"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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ogretown's picture

Only slightly off topic....three years ago I wanted a vehicle just for mucking about. A car dealer I knew offered me a 2003 Honda Element for under $3K.  Reason so cheap, even though it only had 71,000 miles on it was that it was owned by a woman who was a dog walker/groomer.  No one wanted to buy a 'stinky' SUV that smelled of dog.  Thing is with the early Element, the interior was created out of materials that allowed one to open all of the doors and take a fire hose to the interior. Wait for it to dry and Robert is indeed your uncle. 

Freddie's picture

Bob was my uncle.  1990s Hondas with a little interior and exterior care will last forever.  Tinted windows protect the interior too,  Just make sure to change water pump, timing belt earlys and flush the radiator every few years.

Diatom's picture

1996 Civic coupe 1.6

The motherfucker doesn't  die...

 

Falling Down's picture

Kid in the neighborhood I lived in 12+ years ago had a '90 or '91 1.6L 4 door. Dipshit HS buddy of his overheated the thing numerous times. I told the kid I'd help him push it over to my house/garage, as long as his brothers helped push it, so I could show him how to wrench.

Yanked the head off, and had it checked. Luckily, no cracks, and head it milled .010" or so. Just had the typical break on one of the cam journals (I forget the correct term), so the shop welded it back in place. Kid bought a head gasket set, some new head bolts, timing belt, tensioner, and a few other odds and ends. His younger brother watched me as I put it back together, as he wanted to be a mechanic after HS.

Next thing you know, he's getting 41 mpg, and drving the wheels off it. Too bad it was a Rochester rot box, it would've lasted a lot longer, but i think he bombed around in it for a few years. Not bad for a free vehicle. 

 

GooseShtepping Moron's picture

I would not put it past the government to announce a plan to "bail out" the auto dealers by paying them a premium for each used car they send directly to the scrap yard, thus artificially reducing supply, removing the dealer's nonperforming assets (cars), and keeping Detroit in business and the union bosses happy. You just can't trust these bastards.

38BWD22's picture

 

 

Schtepper

That sound about right.  So similar to Obama's GM bailout.  Yep, with our money.  Ugh.

Stormtrooper's picture

You didn't pay a dime for Cash for Clunkers.  It just added another $500 billion to the national debt.  Do you plan to pay for that?  No one does and it will never be paid back.

chopd livr's picture

we will all pay it back... w reduced soc sec, medicare, exploding infrastructure....

directaction's picture

And $550,000,000,000 wasted on paying interest on the national debt in 2016. That's more than half of income tax revenue.

peopledontwanttruth's picture

I was thinking payment will be NO soc sec, medicare, more exploding infrastructure
Not reduced

ChanceIs's picture

Like....ummmm.....Dude.  Ummmm...like where have I seen this movie before?????

Ummmm.  Wait, wait.  Don't tell me.

Ummmmm.  (Bong hit.)  Ummmmmm

Oh yeah.  Franklin Delano Roosevelt.

He was the stoooooopid f*&k who paid farmers to burn crops. Cool man.  Ummmm.  Just don't torch my Panama Red on the back 40.  OK???

ChanceIs's picture

Like....ummmm.....Dude.  Ummmm...like where have I seen this movie before?????

Ummmm.  Wait, wait.  Don't tell me.

Ummmmm.  (Bong hit.)  Ummmmmm

Oh yeah.  Franklin Delano Roosevelt.

He was the stoooooopid f*&k who paid farmers to burn crops. Cool man.  Ummmm.  Just don't torch my Panama Red on the back 40.  OK???

pliny the longer's picture

oh boy, here we go, weekend horeeee fuk too many cars article;  there is zilch, zero no evidence of used car prices going anywhere in my area.  in fact they're a ripoff, you might as well go new.  tyler said, :

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.

 

really?  got a 2017 honda accord 0 down 215 per month on lease;  i can't buy a used car for that and with even 1 repair, i'm losing compared to the lease;  and its mommie's car so no i can't just buy a POS like i drive (old chrysler aspen, hemi 5.7 L v8, i swear that engine has its own penis, is boss)

 

summary:  used car prices are insane local; NO signs of relenting; dealer lots are packed but doesn't seem to matter; hemi is boss w / its own penis 

yogibear's picture

That's ok. Let that idiot dealer keep them. Every month they keep them the used cars drop. Eventually they give what they can. Something is better than nothing.

NMA's picture

Well here in the UK, they are suddenly talking about the horrible effects of diesel (which has been pushed on the sheep as a clean fuel for the past 2 decades).... despite the rest of the world knowing this ever since the invention of the automobile.... and wonder why they are suddenly taking about a government diesel scrape scheme.....

iampreparedru's picture

You guys are buying cars?? Just steal one, no one is going to do anything to you! Worst case is you get stopped, thc cop says its stolen, you say you bought it from a guy on the side of the road, show him a fake bill of sale, they take the car you us Uber home. Same goes for boats, trailers, etc. Several cops have confirmed they will not do anything. because prosecutors will not prosecute. And that is in Texas, so I know it will work everywhere else.

83_vf_1100_c's picture

Good luck with that plan. A tip. Make you keep a tube of KY on you so it doesn't hurt as much when your cell mate shows you some man love.

pparalegal's picture

You could also be a California resident up on current events. Stealing cars and burglarizing homes is no longer a crime, just a rehab & probation industry candidate.

delmar Jackson's picture

LOL Texas is not everywhere else. My brother in law in Texas loaned a car to a person who refused to return it. he called the cops. They said if he loaned it the car was not their problem.

Juliette's picture

Time for a new edition of "Cash for Clunkers" ... destroying perfectly good used cars with tax payer money.

Cordeezy's picture

Where can I get a cheap car off these guys? I need a new car but haven't seen any great deals from the over supply yet

www.escapeamazon.com

gregga777's picture

Nah, the gangster CONporations will just use their ownership of the USA's Feral Gangster Government to enact another cash for leased vehicle returns, er, I mean, cash for clunkers program.  And, just like that, problem solved!  Hey, what's another couple of $ TRILLION added to the national debt to bail out a few gangster CONporations?

 

 

 

 

VWAndy's picture

 The greenies want to ban all older cars. Any excuse will do. Elon too. That might get him the sales #s he needs?

rejected's picture

Live in Northwest Florida,,, Every empty lot seems to be turning into a used car dealership or overflow for the majors. 

Cars, cars, and more cars everywhere!

RichardENixon's picture

Even if I have to stick my legs through the floor and run like Fred Flintstone, the car I'm driving now will be my last

BarkingCat's picture

I have 3 vehicles. The newest one is an 1997 and that's my daily driver.

Not buying another car unless I cannot keep this one running.

If I do replace it, I will be going backwards to a 1970s American big road boat.

Something that has body pannels that don't bend in strong wind.

cbxer55's picture

I have three myself, newest a 2006 Suzuki 1800 c.c. scooter. 2004 Ford Lightning and my daily beater 98 Ford Ranger.

Not buying another unless the Ranger crashes and burns. Then I'll buy another beater of some sort or other for a few grand.

Bending in the wind isn't really a problem. But dents from hail sure as hell are. Vehicles start looking like rolling golf balls. ;-)

Manipuflation's picture

I have six vehicles.  02 Chev ZR2, 02 Chev Venture, 07 Hyundai Sonata Platinum(she's fast for a 3.3), one custom 1996 carb Harley Davidson Sportster.(wife's), one 2007 FI Harley Davidson Screaming Eagle Sportster, one 1978 Honda Twinstar CM185.

I really want a 1982 Honda Silverwing

 

rz the 1st's picture

If you find the silverwing, do yourself a favor and pull the starter and do a 4 brush conversion.
When they punched the motor to 650, the 500 spec starter wasn't up to the task.
That motor was a beast, and the cool part of it was you could tune it for your preferred riding style.
If you wanted the bottom end grunt, set the valves just a wee bit loose.
If you want more top end, tighten them up.
The only bugs in that motor were the water pump seal (total bitch to get in and out) and you needed a special screwdriver/nutholder thingy to sync the carbs.
My last bike before I got my shitster was a cx650, which was the bare-bones version.
Fun bike, once you punched the mufflers and re-jetted it.

cbxer55's picture

My ex wife used to have an 83 Silverwing. Never had a problem with the starter, despite having the bike for many many years and many miles. Nice bike until someone rear-ended me at a stop light. Driveshaft was shoved into the motor and seized it up for good.

rent slave's picture

I won't get a new one until my GM Buy Power Card rebates equal the car's price.

GestaltNine's picture

hasn't the government and the car companies dealt with this problem for decades? by pulling sleazy stupid shit? I am confident they are going to figure something out

BidnessMan's picture

Sure. The bond holders get 10 cents on the dollar.

peopledontwanttruth's picture

Difference this time I don't see the world desiring to perform CPR on the dollar or the USA economy anymore. Rather this time I see the world willing to stand on its throat to expidite its death

Deplorable's picture

And there goes Teslas plan to swamp the market with cheap 40K electric cars.

Big losses for every car sold....up goes the stock price....

Silver Savior's picture

I still say they should make a cash for non clunkers again or a lot of people are going to be in a world of hurt. Trump could get away with announcing something as ridiculous as that. 

Ship them to Cuba maybe? I like the idea of making them into housing better. And people should be able to park them on the street with no tags. Heck without licence plates even. Stop paying the rent and crash the housing market! 

MadRunner's picture

75K for a new Chevy Tahoe fully loaded.

Fuckin Bullshit

Silver Savior's picture

And be worth below 5k in no time.

Berspankme's picture

Neighbor bought a new Escalade. Wife said that guy is nuts. I agreed . $78k to impress other people. New one depreciates $10k while you drive it home.

GunnerySgtHartman's picture

Friend of mine who sells used cars sold a one-year-old Escalade not long ago ... sticker was nearly $90k, the dealership sold it used for almost $70k so you know that they didn't pay much over $60k-$63k (if that) for it when they bought it at auction.  Original owner took a massive beating on trade.

Manipuflation's picture

Somebody just posted a 2005 Toyota Camry with 200K for $4500.  I replied $750.  The amount I am willing to give goes down the longer it takes for a reply.  They dropped that they were done with college.  I am sure that you are.  That is a lot of miles.  I would have to throw 2k$ into it to make it right.  Tires, brakes, suspension, fluid flushes.  $750 was generous.

just the tip's picture

did you drop that now they were done with college, it's time for their first life lesson?

Manipuflation's picture

It's too much for that Toyota.  You know that is has not been maintained.  I have been known to own a lot of cars.:-)  I miss that old 95 Lincoln Town Car but that had to go.  I forget so many of them.

I want a 65 GTO.   

wally_12's picture

I sold my 2002 Honda Accord with 353,000 miles for $2,500.00. The dealer couldn't take it under the cash for clunkers fiasco because the mileage was to good. Expect more crap from the Government if supply and demand threaten the big three.

peopledontwanttruth's picture

The true value of anything isn't what a person is selling it for or any book value or CMA, only what another is willing to pay. I see plenty of depreciation on the horizon just like the sun setting

just the tip's picture

i don't see how this effects ISIS?

Manipuflation's picture

Since I have been in the car repair business for a while I have some inside knowledge.  If you are looking for a used car the Toyota RAV4 and Honda CRV are solid choices.  I am pro American too but I saw what I saw and it is well built.  Not a huge fan of Fords because of their poor suspension.  Not a fan of GM because of the rust or their 3.6 liter. 

MOPAR is the worst for domestic.  I have owned two of them.  I liked the T&C for it's weight.  Friends don't let friends buy MOPAR.

Don't buy German cars.  They have electrical problems big time.  That and the fact that they require full synthetic oil changes.

One thing that I do have to say is that I gained respect for Subaru.  They rust but they are solid.  It is the supension control arms that go first.  I would buy one for the right price.

I have no reason to lie to you.  I have owned a lot of cars in my day.