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Deals Too Good to Be True: Off-Lease Vehicles Are Flooding the Auto Market

JUNE 20, 2017

After years of skyrocketing car sales with leasing deals, the auto industry is starting to feel the weight of their success. Chief economist, Tom Webb, at Cox Automotive estimates that the pool of off-lease vehicles will grow from 3.6 million in 2017 to 4 million in 2018.1 This is nearly double the pool of off-lease vehicles in 2015 at 2.6 million.2

Automakers are faced with the challenge of maintaining previous year’s sales numbers, which have been greatly inflated by these aggressive leasing deals. According to a Market Report from Edmunds, the volume of leases grew by 91% over the past 5-years with 31% of all new vehicle sales under leases in 2016.3 Luxury brands and SUVs by Ram, GMC, and Chevrolet have shown the greatest amount of increase with lease growth rates jumping well over 100%, a major change to the 5-12% growth rate in 2011.4

INDUSTRY IS MOTIVATED TO KEEP LEASES GROWING

Leasing is a gateway for millennials with a household income under $50,000.5 Millennials can own a new SUV or luxury brand vehicle at an affordable price point with all the key features they want. Executive director of industry analysis at Edmunds, Jessica Caldwell, explains, “If automakers make a positive first impression with this influential group, they have a great opportunity to build lasting relationships as brand loyalty rates are much higher among shoppers who lease versus buy.”6

Many customers like leases because they make lower monthly payments than if they took an auto loan or paid for the vehicle in full. Automakers like leases because payment structures are flexible. They’re able to groom prices and payment plans on more expensive vehicles to fit larger customer bases.

WHERE THERE’S SMOKE, THERE’S FIRE

Although car leases can help drive sales of new cars, they also pose greater risks for the auto industry. The success of car leases relies on a healthy economy. If the economy turns like in 2008, automakers and dealers will be left with an even greater glut of cars coming off leases.

Used vehicle prices continue to trend down as 3.36 million leased vehicles will return to the market this year – a jump after a 33% surge in 2016. Some automakers are already beginning to feel the consequences of off-lease vehicle growth. Ford Motor Co. has reported to the U.S. Securities and Exchange Commission that they’re cutting as much as $300 million or 16% in pre-tax profit from its financial-services arm’s forecast for the remainder of 2017.7

The fallout of booming off-lease vehicle growth entering the market has affected the rest of the industry as well. The National Automobile Dealers Association’s Used Car Guide price index tracked used-vehicle prices as they fell 23% in 2016, which is much quicker than the average annual rate of 18%.8

To cope with the flood of off-lease vehicles, Ford Motor Company is cutting back their leasing programs and leaning on their retail sales to make up the losses. Other automakers are considering certified pre-owned vehicle offerings like extended warranties to try and strengthen sales.

Unless used car prices stabilize, it won’t just be leasing that is impacted—the ripple effect will affect all new vehicle sales. In the first quarter of 2017, the percentage of trade-in vehicles with negative equity and the amount were at an all-time high.9 If a consumer with negative equity cannot increase their down payment, they have to roll the negative equity into their new loan, resulting in a higher payment. However, the higher loan to value ratio and higher monthly payment can make obtaining a loan more difficult. As a result, consumers are often faced with the choice of selecting a lesser vehicle or driving their current vehicle longer.

The ability of car companies and their dealers to manage the flood of off-lease vehicles will determine just how large the ripples will be.

 

1.  Arlena S. “Dealers anxiously await off-lease vehicles”. Automotive News. http://www.autonews.com/article/20160328/RETAIL06/303289976/dealers-anxiously-await-off-lease-vehicles

2. Ibid.

3. Nicole C. “Automotive Lease Volume Reaches Record High in 2016”. PR Newswire. http://www.prnewswire.com/news-releases/automotive-lease-volume-reaches-record-high-in-2016-according-to-new-edmunds-report-300397551.html

4. Ibid.

5. John I. “Millennials may be fertile market for CPO”. Automotive News. http://www.autonews.com/article/20170422000100/RETAIL04/304249987?template=print

6. Nicole C. “Automotive Lease Volume Reaches Record High in 2016”. PR Newswire. http://www.prnewswire.com/news-releases/automotive-lease-volume-reaches-record-high-in-2016-according-to-new-edmunds-report-300397551.html

7. Corey M. “Ford Motor Company”. United States Securities and Exchanges Commission. https://www.sec.gov/Archives/edgar/data/37996/000003799616000166/letschat.htm

8. Gabrielle C. “A Rising Tide of Used Cars Threatens Ford’s Profits”. Bloomberg. https://www.bloomberg.com/news/articles/2017-01-23/ford-seen-as-canary-with-record-leases-spurring-used-car-glut

9. Hannah Lutz “Negative effect?” Automotive News June 12, 2017

ABOUT THE AUTHOR:

Brad is inspired to change the way cars are bought, serviced, and sold. Having spent the last 30 years in the automotive industry, he’s adept at turning around automotive retail operations and solving dealer network challenges. With a unique blend of sales, finance, and operations expertise, Brad is charged with growing Square Root’s automotive footprint. Brad is a CPA who holds a MBA from Columbia University as well as a bachelor’s degree in accounting from the University of Illinois.