's news may be bad for Toyota, but it is worse for the the industry as a whole.
Douglas A. McIntyre is an editor at 247wallst.com.