Soaring Lease Returns Set To Wreak Havoc Used Car Pricing and Auto Industry Profits

Tyler Durden's picture

For months we've 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.

A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.

 

“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.

 

This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. If used values weaken more than anticipated, it can lead to losses across the industry, hitting carmakers, auto lenders and rental companies.

 

Lease

 

Unfortunately, the volume of lease returns is only expected to grow even more in 2018 with returns expected to approach 4mm units.

Auto Leases

 

As J.D. Power points out in it's most recent "NADA Used Car Guide Industry Update," the flood of lease returns is driving used car prices lower.

Used Car Prices

 

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 skyrocket 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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edifice's picture

Hmmm... Maybe in a year or two: Great time to replace my decrepit Civic with a used car, paid for with cash?

Mr. Universe's picture

I keep seeing these stories about the used car market melting down but I don't think it means what you think it means.

edifice's picture

What do you think it means?

JamesBond's picture

Cut out all the middle men in the car buying process.  

 

NotApplicable's picture

Thanks to fedgov, I hate new cars.

I'll be driving nothing newer than 2006 for as long as I can.

balolalo's picture

HOW ABOUT WE DRIVE LESS

REPLACE CARS LESS OFTEN

and not fuckup the biosphere

evoila's picture

anybody who pays 560 a month to lease a 40K car is a moron to begin with. 40K car should be leased for about $300 per month.

Justin Case's picture

They didn't mention the manufacturer's recommended maintenance intervals. You won't get a simple maintenance check for under $300 on German import. Part of the lease agreement.

Oracle of Kypseli's picture

best upcoming business: Popular Luxury Brands 4 year old exporting to 3rd world countries. 

Joyo Bliss's picture

Remember the old chevy nova 3 on the tree that was shipped en masse to the ME back in the day. An order fell through. It came with Iraqi pinion steering.

greenskeeper carl's picture

Do they show up in the middle east with the .50's mounted already, or will that be extra?

A Nanny Moose's picture

Cheapest car I never bought, was keeping my Y2K Subaru Forester. 312K Miles, one tranny/clutch, and one head rebuild. If I spend <$1200/Yr in maint costs alone, I am still ahead of the cheapest lease.

Fucking Done.

NoDebt's picture

"HOW ABOUT WE DRIVE LESS

REPLACE CARS LESS OFTEN

and not fuckup the biosphere"

You need to take a ride in my 800 HP twin turbo Cadillac Escalade (the one I pretend I own).  You won't give a shit about those dying polar bears and penguins any more.  It'll take you a month to wipe the grin off your face.  

If I thought CO2 was actually a "pollutant" or a real danger to the environment, I might see the need for alarm.  Fortunately, that's globalist horsehit pseudo-science (and even that was thoroughly corrupted the minute politics got involved) so I don't worry about it.  

 

balolalo's picture

how convenient to forget the

MINING OF THE METALS

AND THE MANUFACTURING OF THE BASE MATERIALS

TRANSPORTATION OF THE ABOVE

Fed Supporter's picture

My car is emitting carbon which is plant food, therefore the more I drive the better I feel about it.

new game's picture

i work at ground level zero and yes indeed near new lease returns are flooding the auction lots. sea of toyota camrys.

waves of hyundi, fords washed up everywhere. yes the flood has begun...

Creative_Destruct's picture

"...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. "

Yeah baby! Used car buyer's market comin' big-time! Time for me to think about replacing my 2002 Toyota Pickup shit-hauler! LOVE these ponzi lease shemes!

garypaul's picture

Yeah, it sounds good. But these days they won't let anything go down, I wouldn't be surprised to see another 'cash for clunkers' scheme.

Oracle of Kypseli's picture

We shopped for a new car with a trade in. 5 weeks later, we decided to pull the trigger. Not happening. The trade in value dropped by $8k. Walked away. Must drive this car for much much longer.  

If you do not have a decent car, you are in luck. If you do have a fairly new car, keep driving.

cbxer55's picture

New? What's that? I drive a 19 year old Ford Ranger, a 13 year old Ford Lightning and a 11 year old Suzuki M109R (motorcycle).

Have zero intention of buying a "new" vehicle, and most especially of ever leasing one. What a rip off vehicles have become.

As for decent, just maintain them properly and they'll always be decent.

Ranger has 147,000 miles and is still running good. Lightning has 63,000 miles and runs exceptionally (supercharged). Motorcycle has 27,000 miles and is like new.

kommissar's picture

sounds like me: 02 lincoln town car, 04 ford ranger, and 96 bmw r1100 motorcycle.  i'm 54, and may never buy another car.  town cars can routinely go 400k miles - mines no where near that, and the ranger only has 50k on it.  i can go most anywhere on the planet on the bmw, too :)

Refuse-Resist's picture

Total shit-tier cars at that.

 

Whither the manual transmission?

 

Oh woe is me!

Deathrips's picture

Its a taxpool they can steal.

 

AKA Its a TRAP!

 

Pollution bad, Co2 good.

 

RIPS

post turtle saver's picture

first, yelling doesn't make you right so you can secure that shit right now...

second, automobiles are the most recycled consumer product on the planet bar none... they don't have the impact on the environment that you think they do... same goes for the steel and aluminum industries, the vast majority of the starting material stock is recycled... don't believe me? look up Nucor and what they do... they have this down to a science...

californiagirl's picture

"how convenient to forget the MINING OF THE METALS AND THE MANUFACTURING OF THE BASE MATERIALS, TRANSPORTATION OF THE ABOVE"

 

Why shouldn't we forget those?  The Al Gore nuts forget the mining of rare earth minerals and all the radioactive and other toxic waste polluting the land, the water, and the air, which, BTW, is coming right back to California on the trade wind. Ironic, don't you think?  Our goverenment claims to be so green for exporting all of our manufacturing jobs, even though everything manufactured in China now creates a lot more pollution than when it was manufactured here and was subject to more stringent pollution controls.

TruthHunter's picture

+100

I used to recycle until I found out the stuff got shipped 

To China in empty containers. It's far less polluting in local landfill.

TruthHunter's picture

+100

I used to recycle...

Damn stu%er post. 

These new cars with their computer controls. It's like having a 5 year old try and run your life.( I'll turn the damn interior light on IF i want.)

Cynicles's picture

CO2, it's like Brawndo

plants crave Brawndo 

froze25's picture

Great site for seeing the bull shit of global warming,  oh excuse me climate change.  http://www.climatedepot.com

Calmyourself's picture

Dammit... Just burned a mattress and a sofa on my pit...  A few tires as well...  Darn biosphere is going to have to reabsorb my carbon...  Oh well...

kiss of roses's picture

Burning carbonacious fuels is feeding the biosphere, not fucking it up. Not very bright, are you?

Mustafa Kemal's picture

finding a car is hard now. I dont want it without a key. I have to look at least 10 years back.

15 year old toyotas are good.

Twee Surgeon's picture

Whats really mean with the newer vehicles is that you can't maintain many of them yourself, you need the software to find the problem in many cases and then 'Special Tool B, X and y to fix a minor problem. No thanks.

post turtle saver's picture

you'd be surprised with what you can fix with HP Tuners and a 10mm socket set... it's not as hard as you think it is...

cbxer55's picture

I flat refuse to own a front wheel drive vehicle with their side-mounted engines. Both my trucks are rear wheel drive, one a V-6, the other a supercharged V-8. I do practically all the maintenance on them myself. There's a few things I won't do, like the 19 year old Ranger I own needs a front end rebuild due to bad ball joints. I don't even want to mess with it. So much so, been driving it for 3 years with a squeaky front end. Hasn't hurt a thing, I just flip the tires inside out once a year and keep on driving it. ;-)

Cole The Bar's picture

tell me more about this super cahrged v8. heheheh  PRAISE the almighty V8

and those front end ball joints can be a bitch without the proper tools but its doable man. I did it on 2000 ford expedition in an afternoon

cbxer55's picture

2004 Ford Lightning. Not stock by far. After market intake, cat back stainless steel exhaust, plenum on top of the blower is huge compared to stock, barely clears the hood. Johnny Lightning Perfoormance long bars (traction bars) and drive shaft safety loop. Panhard bar from the differential to the passenger side frame. 10 inch rims in the back with 305/45-18 Nitto drag radials. 7 inch front rims with 225/60-18 Michelins.

It's an awesome ride for sure. ;-)

greenskeeper carl's picture

Something else I've noticed is they seem to have an odd mixture of standard and metric bolts in some places. My wife's escape is like that, doesn't make any sense, odd for an "american" car. I miss my old jeep with its cast iron inline 6. Tons of space under the hood, too, and no shit in the way.

cbxer55's picture

Been that way for years. My 98 Ranger, I was removing the computer out of the firewall today. Took a 10mm and a 7/16 socket to get it out.

Refuse-Resist's picture

Yep.  My 1982 F-100 (built in the land of back bacon and hockey sticks) is the same way.  I've restored it from teh ground up over the last 10 years.  8 ft bed and a bench seat. The way a truck was meant to be -- not a 4 door car with a 4 foot box that can't even hold a mountainbike.

And the 351W/C6 with headers, RV cam, Edelbrock Performer and Holley carb does have some advantages that make the hassle worthwhile.

New pickups are so cissified and overpriced IMO.

Leather interior and multi-stage paintjobs..  Those trucks were never meant to WORK. Just tall, high center of gravity gas hogging status symbols IMO.

 

I'll keep my single cab oldie, thank you very much.  With Autozone parts being lifetime warranty, my last 4 repairs have been bascially free (alternator, Heater core, waterpump, and master cylinder).

 

 

 

cbxer55's picture

Don't need any software. Just buy a little $40.00 dollar orange tool from Sears, has a plug that fits the OBD II port under the dash of all newer vehicles, like my 98 Ranger and my 04 Lightning. You use this device when the stupid Service Engine Soon, or Check Engine light is on. Plug it in, activate it, it scans, gives you a code. Look that code up in the book that comes with the tool, or online, and you know what's wrong. Most of the tiime it's a sensor gone bad. Most of the time the sensors are not that hard to get at. I've replaced every one in my old 98 Ranger. And several in my 04 Lightning.

Took out the crankshaft and cam position sensors in my Ranger today, took maybe 10 minutes. Bought new ones at the local NAPA, will put them in tomorrow.

I know not all vehicles are easy to work on, which is why I despise front wheel drive vehicles and their STUPID side-mounted engines. Try changing an accessory drive belt on those, FUCK!!! But I can change the one on my Ranger in 10 minutes, same with the Lightning, cause their in front.

 

Refuse-Resist's picture

Agreed. And doing a timing belt on a FWD is a major bitch.

 

Who the fuck thought it would be a good idea to install a high wear rubber belt in an interference engine?

 

Won't buy cars with timing belts (after doing one myself).  Nissans have timing chains that last ~300k, not a bullshit 60k service life with a $800 repair.

Fuck that noise.

Offthebeach's picture

Needed a special socket to pull oil drain plug on VW. Really?

Got a 2wd F150. Stupid reliable, cheap to fix, runs on 87 octane vs 91, I can lay across the bench seat, head on armrest and have nice nap.

Refuse-Resist's picture

My TDI (230k miles, one clutch, one fuel pump, 2 timing belts) is a 19mm. Oil changes every 10k. I did end up removing the plastic panel under the engine... 19 screws to remove before accessing the drainpan? Fuck that.

Oil changes on my Jetta take about 10 minutes. The filter is at the top of the engine for ease of access.

BEst car I've ever owned. And I should point out that TDI Jetta wagons were built in Wolfsburg, not Tijuana.

That's a YUGE difference (I had a TJ built TDI New Beetle that, other than the engine was a total cheap POS).

Any VW made somewhere other than Germany is a piece of shit IMHO.

Give me a non-CVT Nissan any day.

 

La morte sorride a tutti's picture

Agree. Volkswagen TDIs are awesome cars. I have a passat TDI built in Chattanooga, Tennessee that makes me think americans can build german cars better than germans can

1980XLS's picture

Meanwhile KMX, AN, PAG all spiked higher today

zagzigga's picture

Yeah, I don't get it at all. I thought KMX would be trading at a much lower level than it trades at currently. 

radio man's picture

Whoa! Such a buying opportunity. Can't wait to get my hands on one of those exotic Hugo rigs to impress Ashley Judd.