Record High Lease Returns Set To Wreak Havoc On Used Car Prices

Tyler Durden's picture

About a month ago we warned that declining used car prices could spell disaster for subprime auto securitizations (see "Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations").  While it's always difficult to predict the exact timing of when bubbles will burst, a combination of record-high lease returns in 2017 and 2018, combined with rising interest rates could imply that the auto bubble is on the precipice.

As Bloomberg recently pointed out, strong used car pricing is a critical component required to prop up the overall auto market.  While American's love their brand new cars, if used car prices become too soft then substitution can hurt new car sales.  Add to that the impact of falling residual values on the finance arms of the auto OEMs and you have all the ingredients required for an auto market meltdown.

Thanks in part to low interest rates, leasing has become an increasingly popular way to drive away a new car. It accounts for almost a third of all new car transactions in the U.S. and it's also huge in the U.K., as I explained here. For BMW and Mercedes-Benz in particular, it's been a boon for sales.

 

Typically a lease lasts about three years, after which the customer returns to the showroom for another vehicle -- which is when things could get difficult for the industry.

 

"There's going to be a lot of units coming back over the next several years," Ford Motor Co. warned last month. "They're going to get to levels that we have never seen on an absolute basis in the industry before".

 

In 2017,  about one million more off-lease vehicles will be available in the U.S. compared with 2015. That additional volume will put downward pressure on used car prices.

 

If cars depreciate too quickly, consumers will be unwilling to pay high prices for new vehicles. High residual values also help to keep monthly lease payments low. In other words, if used car prices fall, the whole system comes unstuck: automakers' earnings will likely fall and car finance companies (often a subsidiary of the manufacturer) may have to book writedowns on the value of their leased assets.  

As the following chart depicts, with nearly 1mm more cars coming off lease in 2017 than 2015, it's difficult to envision a scenario where used car prices don't come under tremendous pressure.

Auto Leases

 

Of course, how we got here is fairly obvious.  The majority of Americans buy cars based on one factor: monthly payment.  And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go.  Per the Bank Rate calculator below, buying a $30,000 car comes with a monthly payment of around $600 while leasing the same vehicle might only cost $420 per month. 

Bankrate

 

Of course, why buy a $30,000 Ford for a $600 monthly payment when you could lease a $40,000 BMW for $560?  You can afford it so long as you can cover the monthly payment, right?

Bankrate

 

Not surprisingly, these dynamics have caused lease share of U.S. vehicles to skyrocketed in the wake of the "great recession" as people seek to maintain their excessive lifestyles on smaller budgets.

Auto Lease

 

Of course, the problem is that leased vehicles get returned to their originating lenders every 3 years for brand new leases...we wouldn't want anyone driving around in a 5-year-old clunker now would we?  But, as we all know, vehicles have useful lives of 15-20 years.  Therefore, it doesn't take too many excessive lease cycles to flood the market with used supply and bring the whole ponzi crashing down. 

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Stan Smith's picture

Six months from now, I plan on getting my wife a pimpin' ass minivan.    It appears there will be deals to be had.

Raffie's picture

Gonna buy a Hooptie huh?

If you can get a car salemens that goes to the auto auctions (where the car lots buy vehicles dirt cheap) they charge like $100-$200 that is paid to the salesman to BID on the vehicle you want, and you can buy a nice vehicle for about %20 of the same vehicle on a used car lot.

This is a big one near me.

http://daanw.com/

Clock Crasher's picture

need clarification.

do you pay the car salesman 100-200 and he takes you with him... to the auction and he makes the purchase with your money at 20% off.. or there abouts?

acetinker's picture

Don't wanna speak for Raffie, but the buck or two you give the (licensed) dealer is equivalent to the tip you'd leave a cute server after a satisfying meal.

An auto auction is a very dangerous place unless you really know your shit.  However, if you do, you can make out like a bandit.

So you just go to the auction and look around for the guys hanging about and comparing notes- Those are the dealers.  Tell anyone who will listen that you'll pay them ten cents on the dollar for the best deal on XYZ.

That's more than they'd make if they bought the car, checked and fixed all the shit that's wrong with it, and had to offer a 90 day warranty.

No matter what, avoid any dealer who smells of curry or gefilte fish- they'll fuck you in a heartbeat.

greenskeeper carl's picture

A couple years back ZH ran a piece on how huge the % of GMs sales of high end vehicles were just short term leases that would eventually wind up on dealer lots as used cars. As I said then, Ill be looking to upgrade my z-71 tahoe in the not too distant future. I bought it at 4 years old and 65k miles, and its now 13 with 190k on it. Looking to get a 4-5 year old suburban to drive for another 10 years. Hopefully there are enough fucktards who gotta buy new cars every couple years that I can get a good deal. This should help me out.

SafelyGraze's picture

fortunately for everyone, snopes serves as the arbiter of what is real news and what is fake news.

and snopes knows that car sales are doing just fine.

http://www.snopes.com/photos/automobiles/unsoldcars.asp

hugs,
the snopeses 

zhandax's picture

Snopes should stick with what they know, which is jack shit.

There is a new shopping community just off I40 between the town I live and the town I work. I stop at walmart there for cat litter every couple of weeks when I leave work (at night when there are less fucktards) and there was something new being built behind it a couple of months ago. First they paved a big lot, far off the street, lit it, then filled it with new cars. There was occasionally a cop in the gravel in front of the slab they had poured. At least two months later, and they still don't have the dealership building completed (although it is framed, glassed, and they appear close.

From the blatant channel stuffing I assume it will have a GM sign out front, but they haven't gotten that far yet and I don't care enough to drive a half block out of my way. I will know soon enough.

PT's picture

They would rather crush perfectly good cars or ship them off to third world countries than let the prices go down.  Free markets are a myth.  They only work in one direction.  The other direction is rigged to the hilt.

ModernMusket's picture

Snopes is a Leftist fake site that tries to back up Leftist lies.

nufio's picture

Whats the fastest car in the world?

A rental car 

Chauncey Gardener's picture

Ten cents on the dollar? Are you serious? You are delusional if you think you can buy wholesale for one tenth of the price of the car, wholesale or retail. The auctions I go to DO NOT allow dealers to bring customers on the premises, Period. It doesn't work that way. As an example, you're advocating buying a $2000 car at wholesale for $200? DId you use common core math, or do you assume that anyone on this site who is in the car business is that naive? So, if we sell at a 90% loss we make it up on volume?

Raffie's picture

I went a few times myself, they only focus on the car dealer who will have a number on a sticker who is bidding on a vehicle.

I seen $3k vehicles get a few things fixed and sold for around $10k or more.

zhandax's picture

Manheim is two cigarettes down the street from where I work and I believe you can attend with a licensed dealer. The husband of one of the Occupational Health nurses we had at work was a licensed dealer and supposedly would take someone to buy them a car for a couple $hundred tip. One of the dealers with an office closer to Manhein listed a car I considered a year or two ago on eBay. If this dip in prices materializes, I may tell him I will give him $300 to buy me x for $xxxx in x condition. That final x represents receipts in the glovebox for recent dealer service.

acetinker's picture

No.  I meant 10% commission.

A used car salesman has the gall to come on these pages and criticize the guy who has actually bought cars via slimy assholes like yourself--- at auction?

Fuck you!

golden kafir's picture

I know a car dealer and he bids online and will purchase for a small commission.

Raffie's picture

That is why u go with a car dealer who does this.

Raffie's picture

yes u pay for his service because he has a special permit to attend car auctions. u can get a permit but will cost around $600 I am told.

Yukon Cornholius's picture

I'm waiting for volkswagon's two-for-one sale. I've actually considered going to a VW dealership and offering half price for a Jetta. How can they say no at this point?

saveUSsavers's picture

ur pimpin ur wife's ass in a minivan? Any pics?

Iconoclast421's picture

I beat the hell out of my last lease. I mean I beat the HELL out of it. lol. Dont buy off lease vehicles ...

Bob's picture

I shudder to imagine.  The obstacle courses of curbs I've hopped just for fun, the fields of mud I've run with just rental jeeps while my car was in the shop (not getting tickets on construction sites when you gotta be towed out in the wee hours is an art), oh, the fun I've had! 

On the upside, I've never known anybody who was anything but paranoid about their leased vehicles.  Never leased one, but have of course known legions of people who did over the years.  

Hey, looks like it's time to party like it's 1999!

kommissar's picture

yeah. you guys are assholes.  i worked with a guy like you who abused rentals, and now i'd never buy one.  there's no reason or that bullshit.

Bob's picture

Actually, the machines were fine after all that.  Very impressively engineered and constructed vehicles.  I was merely testing their capabilities . . . I can't help it if it was so damn much fun! 

Normalcy Bias's picture

...and, REALLY don't buy used Rental Cars - Talk about ABUSED.

sun tzu's picture

Rental cars are fleet cheap tincan crap to begin with and the rental companies barely do any maintenance on them. Leases can be okay. I got a 1 year old lease and 40% off and it runs like new three years later. You have to be careful about repos though. Those lowlifes treat their own property like shit. A lease isn't even theirs

Pumpkin's picture

I bought a rental car once, was one of the best vhicles that I ever had.  Most likely they at least change the oil regularly.  I've rented cars too, I have never abused them and really wonder how many would possible put themselves and family in real danger to over abuse a rental.

ne14truth's picture

Iconoclast421--- you are so correct, never buy a used car that was once leased, never.

Nobodys Home's picture

I bought an off corporate lease 98 Dodge Neon on the cheap in 99..paid cash... Car looked and drove mint. It's still on the road with a niece driving it. Never a major repair. I lucked out.
Those pieces of crap drive great in the snow! Whodathunk?

Rakksan's picture

Leased not the same as rented?

Jack's Raging Bile Duct's picture

They're talking connotations, long term single user (lease) vs short term multiple user (rental).

Occams_Chainsaw's picture

You need the background on the vehicle.  I picked up a 13 Edge in 14.  It was a small company highway car so it had high miles (30k) but otherwise pristine and had been garaged....it was not a hertz type of rental car.  One year old with high miles and the full maintenance record got me a 40k car for 25k.  Ms. Chainsaw only drives about 6k miles a year so essentially inside of 3 or 4 years I will have less than average miles on it.  Also got the 7 year warrenty since it was a cerified Ford car.  I did something similar in 1994 with a Taurus....picked it up from a corporate fleet sale (driven by a manager there) and it had 9k miles on it with all service records....got it for 10k.  Had to replace it with the edge when it got t-boned....otherwise with only 78k miles on it we could have driven it for another 5 years easy.

Problem is cars cost money and sometimes you can come out ok (that Taurus cost me $50 a month over having it for nearly 20 years) and sometimes you don't come out of the deal ok.  I guess you just have to pick which hole you want to throw your money into.

wisehiney's picture

Hey Tyler,

First author/writer that I have seen to properly spell and use "wreak havoc" in a long time.

I keep seeing "wreck havoc" and "reek havoc" etc.

Plus 100!

Burticus's picture

No, he flocked up "to skyrocketed".

Don't nobody never proofread nothin' no more?

Clock Crasher's picture

I misspelled hyperinflation today and replied to my own 1st comment (preventing corrections) in the market review today

I spelled it "Hyerpinflation"

I let the typos slide in the ZH authored articles (all tho they are annoying) because ZH does a lot of volume

No excuse for featured articles

Archibald Buttle's picture

how much fun has been had with the typo "shitgum" around here? it's almost, and i use the term "almost" quite loosely here, worth the other million or so spelling fails one has to put up with these days. not just on ZH, but everywhere. fuck it, i will leave it at that, and get another beer instead of complaining more on this topic.

slightlyskeptical's picture

It's not that they don't know how to spell, it is that they don't type well. 

 

zhandax's picture

It's both, but there used to be a spellcheck box above the comment box (an insert link icon as well). Where did both go, or is it just my browser settings?

LetThemEatRand's picture

I'm still waiting for Detroit to dust off the old specs and build a 1965 Corvette with a modern engine/electronics and throw in an air bag or two, or a 1991 Bronco, or I could go on. They couldn't keep them on the lots.

dot.dot's picture

Funny you said that.  I was just telling my wife I'd LOVE to have a mid-year vette remake.  Those were sexiest of all the vettes.  Love the whale tail rear-end.  I could even see past it being made by GM -The WORST Company ever known.

I helped my Dad rebuild a '66 Coupe 327 super jet back in the day.  Lots of fiberglass sanding and itchy arms.  I loved that car at first sight.  Sadly, he sold it before they became so valuable.

The tail end of the new vette looks just like one of those grotesque camaro's.  UGLY.  What were they thinking?  I think they were just lazy and said, fuck-it just slap a camaro rear on it and be done w/ it.

LetThemEatRand's picture

1965 corvette. No comparison, even though the 2016 is superior mechanically.  https://www.youtube.com/watch?v=UAX-djnbkGA

I would be the first guy in the showroom to plunk my money down for a 2017 version that looked like this.

BetterOffDead's picture

Couldn't agree more, have had the same exact thought. They brought back the thunderbird, why not the classic corvettes?

Clock Crasher's picture

as far as aesthetics goes modern cars are WHACK compared to previous decades

I like the 80's nascar monte carlo super sports

well defined lines and hard edges (like a F15 Eagle) 

cbxer55's picture

I could dig a modern day remake of the Plymouth Superbird, or the Dodge Charger Daytona. Awesome cars.

Whatever inspired Dodge to make a Daytona truck? WTF? 

de3de8's picture

Montes of that vintage have waaaaaay too much front overhang. Terrible proportions.

dot.dot's picture

I'm with ya, but would wait a few yrs to pick up a used one.  New vette's depreciate quite a bit.  There is a place near me who has a pretty good selection of vettes and a nice web site:  www.mershons.com  Take a look and see how little you can pay for a 10 year old vette w/ minimal miles.  They are asking crazy money for a clean mid-year.

I think the 63-67 were pretty much identical (sans the '63 coupe's split window).

de3de8's picture

Correct, with just yearly upgrades such as disc brakes for 65 on, big block in 65, 396 to 427 for 66 on, as well as many minor styling changes most notable being the side "gills" in front fenders. Probably the two most coveted are the 63 split window "fuelie" and the 67 427-435, also in coupe form.

dot.dot's picture

Sweet.  Loved how the tires chirped in all 3 gears!

 

Never knew they came in a 396.  

I don't know a great deal about working on cars, but my dad sure did.  I remember asking why he didn't get a 427 instead of the 327 and he said the 327 was easier to re-bore to get more displacement.  No replacement for displacement.

say it aint so's picture

 

the old man use to sellChevys in the 60's learned how to drive in SS camaros and chevelles, my vavorite was 70 monte carlo with 454

 

Rabbi Chaim Cohen's picture

I don't know, the Monte's styling was an acquired taste and it didn't handle well. I'll take my 1970 454 in a Chevelle SS, thanks. Though Im more of a pony car type. The real dream for me is a 1970 440 'Cuda.