Millions of off-lease vehicles will hit the wholesale market this year. Dealers can’t wait, but some remarketers are bracing themselves for the onslaught.
Dealers typically like leasing because they know when a customer in a leased vehicle will need a new one, and they get first crack at that in-market consumer.
Dealers also replenish their used-car lots with their customers’ off-lease vehicles. Plenty of those will come back this year because of improved leasing levels dating to two and three years ago.
“There are franchised dealers who are salivating at the fact that good used-car inventory literally is driving up to their doors,” says Tom Webb, Manheim Consulting’s chief economist.
But in a supply-and-demand issue, used-car prices are expected to take a hit in 2014 because of an increased number of vehicles coming off lease and entering the market as pre-owned stock. The expected price drop shouldn’t reach code-red levels, though.
“The higher supply will affect used-car prices, but it won’t be a bubble correction,” says Jonathan Banks, an analyst for the National Automobile Dealers Assn., predicting pre-owned demand will stay strong though not as high as 2013, a banner year for automotive remarketing.
Leasing has had its ups and downs since the 1990s, when it became a popular way for consumers to get behind the wheel of a new vehicle but at less of a financial commitment than if they had bought it.
Leasing peaked in 1999 with 3.7 million deliveries. Nine years later, General Motors and Chrysler virtually ended their leasing programs because of major losses stemming from poor residuals on returned vehicles.
Leasing’s low point occurred in 2009, when it dropped to 1.1 million units. Since then, it has steadily grown, passing the 2 million-unit mark in 2011, hitting 2.5 million in 2012 and exceeding 3 million in 2013, according to Manheim.
“Some aggressive leasing programs are out there,” Juan Flores, AutoTrader’s director-Trade-In Marketplace, says at a recent National Remarketing Conference in San Diego.
Currently at 24% of retail deliveries, leasing has contributed to strong auto sales that reached 15.5 million light vehicles in 2013.
“We didn’t expect auto sales to be so high, and a lot of it has to do with increased lease penetration,” says Rene Abdalah, vice president of RVI Group, a residual-value insurer.
Higher used-vehicle supplies brought on by more leasing of late “will put a downward pressure on wholesale pricing in 2014, but it will not be a collapse,” Webb says in a conference call with journalists and auto analysts.
“By the time we get to 2016, it will be a challenge, but we will have time to prepare for that challenge,” he says.
Howard Segal, national remarketing director for Wells Fargo Dealer Services, recalls leasing’s low point of five years ago.
“I never thought then that we’d be talking about leasing like we are now,” he says. “We are talking about 3.5 million vehicles coming off lease in a few years. That will make it a different market for us.”
Adds Linda Silverstein, Ford’s manager-remarketing and rental operations, “A lot of vehicles will be coming at us.”
The high number of returning off-lease vehicles is good news to Jennifer Costabile, general director-fleet and commercial operations for General Motors. “It gives us a chance to sell a new vehicle.”
For dealers, an ideal transaction is to lease new vehicles to lease customers and then make additional money by selling their turned-in cars.
“With all the off-lease vehicles coming back, it will be a matter of who can most efficiently and quickly get a car ready and turn it,” says Cary Donovan, who runs used-car operations for the 16-store Sam Swope Auto Group based in Louisville, KY.
Replenishing used-car inventories with the right vehicles is an ongoing effort for dealers. “We are constantly looking for cars,” David Andrews, owner of City Auto Sales in Memphis, says at the remarketing conference. “It’s a full-time job.”
The average lease payment is $414 and the average lease runs 35 months, says Marty Miller, senior product marketing manager for data firm Experian Automotive. “Big lease states are New York, Pennsylvania, Ohio and California.”
Some people fear the auto industry may get too carried away with leasing, as it did in the late 1990s and early 2000s when residual losses splashed red ink on the walls.
But Webb says those were different times.
“Leasing contracts were heavily subvented back then,” he says, referring to overly generous rates offered by automakers. “And some of the residual forecasting was wrong. It turned out to be nowhere near market values.”
Webb also notes many banks back then were involved with leasing whereas today it mostly is done by automakers’ captive-finance units with a vested interest in protecting brand and vehicle values.
Responding to skeptics who say some automakers are using leasing to artificially inflate sales, Webb says, “Actually, I would say lease-penetration rates should be higher.”
He adds: “If not overly subvented at origination, a lease return is viewed by the lessor and grounding dealer as an opportunity to sell a satisfied customer another car. If overly subvented, however, that lease return means a downward spiral in both residual values and customer satisfaction.”