Flood Of Off-Lease Vehicles Set To Wreak Havoc On New Car Sales
The percentage of new car ‘sales’ moving off dealer lots via leases has nearly tripled since late 2009 when they hit a low of just over 10%. Over the past 6 years, new leases, as a percent of overall car sales, has soared courtesy of, among other things, low interest rates, stable/rising used car prices and a nation of rental-crazed citizens for whom monthly payment is the only metric used to evaluate a “good deal”. even though leasing a new vehicle is pretty much the worst ‘deal’ you can possibly find for a rapidly depreciating brand new asset like a car. but we digress.
Of course, what goes up must eventually come down. And all those leases signed on millions of brand new cars over the past several years are about to come off lease and flood the market with cheap, low-mileage used inventory. As Reuters noted, the flood of used vehicles is already starting to impact used car dealers:
Recently, though, a computer search for available used vehicles within 150 miles of Reel revealed an eye-popping figure: 668 Escapes. That’s enough to put more than 40 percent of the inhabitants of this small northeastern Ohio town, population 1,600, into the popular crossover.
A search for the Chevrolet Equinox, a comparable crossover, showed 461 available.
“The automakers have flooded the market,” said Reel, owner of Reel’s Auto in Orwell, Ohio, about 40 miles east of Cleveland.
By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.
And, of course, that kind of supply is already starting to take it’s toll on used car prices.
Chief Executive Mike Jackson said rising off-lease car numbers means “a higher supply of pre-owned vehicles at a more attractive price.”
Consumers seeking great deals are in luck. Used-vehicle prices at auction fell about 3 percent last year, according to Carmel, Indiana-based KAR Auction Services Inc (KAR.N), which facilitated the sale of 5.1 million used and salvaged vehicles in 2016. Used prices should drop around 3 percent annually for the next couple of years, according to KAR’s chief economist Tom Kontos.
General Motors Co (GM.N) and Ford Motor Co (F.N) say prices for its used vehicles, which consist largely of nearly-new ones coming off lease to consumers, fell 7 percent in the first quarter versus the same period in 2016. GM says it expects a 7 percent decline for 2017 compared to last year.
and, as Morgan Stanley recently pointed out, we’re just getting started as they see used car prices dropping by up to 50% over the next 5 years.
So what happens next? Unstable used car prices will almost certainly reduce OEM reliance on leases as the implied 3-year depreciation (or residual values, if you prefer) will make them all but completely uneconomical. remember, Americans only care about that monthly payment. Meanwhile, the relative value between used and new cars will tilt heavily in favor of the used market. Thankfully Americans will still be able to buy that Mercedes they require to get back and forth from their minimum wage jobs, while maintaining a monthly payment of $500 or less, but it will just have to have 30,000 miles on it.
Of course, the OEMs of the world won’t admit that their game is over until it’s way too late. So, they’ll keep right on producing new cars to cover a 17-18mm SAAR environment up until the point they face an outright revolt from their dealer networks. At that point, however, dealer inventories will be so high that Detroit will be forced to shutdown for months on end while new car prices are slashed to reduce the massive inventory glut. Tanking new car prices will put even more pressure on used car prices which will mark the beginning of the death spiral that will result in a new round of inevitable auto bankruptcies. but that’s just a hunch.