Deflation Is Coming To The Auto Industry As Used Car Prices Drop, Off-Lease Deluge Looms

Tyler Durden's picture

Last week, we learned that vehicle leasing as a percentage of monthly light-vehicle sales hit a record in February at 32.3%.

In other words, a third of the over 1 million cars and light trucks “sold” during the month were leases, according to J.D. Power.

This is indicative of what is now a long-term trend. Have a look at the following chart from WSJ, which shows that since 2009, the share of monthly auto leases as a percentage of vehicle sales well more than tripled:

Of course the thing about leased vehicles is that they come back, and as WSJ wrote last week, “about 3.1 million vehicles will return to dealer lots off leases this year, up 20% from 2015 [and] the number will climb to 3.6 million in 2017 and 4 million in 2018.”

So what does that mean for dealers? Deflation

And what does that mean for the automakers? Hefty losses.

Nothing about this is hard to understand. You get a supply glut causing pricing assumptions for your existing inventory to prove wildly optimistic and you end up with giant writedowns.

This has happened before. "The auto industry expanded the use of leasing in the mid-1990s, helping to fuel retail sales of new vehicles," WSJ recounts. "Eventually, a glut of off-lease cars sent resale values down and auto lenders who had bet residuals would remain high ended up racking up billions of dollars in losses, having to sell the cars for much less than they anticipated."

Right. Nothing difficult to grasp about that. But the especially silly thing about the dynamic with auto leases is that it was the dealers and the automaker-affiliated financing companies that made the leases in the first place. In other words, it's not like this was some supply shock that couldn't have been forecast ahead of time. In fact, they knew exactly when the off-lease deluge would start, so it's not entirely clear why they would have set optimistic residual assumptions.

Anyway, the cracks are already starting to show.

The Manheim Used Vehicle Value Index posted its largest Y/Y decline in over two years last month, falling -1.4% and -1.5% M/M. We're now 3.5% below the peak. 

"All else equal, it puts pressure on lease residuals - though we note most fincos had assumed declining used vehicle prices in their lease writing," Goldman said, earlier today. "Second, while improving inventory acquisition cost for the dealers, it may put downward pressure on the value of existing dealer inventories, which can be negative for used margins."

Well yes, declining used vehicle prices "may" be a "negative for used margins" - in fact that's almost a tautology. 

And of course falling used car prices means pressure on new car prices as well, which would be a shock to America's booming auto market.

Obviously, the scariest part about all of the above is that consumers still have the pedal to the metal (pun fully intended) when it comes to leases, which means there's no end in sight to the off-leases and thus no way to determine, at this juncture, how big the residual writedown wave and deflationary auto industry calamity will ultimately end up being.

So, you know... "buckle up."

*  *  *

Bonus chart: largest used car price decline for any February since 2008

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TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Mar 8, 2016 5:47 PM

I'd love for the price of used cars to plummet, maybe I'll finally upgrade my 1995 SUV

MarkD's picture

Drumpf will build a deflation wall and inflation will pay for it.

Gaius Frakkin' Baltar's picture

Full sized new trucks are approaching 60k... it's hilarious.

aint no fortunate son's picture

1988 bought a new Chrysler LeBaron w/ a 3 year note and kept it 13 years. I was 38.

2001 bought a new Mazda 626 w/ a 4 year note and kept it 13 years. I was 51.

2014 bought a new Hyundai Sonata w/ a 5 year note (plan to have it paid off in 3 years). I was 64. Keeping it ?????? Let's just say that I'm thinking they may bury me with it.

DanDaley's picture

A friend bought a new Ford F-250 last year with doo-dads moving it well into the $50+k arena...but he wants some silver and gold, so I said man, ditch that bitch, buy a $10K job, invest the difference in PMs, and in a couple of years you will probably be able to buy the same truck back for a few OZs of Au. At least that's what I'd do.

SoCalBusted's picture

I stopped buying new cars in 1995.  Now I just buy from CarMax.  Run them until the wheels fall off, then spend the money to keep them running - I do spend the money to maintain them.  People think I am crazy putting money into these things, but it's far less than a down payment and worth a few months of a new car payment.  Plus there is the added benefit that nobody wants to steal them.

DownWithYogaPants's picture

Electrical Engineer here.   Never. Ever. Owned a new car. 

And boy did I have the testosterone.  First car in Arizona was a black on black sedan with anemic aircon.  Second vehicle was black on black CJ7 with NO aircon.  Drove around like it was nothing.  Man I wish I was still that tough.

LibertarianByPopularDemand's picture

I know right! Get something from the turn of the century!

FreeShitter's picture

Not just autos, housing too.

onewayticket2's picture

nothing a little Helicopter Money cant fix (in the near term)

logically possible's picture

I'm thinking another round of cash for clunkers, to screw up the used car market, just like last time. Whatever the .gov touches turns to crap.

milking institute's picture

Yep,same deal with RE and rentals. my Caddy is just about paid off,will put it on the market ASAP.  Then get a cheap 2 year lease,return it to the dealer when i'm done whether he wants it or not,his problem then....

Hohum's picture

Give them away to people who have theirs repossessed.  Get a government subsidy.

Osmium's picture

Cash for clunkers II.  Just take all those slightly used vehicles and destroy them.  It's good for EVERYONE.


TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Osmium Mar 8, 2016 5:52 PM

Fill them up with cheap crude oil and drop them out of planes onto countries we are at war with.  Solves a lot of problems in one swoop

Jack Burtan's picture

They already do that. That's why you always see newer Fords with a anti aircraft gun mounted in the back with a moderate terrorist ? or some shit head sitting in the back.

That's probably why Ford was doing so well. Every middle east shit hole flooded with Fords.

Winston Churchill's picture

Fords developed holes in the floor after a short time, so shit holes for shit holes.

new game's picture

campaign slogan; my vote is worth a slightly used lease return vehicle. make america great again. nobody deserves not to have a late model car in the driveway...

screw the free phone, food rent and healthcare, give mericans what they really want.

NotConvicted's picture

TPTB will just create a global warming auto tax that increases dramatically based on the age of the car, forcing people into newer cars to avoid the tax.  Problem solved.

adanata's picture



NC.. Absolutely! ...they are actually working on a tax for Prius/low gas/high mileage cars because they are not paying enough gas tax anymore. Death and taxes man, death and taxes.

Navymugsy's picture

$63,000 for an F-150? WTF planet are we on?

gmak's picture

What are the people who had the leased-cars-being-returned going to drive, then?  They'll have to buy another car.  So there is a floor on car sales defined by the number of leases. Since this has been rising, it's a "good" thing, no?


True, there will be lots of good used cars, but I think that buyers will come in - those who have old junkers now.  Of course, if there is NO FINANCING for thes cars, then that won't happen. But, the CLO and CDO business needs product (car loans) and their wish is the banks' command.

buzzsaw99's picture

some people lease for three or four years and then end up buying the damn thing on another five year note. that's some funny shit right there. just 71 more payments and it's mine bitchez. hahahahaha

SantaClaws's picture

The so-called "buy here-pay here" subprime car dealers do very well by selling used cars to people with poor credit at inflated prices and interest rates, repossessing the vehicles when the monthly payments aren't made, and then repeating the process again and again using the same vehicles.


Those vehicles have tremendous value, long-term, to the dealers.  As the numbers of those dealers presumably increases, they may keep the prices of some of these recently-leased-but-returned vehicles higher than one might assume.

Barnaby's picture

Just to move around a pile of meat. Even funnier than Chumpf.

gmak's picture

To move it FAST. And sometimes with style.  Don't condescend towards the joys of others, and we won't point fingers at your pecadillos.

1manrme's picture

Cheaper car bombs

directaction's picture

I don't think it'll increase the number of used cars for sale or reduce the price of used cars. 
Here's why:  Every new car sold eventually winds up for sale as a used car. 100% of them, except for those wrecked by idiot tailgaters, cell phone users or drunks.

Pheonyte's picture

The article pointed out how it's already happened before, and here you are saying it can't happen.

BellevueTrader's picture

Trying to hear with your head in the sand is difficult.

Btw...How do I short "Used Cars" ....I can't find the ticker

Wile-E-Coyote's picture

I think you are missing the point leases are so cheap people who would normally buy secondhand are now leasing new vehicles, this leaves fewer people to buy the secondhand market. Therefore, there will be a glut of vehicles off lease driving the price down. We have the same issue over here, mums on the school run driving new Mercs, where as in the past it would have been a five or six-year-old Ford or the like. Premium brands are going to have a real headache shifting their off lease vehicles because the residuals will be relatively high. There are some great lease deals around, lets face it you never really own a car you are only ever a custodian.

lenovot60's picture

Sometime, is cheaper to lease than to buy.  I was able to lease a luxury vehicle with no money down and $330 per month.  In addition, if I decide to buy it, the car was 20% off MSRP to begin with...

Amish Hacker's picture

And leasing avoids sales tax, which can be a lot.

brown_hornet's picture

Leased vehicles in Illinois pay sales tax. Its just amortized into the lease payment. Extra fees in City of Chiraq.

Abbie Normal's picture

At the end of a car loan, you own the car.  At the end of a car lease, you own nothing.  That's why the monthly payments are lower, because you're just renting it.

scintillator9's picture

About used cars:

Certified pre-owned......

Start at 1:46, but the entire clip is worth watching.

cowdiddly's picture

I never quite got the certified preowned used car spmeeel. Yea nooooo shit.

GhostofBastiat's picture

Now thats funny....I dont care who you are!

ejmoosa's picture

Cash for clunkers destroyed the used car market and drove up prices to save the automakers.  Now we have refilled those vehicle channels and prices are falling.

And you did not see that coming?

ihatebarkingdogs's picture

I see something in the chart showing a 1.4% decline. EVERY year in that chart has a dip in the Spring. I don't know why, but every year has a dip just like the current year is in.

My newest vehicle (of my 5) is a 1999 F250 7.3 diesel. Only had it 3 years, but it's in the top 3 of the 'best' vehicles I've owned out of over 30. I'd love to own a 2016 King Ranch, but I don't see 70K of value, and can't affoard it if I did. The paid-for 99 is fine for accomplishing the same work.

emersonreturn's picture

last fall i bought a 1995 lexus sc400 for 3000cad.  in collector condition. i had a 92 lexus sc400 for 15yrs, sold it for 1500us.  the body needed work, so i decided to trade.  i love the car, drives like a dream.  i smile when friends or family tell me what they've just spent on a car.  unfortunately, the money i saved disappeared in that boating accident.  still love my lexus, it will easily last another 15yrs.

Abbie Normal's picture

Just don't google "lexus V8 starter issues"

toadold's picture

I'd like to see the stats on the number of people who have given up on cars and are using Lyft, Uber, and Public transportation?

I've seen an increase in the size of buses used on a number of routes. 

ejmoosa's picture

The buses are bigger here in Atlanta too.  But they are still empty.

RAT005's picture

Atlanta probably got Washington socialist grant money to install more seats to save the environment.  Someone else is responsible for them not being used.