"Flood Of Off-Lease Vehicles" Set To Wreak Havoc On New Car Sales

Tyler Durden's picture

The percentage of new car 'sales' moving off dealer lots via leases has nearly tripled since late 2009 when they hit a low of just over 10%.  Over the past 6 years, new leases, as a percent of overall car sales, has soared courtesy of, among other things, low interest rates, stable/rising used car prices and a nation of rental-crazed citizens for whom monthly payment is the only metric used to evaluate a "good deal"...even though leasing a new vehicle is pretty much the worst 'deal' you can possibly find for a rapidly depreciating brand new asset like a car...but we digress.

Of course, what goes up must eventually come down.  And all those leases signed on millions of brand new cars over the past several years are about to come off lease and flood the market with cheap, low-mileage used inventory.  As Reuters noted, the flood of used vehicles is already starting to impact used car dealers:

Recently, though, a computer search for available used vehicles within 150 miles of Reel revealed an eye-popping figure: 668 Escapes. That's enough to put more than 40 percent of the inhabitants of this small northeastern Ohio town, population 1,600, into the popular crossover.

 

A search for the Chevrolet Equinox, a comparable crossover, showed 461 available.

 

"The automakers have flooded the market," said Reel, owner of Reel’s Auto in Orwell, Ohio, about 40 miles east of Cleveland.

 

By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.

 

And, of course, that kind of supply is already starting to take it's toll on used car prices...

Chief Executive Mike Jackson said rising off-lease car numbers means "a higher supply of pre-owned vehicles at a more attractive price.”

 

Consumers seeking great deals are in luck. Used-vehicle prices at auction fell about 3 percent last year, according to Carmel, Indiana-based KAR Auction Services Inc (KAR.N), which facilitated the sale of 5.1 million used and salvaged vehicles in 2016. Used prices should drop around 3 percent annually for the next couple of years, according to KAR's chief economist Tom Kontos.

 

General Motors Co (GM.N) and Ford Motor Co (F.N) say prices for its used vehicles, which consist largely of nearly-new ones coming off lease to consumers, fell 7 percent in the first quarter versus the same period in 2016. GM says it expects a 7 percent decline for 2017 compared to last year.

...and, as Morgan Stanley recently pointed out, we're just getting started as they see used car prices dropping by up to 50% over the next 5 years.

 

So what happens next?  Unstable used car prices will almost certainly reduce OEM reliance on leases as the implied 3-year depreciation (or residual values, if you prefer) will make them all but completely uneconomical...remember, Americans only care about that monthly payment.  Meanwhile, the relative value between used and new cars will tilt heavily in favor of the used market.  Thankfully Americans will still be able to buy that Mercedes they require to get back and forth from their minimum wage jobs, while maintaining a monthly payment of $500 or less, but it will just have to have 30,000 miles on it.

Of course, the OEMs of the world won't admit that their game is over until it's way too late.  So, they'll keep right on producing new cars to cover a 17-18mm SAAR environment up until the point they face an outright revolt from their dealer networks.  At that point, however, dealer inventories will be so high that Detroit will be forced to shutdown for months on end while new car prices are slashed to reduce the massive inventory glut.  Tanking new car prices will put even more pressure on used car prices which will mark the beginning of the death spiral that will result in a new round of inevitable auto bankruptcies...but that's just a hunch.

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HelluvaEngineer's picture

Fine by me.  I'll take an off lease IS350 with 30k miles for $15k please.

GUS100CORRINA's picture

If you lease them, they will come.

Yes, it is all COMING HOME TO ROOST! Easy money and low interest rates resulting in over production resulting in SUPP/Y/DEMAND imbalances.

What do we have to show for it? MORE DEBT and an ECONOMY STUCK IN THE MUD!!!!!

 

38BWD22's picture

 

 

Before leaving for Peru, I sold my RX350 (2009 with 69,000 miles) for $10,200.

AutoBuy (the guys on the radio: wepaythemax.com), seemed pretty good.  They paid more than I thought they would.

After our trips are done and we are back, I will look into buying something new.  Maybe.

Stackers's picture

Doing samething with $1 million construction equipment too.

A Nanny Moose's picture

I would settle for a discount MBZ 4x4 "sprintervan down by the river."

Mr 9x19's picture

you should all consider with cars than prior 2000 we used to discover 9 billions barrels, while last year 2016 we discovered  only 2.4  billions.
another info is,  global  world use 33 billion per years.

the days of your oil cars are numbered.

 

get a bicycle with ton of wheels and couple of cheap manual pumps.

Dusty Rhodes' Muffler's picture

That is a good one, but I prefer his simple, one word response in the "Hidden Camera Coffee Commercial":

Interviewer: How do you feel about being in the commercial?

Farley: (In a neck brace, with head bandages and contusions)Angry.

phatfawzi's picture

cash for clunkers bitches, 2-3 year old clunkers. 

peopledontwanttruth's picture

"The automakers have flooded the market,"

Every flood I've ever seen or heard of brought destruction and pain

Doubt if this one will be different

MANvsMACHINE's picture

Would you like all weather floor mats with that for no extra charge?

johngaltfla's picture

Call me when the used Audis are BOGO.

pugilist's picture

so, we've already had "cash for clunkers"
what's the opposite of "clunker"?

yogibear's picture

People are still enjoying their Obama cars from 2009. See plenty of young woman driving new BMWs, Mercedes and Audis.

Maybe Trump will have them driven right to the crusher. He'll have to buy them and they'll be a lot more expensive then the $4500 for the cash for clunkers.

Freddie's picture

Weird - I noticed thsi a lot witrh Mercedes.

Enldess Trayvons with Chrysler leases.   These shitty Chryslers are worthless.  They probably all smell like Popeyes.

DownWithYogaPants's picture

What we need is the Travvons to go into the crusher with the car.  Now that would make their eyes pop while they eat Popeye's. 

Now THAT would be a deal.

finametrics's picture

das racyss, trayvon dindu nuffin

J Jason Djfmam's picture

Cash for just off limited mile leasers.

Roadracer86's picture

I cando that; I work in Remarketing for VW/Audi.

JoeSchmuckatelli's picture

That'll be a nice ride to take to the food pantry.

acetinker's picture

I'm gonna go out on a limb here, but I'll say you've spent significant time in Michigan.

Every time I've heard Joe Schmuckatelli, the person who said it was from Michigan, or a Navy Vet.

I ain't judgin', bein' originally from Lower Alabama, and not a vet.

I'm just curious.

Likewise, I ass/u/me the fella (fella-ette?) you replied to has ties to my neck o' the woods;

I'm the ramblin' wreck/

From Georgia Tech/

And a Helluva Engineer.

Anybody know if the foregoing is still a meme at Tech?  I ass/u/me it is not, but would love to be disabused of this notion.

CNONC's picture

I use "Schmucatelli" alot.  And I'm from Michigan originally.  Lived in Atlanta for decades.  Georgia Tech is still the home of the Ramblin' Wreck.

buzzkillb's picture

When I leased the IS350, I saw the FICO score graph on their computer as they printed the contract up. Most Lexus owners have 800+ scores, for whatever that's worth. Its interesting doing a lease while running a small business compared to getting a car as an employee. Probably more credit worthy if I had a minimum wage job at McDonalds.

GunnerySgtHartman's picture

And it will save consumers money on their vehicle property taxes - those taxes are based on used-car resale values!!

Caledonian's picture

So my 05 Silverado 4*4 I'm trying to sell is now worthless?

MANvsMACHINE's picture

Give me $3,000 and I'll take it. That's my final offer.

silverer's picture

I have good news for you. Light trucks are expected to hold their value better than any other vehicle. You'll lose the least. I guess that's good news.

just the tip's picture

light trucks = technicals

HelluvaEngineer's picture

Well, it's not a Ford, so NO.

Whoa Dammit's picture

Gotta see the names on the title before buying a used car. I know from the hood I live in that BLM  car maintenance doesn't happen. 

RawPawg's picture

My plan(you ask)....

when SHTF..imma gonna buy a car lot(new or used...i don't care) with just a Silver 1 ozer...just 1

gonna be diversified until i ain't 

peopledontwanttruth's picture

Paw, when the SHTF you'll be able to pick one up along side the road for nothing. I see plenty of abandoned cars in the future. Bring your own gas bc there won't be stations available for refill.

Anderson Coopers Gerbil's picture

70 chevell ss 454 for 1 oz of gold

jaxville's picture

  1970 Challenger 426 R/T.   I can afford the gas for them dual qual carbs.  And R/T stands for Rapid Transit.  Not sure where this road and track shit came from.

Freddie's picture

A girl in high schooll - her dad had a 1970 dark green Cuda with white stripes, convertible and mags. I am not into muscle cars but that car was gorgeous.

TalkToLind's picture

Want to fix this "problem"? Just label any Murican who purchases a used car as a terrorist. Because purchasing a used car is a direct attack on democracy. Then make up a stupid term to scorn those who would dare to purchase a used car anyway. Here's a good one:

New Car Economic Suppression

Yep! That's exactly how my hook nose friends be fucking up your society, by using the MSM "news" shows to plant ridiculous shit like this in your head. But don't you dare call it Fake News.

pitz's picture

Drove by the local high school the other day and looked at the student parking lot.  Don't think I saw a car more than 10 years old.  In a student parking lot no less.

HelluvaEngineer's picture

I see teens near me driving M3s and Maseratis all the time.  North Atlanta 'burbs.

Freddie's picture

When the SHTF them hot lanta Trayvons gonna be taking them.

I would not want to be with 500 miles of Atlanta when things fall apart.

Falling Down's picture

It'll make The Waling Dead look like a Sunday picnic.

Abbie Normal's picture

When I went to high school, half the student cars were nicer than the teacher ones.  It's probably closer to 80% by now.

Déjà view's picture

Correct itself...come retirement...

GunnerySgtHartman's picture

Not surprised.  When I was in high school, the car I drove was nearly 15 years old, but I didn't care; it was a set of wheels!

Blankone's picture

And then you used some of your free time and money from a part time job to do brake jobs, rebuild the carb, water pump, etc. yourself. I doubt the high school boys even change their own oils themselves.

HomelessPatriot's picture

ttyl I'm hopping a train. If I ever need a lift I'll call Lyft.

Duc888's picture

 

 

I call bullshit.  I have seen this story at least six times in the last eight years.  It never happened.

BeanusCountus's picture

Not sure about last eight years, but watching this as well. For sure, lots of used lease vehicles coming to market. No, they will not lose 50% of their value. Demand for used vehicles will keep prices higher than that. But... New cars will be tougher to sell. Sounds like win win for consumers.

Giant Meteor's picture

It's different this time ...

/s

peopledontwanttruth's picture

I agree with you thus far, it hasn't happened yet. The USA economic train has been on greased tracks going nowhere to backwards. I don't see any of these articles we read and comment on happening until the world comes completely off the dollar which is in the works, thus why the war rhetoric with Iran and Russia being turned up. When that DOES happen is when the train completely derails. At that point in time no one will be thinking of the deal but rather a meal?

Roadracer86's picture

I can tell you this...vehicle auction inventory hasn't been this high in at least a decade.