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The Mystery Behind Strong Auto "Sales": Soaring Car Leases
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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We have two old cars...paid off a longggggg time ago. They're not pretty but they work fine. I always shake my head when in the store parking lot and see those on EBT (behind them in line / know them) who are driving some seriously nice cars. That house of cards is set to fold.
I used to get a chuckle watching the Little Saigon matrons pull up to the Free Food Bank in their Mercedes Benzes. The staffers would wheel out boxes of foodstuffs and help them load up the trunk.
I own four smart cars......they're all paid for.
Tyler is correct about the resale value of these cars after 3 years. The dealers and manufacturers are aware of this and factor it into the amortized part of the vehicle you're purchasing. Additionally, if you don't have very good credit, deposits and the interest rate "money factor" are much higher on the lease.
The best thing to do is buy a few year old car unless you have a tax incentive or some other specialized reason for not doing so. A (2) year old car will have depreciated between 35-50% , and the warranties on most upscale cars are at least 4 years 50k miles with even longer emissions and powertrain coverage.
In November of 2012 I bought a 2006 Mustang GT for $18,000 plus they gave me $5,000 trade in for a 1993 Miata. And the Mustang only had 9,000 miles on it! I plan on keeping that for 10 years as I did the Miata.
Excellent job! Most cars hit the steepest part of their depreciation curve about (3) years out. Then it really flattens out if you keep the miles reasonable.
Chick sitting near me who wont shut up and is 56 yrs old makes just 70k/year, just leased a 55k car (prior car was just 4 years old), and lives in a shitty condo that will have payments until she is 81 years old.
She's fucked, but she drives a fiiiiiiiine ride ... would be nicer if she's spend a buck on spinners, though.
where can one meet such charming persons?
So when will be the best time to buy an off lease vehicle 2016? 2017?
Find a vehicle you really like that has recently undergone a redesign or bodystyle change and count forward or back (3) years. When new models are introduced they're heavily leased for maximum exposure. There's always 3 year year leases rolling off, though.
I lease four cars now.
Actually leasing is a great idea but you need to be smart.
Three friends drive three of the cars and I basically rent to them at at a 10 % discount to the gross lease payment. They are employed.
I am running a business so I get 4 cars with an effective 40 % discount on combined lease payments
They get almost $40 dollar discount on the monthly lease and I get mine paid almost in full by tax deductions.
Actually costs me less than $50 a month for the car I run net of deductions on all four cars
Whey hey
Go find some guy in business and do a deal with him if you gonna lease
Now if I can find a few more suckers the dealers are pushing into leasing I might just go get that Bentey Arnage I wanted
Just happy my vehicle is paid for. I have no desire for another monthly payment as long as I can economically run this one. I have nothing to prove by what I drive.
Ten years ago there was a real shortage of 3-year old used cars, and when I returned a leased car I could get a healthy bonus for turning it in - if I negotiated a bit with the dealer.
Two years ago when I turned in a lease nobody would give me a bonus, but I'm not sure if that reflected a surplus of used cars or a conspiracy by the dealers regarding lease turn-ins, because after they denied wanting to buy my return, it turned out they bought it off Honda the minute I stepped off the lot - only an honest Honda corporate told me the truth when they returned my $200 mileage fee. I just thought the conspiracy-loving ZH crowd would go for that one.
So increased leases may be a sign of whatever, is I guess my only point. The leasing companies estimate the resale value and that goes into the lease prices. They have been wrong before, on both sides, the market has gone up and down a lot over twenty years, but I'm not sure how much it reflects the economy.
Did you really think all those small BMWs you see your local hipster drive is purchased?
BMW is basically Hertz Rental Co. in lederhosen.
Besides, autos (like housing) are dependent on low rates. My last two rides were purchased for near 1% for 5 or 6 year terms.
Car go beep beep!
When in the U.S. will people start in larger numbers using motorized bicycles, small motorcycles, and the like as alternatives to the automobile? Not to mention bicycles?
Granted, it may be harder to eat a sandwich or text message while driving a motorcycle or moped, but perhaps not if you're the passenger.
You can't live in a moped