The Mystery Behind Strong Auto "Sales": Soaring Car Leases

Tyler Durden's picture




 

When it comes to signs of a US "recovery" nothing has been hyped up more than US auto companies reporting improving, in fact soaring, monthly car sales. On the surface this would be great news: with an aging car fleet, US consumers are surely eager to get in the latest and greatest product offering by your favorite bailed out car maker (at least until the recall comes). The only missing link has been consumer disposable income. So with car sales through the roof, the US consumer must be alive and well, right? Wrong, because there is one problem: it is car "sales" not sales. As the chart below from Bank of America proves, virtually all the growth in the US automotive sector in recent years has been the result of a near record surge in car leasing (where as we know subprime rules, so one's credit rating is no longer an issue) not outright buying.

From BofA:

Leasing soars: Household outlays on leasing are booming at a 20% yoy pace - a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.

 

Chart 1: Households go for the low capital option: leasing soars 

(yoy growth rate, inflation-adjusted)

 

It could also translate into even higher leases, which in turn bottlenecks real, actual sales.

Of course, the problem is that leasing isn't buying at all. It is renting, usually for a period of about 3 years. Which means that at the end of said period, an avalanche of cars is returned to the dealer and thus carmaker, who then has to dump it in the market at liquidation prices, which in turn skews the ROA calculation massively. However, what it does do is give the impression that there is a surge in activity here and now... all the expense of a massive inventory writedowns three years from now.

Which is precisely what will happen to all the carmakers as the leased cars come home to roost. But what CEOs know and investors prefer to forget, is that by then it will be some other management team's problem. In the meantime, enjoy the ZIRP buying, pardon leasing, frenzy.

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Wed, 08/06/2014 - 10:06 | 5053636 q99x2
q99x2's picture

Good article.

Wed, 08/06/2014 - 10:44 | 5053837 hedgeless_horseman
hedgeless_horseman's picture

 

 

I personally know three young African-American males that earn between $2500 and $2850 per month, and each of them have car payments over $1100.

Two drive Lexus (Lexi?) and one a GM.

None of them have health insurance, because it is, "too expensive."

Wed, 08/06/2014 - 10:45 | 5053860 Headbanger
Headbanger's picture

Now what was the old term we used for that kind of car back in the '60s?

Same as it ever was...

 

Wed, 08/06/2014 - 11:19 | 5054072 mvsjcl
mvsjcl's picture

So now it's leasing? What about all those millions of cars just sitting in parking lots world-wide? Wasn't there a ZH article about that a few weeks ago?

Wed, 08/06/2014 - 11:32 | 5054152 toady
toady's picture

Piece of shit?

Seriously though, the wife crashed her car back in 11 and we went looking for a new (had to be a new car... women! )

We're at the dealership and they can't tell us how much the payment will be if we buy, only the lease payment. After an hour the dealership owners son brings the old guy from accounting in so he can produce buying numbers. Everyone else only knows how to do leasing.

This is at a major dealership in the Phoenix metro area, not some place in the sticks.

Wed, 08/06/2014 - 11:44 | 5054218 besnook
besnook's picture

that's sales technique to scare you away from buying. the f(inance) and i(nsurance) guy certainly knows the payment. they must get some vig from the leasing company.

Wed, 08/06/2014 - 12:37 | 5054512 Jack Sheet
Jack Sheet's picture

I mentioned this a few weeks ago but it's the same in the EU. In the big BMW dealerships they have dozens of big fat limousines in the showroom but the price tags only show the monthly leasing rate. If you have a magnifying glass you might find the cash purchase price in small print on the back of the tag.

Wed, 08/06/2014 - 14:55 | 5055220 JRobby
JRobby's picture

There is an app for that.

Don't these fucks have phones?

Wed, 08/06/2014 - 10:56 | 5053935 Oldwood
Oldwood's picture

And its no big deal to claim bankruptcy due to excessive consumer debt, but let anyone go broke trying to save their own lives through modern medicine, it a crime. Evil Pharma or insurance companies. Is it possible that our troubles come from what we value and what we do not? I'm not excusing the theft that occurs in medicine but only what we see as important in a relative way.

Wed, 08/06/2014 - 11:42 | 5054185 tickhound
tickhound's picture

The medical "industry" is no different from the auto industry or the mic or the prison industry. At near 20% of GDP it's busy creating your "choices" from trappings that are beneficial to it.

Those choices are marketed to you and a particular behavior is rewarded.

You're then conflicted cuz half of you wants to condemn the profit machines relentless behavior, while your other half may even admire the industry success.

Then the predictable and too often less than optimal outcomes are blamed on OUR behavior, or our value systems, rather than the machine that framed our choices and those values.

No different than Greenspan blaming human "nature" for economic bubbles.

Wed, 08/06/2014 - 14:41 | 5055131 Its_the_economy...
Wed, 08/06/2014 - 14:41 | 5055137 Its_the_economy...
Its_the_economy_stupid's picture

I just read in the past couple days that Spain has joined Japan, India, and France in lawsuits against Guardisil. It's probably the most dangerous vaccination on the planet, and being given to an entire generation of girls.

In USA, such lawsuits are illegal.

Wed, 08/06/2014 - 11:15 | 5054033 world_debt_slave
world_debt_slave's picture

it's in the culture

Wed, 08/06/2014 - 11:15 | 5054034 DavidC
DavidC's picture

Lexuseses?

SavidC

Wed, 08/06/2014 - 11:36 | 5054184 toady
toady's picture

I'm thinking Lexi, but I do the cacti thing over cactuses too.

Wed, 08/06/2014 - 14:53 | 5055199 JRobby
JRobby's picture

43% - 44% DTI. Don't think Fannie will touch that on a (theoretically) appreciating asset - house (laugh track deafening, painful, POP!)

Now back in '08 when I did a 65% DTI w Fannie...........................................................Why are we fucked answered.

 

Wed, 08/06/2014 - 10:07 | 5053639 NoDebt
NoDebt's picture

Owning things is so pre-2008.  If I don't owe a never-ending stream of payments for consumable goods that totals upwards of 110% of my monthly income, I feel unfulfilled as a human being.

Wed, 08/06/2014 - 11:01 | 5053955 RafterManFMJ
RafterManFMJ's picture

If I stop paying my musical utility, they will shut my music off.

Wed, 08/06/2014 - 11:38 | 5054191 MortimerDuke
MortimerDuke's picture

Now that's funny.  One upward pointing green arrow for you, sir!

Wed, 08/06/2014 - 10:07 | 5053642 souljaboy
souljaboy's picture

Everyone in Atlanta is driving a BMW, Mercedes, or Lexus. It's unreal.

Wed, 08/06/2014 - 10:20 | 5053707 jackstraw001
jackstraw001's picture

I know at least 10 people here in Atlanta who have leased the Nissan Leaf electric car because state and federal subsidies bring the actual cost of the lease to less than $100/mo. I heard somewhere that the Atlanta metro area is responsible for something like 20% of all Leaf sales/leases -- the perverse consequences of trying to modify consumer behavior through the tax code.

Wed, 08/06/2014 - 10:32 | 5053787 ejmoosa
ejmoosa's picture

And the ones I know driving one will tell you they are against subsidies in general, but this one was different.  

It's a free ride, they tell me.

 

Wed, 08/06/2014 - 11:14 | 5054027 Oldwood
Oldwood's picture

I say buy a van. A place to live when you can't make rent. I sure as hell wouldn't want to live out of a Nissan Leaf. Mileage isn't really important if you don't have to drive to work, and there is almost always plenty of parking at Walmart.

Wed, 08/06/2014 - 12:00 | 5054315 RafterManFMJ
RafterManFMJ's picture

One reason I bought my Element; and no, I'm not kidding.

Wed, 08/06/2014 - 14:56 | 5055228 JRobby
JRobby's picture

It is always different when it is "my habit"

Wed, 08/06/2014 - 10:27 | 5053748 ejmoosa
ejmoosa's picture

I just recently bought a used 2011 BMW in Atlanta.  The numbers I had to choose from were incredible.  They wre all cars that had been leased.  

 

Using Carfax, as I narrowed down my choices, they had come from all across the country, but primarily New York, DC, and Florida.

 

 

Wed, 08/06/2014 - 10:09 | 5053645 Wahine
Wahine's picture

My neighbor just got a new car.  It is parked outside the fence of our apartments because he couldn't afford the $75 parking pass.

Wed, 08/06/2014 - 10:12 | 5053664 PartysOver
PartysOver's picture

That is so 2014.  Bring on the parking pass entitlement program!

Wed, 08/06/2014 - 10:14 | 5053667 NoDebt
NoDebt's picture

Its a basic human right.

Wed, 08/06/2014 - 10:27 | 5053754 ejmoosa
Wed, 08/06/2014 - 11:08 | 5054001 KnuckleDragger-X
KnuckleDragger-X's picture

California, leading the nation...off the cliff.

Wed, 08/06/2014 - 10:19 | 5053692 medium giraffe
medium giraffe's picture

Enormous stupid car, tiny apartment/house.  My favourite kind of comedy narcissists.

Wed, 08/06/2014 - 10:46 | 5053872 JRobby
JRobby's picture

"comedy narcissists" good one, and they are fun to watch in action.

Wannabee's really. The serious narcissists concentrate on preying on and wrecking economies through banking and legislative control and manipulation.

Those are the ones that need to be euthanized.

 

Wed, 08/06/2014 - 10:47 | 5053882 IANAE
IANAE's picture

...or to paraphrase in Texan - big hat, no cattle.

Wed, 08/06/2014 - 10:21 | 5053710 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

Lease your pass to him.

Wed, 08/06/2014 - 10:41 | 5053842 JRobby
JRobby's picture

Just get Liberty Mutual and total it within the first 2 years..................

Wed, 08/06/2014 - 11:17 | 5054049 Took Red Pill
Took Red Pill's picture

leasing also usually requires higher insurance

Wed, 08/06/2014 - 10:10 | 5053651 saveUSsavers
saveUSsavers's picture

This is the most corrupt time in all US history in my 63 years watching this country FLUSH.

Wed, 08/06/2014 - 10:12 | 5053663 doomandbloom
doomandbloom's picture

There is moar to come...

Wed, 08/06/2014 - 10:27 | 5053752 MartyFlesh
MartyFlesh's picture

Wasn't that the Old GM Mr Goodwrench Commerical?

Wed, 08/06/2014 - 10:11 | 5053658 Joe_in_Indiana
Joe_in_Indiana's picture

Reminds me of the old Fram commercial--

 

"Pay me now, or Pay me later!"

Wed, 08/06/2014 - 10:12 | 5053662 Dr. Engali
Dr. Engali's picture

It always provide a good laugh when you drive around town and see a $50,000 car parked out in front of a $30,000 house. What a fucked up country we live in.

Wed, 08/06/2014 - 10:16 | 5053677 NoDebt
NoDebt's picture

Damn our country and its obsession with long-term thinking!  Doesn't anybody just live for TODAY?

Wed, 08/06/2014 - 10:25 | 5053726 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

Contemplating tomorrow is so, like, yesterday.

Wed, 08/06/2014 - 10:16 | 5053679 corporatewhore
corporatewhore's picture

or the lady in the mercedes convertble or landrover coming into the shop to use her EBT card to buy chips and a soft drink

Wed, 08/06/2014 - 10:25 | 5053737 Big Corked Boots
Big Corked Boots's picture

I had someone at my farm stand in an Escalade buy some peppers and eggplant. She presented an EBT card. I told her I didn't accept that, 'cause for me, it was like not getting paid at all.

Wed, 08/06/2014 - 10:50 | 5053904 Lendo
Lendo's picture

You can also tell her that you ain't got time for that. 

Wed, 08/06/2014 - 12:38 | 5054516 atomp
atomp's picture

ain't nobody got time fo dat!

Wed, 08/06/2014 - 13:06 | 5054643 General Decline
General Decline's picture

Are we playing "Guess That Race"? Cause I love that game.

Wed, 08/06/2014 - 11:15 | 5054035 thamnosma
thamnosma's picture

Seriously, an EBT card at a farm stand?   What sort of person was this?

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