"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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Manipuflation's picture

Well, you see, I have some Government Motors.  I can't stop buying and selling cars.  I don't think it is profitable.  Some days you make bank and others lose your ass.  I made bank on that 2007/06 Impala that I bought for $400.  I think that was a 3.5 and not a 3.6.  Volkswagons are the best of the German cars than I have seen.  The oil filters tend to be spendy.  

I want to fix everything.  You can't do that and make money.  I don't feel good about selling a used car that I don't know shit about so someone.  Just stand their and lie like a politician? 

 

I am a terrible used car salesman. 

VWAndy's picture

  I miss the old car industry. It was better for everyone. If it were up to me Id do it way better then this.

Manipuflation's picture

 I hear you Andy.  You and I could talk.

tuetenueggel's picture

The more electronic gimmicks, the more you´re screwed.

Victor999's picture

My dad used to say that the more power and fancy equipment on your car, the more things to go wrong.  He liked bare bones.

yarpos's picture

"Don't buy German cars.  They have electrical problems big time"   what total BS,  the Germans have more structured and servicable electrics than most.  I'd be far happier to work on them than anything else.

 

Do like and own Subarus for the last 20 years.  If looked after they seem bulletproof,  although I am sure someone will have a disaster story.

Manipuflation's picture

It is not BS.  It is what I saw with my own eyes.  Electrical is terrible in German cars.  I saw what was junk and what was not.  Your German dashboard is not working.  Mercedes is better than BMW. 

I don't really fucking care what you think.  I know what I saw.

Berspankme's picture

Have a friend who bought a used audi. He has spent $4700 chasing electrical gremlins in the past 18 months. Hates the car

peopledontwanttruth's picture

Not sure of the percentage of things being manufactured but I believe it goes beyond the car industry. They use to make things that lasted. Now I believe it's all in the design to break down to keep people buying and the economy grinding. I think the percentage is high were all buying junk with a very limited shelf life.

It doesn't make economic sense from these greedy people to make something to last. Cars included

cornflakesdisease's picture

You are correct.  Made in Romania.  The require a crapload of exspencive maintence. I would never own any German car.  Tempermental pieces of crap.

Peterman333's picture

BMW's and Mercedes are quality cars and certainly fun to drive and they should be for the highly inflated price but the German mentality is to mantain and you have to change out modules, etc, it gets expensive. Volkswagons are absolute laughable pieces of garbage and are what you get when Germans try to make a car that does not cost $90,000 and even then the prics are high.

Basically it comes down to Toyota for me as the most reliable with low maintenance.

 

Rjh's picture

Subarus have head gasket problems 1999-2008. Everything else about them is great though.

PrayingMantis's picture

... there's a gasket-sealer oil-additive you could buy for $8-$10 per can to seal the gasket ... works very well ... you might use 2 to 3 cans depending on the small leak ... recommended by my mechanic and worked for my old Impreza (see my comment below for car info) ...

... edit: the product is called Rislone ... I used the "main seal" product about $8 plus tax ... the Rislone "gasket" repair is about $35 ... my mechanic says the cheaper "main seal" Rislone works just as well ...

... disclaimer: I'm not here to convince anyone that this product will work on your gasket problem ... just pointing out that for my old car's engine, upon recommendation of my mechanic, it kept the engine's gasket tight ... something like an ounce of prevention ... you'd know the rest of that saying ...

... just sharing ...

GunnerySgtHartman's picture

A guy I know had a 3-series BMW.  About a year before the lease ran out, he went out one day to run errands and the car was dead in the water.  Jump start didn't help.  Fuses were all OK.  No power locks, no power windows, no lights, no accessories, nothing.  Dead as a doornail.  Had it towed to the dealership, which spent two weeks trying to find the problem without success.  BMW then sent in their zone people to investigate, with no luck.  BMW paid to have the entire electrical system replaced, every single wire, and the car was on the road again.  Total time for repairs: two months.  He was more than happy to turn the car over to BMW when the lease ran out.

His words of wisdom to me were, "German cars are great - as long as they are under warranty.  If you want a German car, lease it, don't buy it."  He drives a Benz E-class now, on lease.  His other vehicle is a Chevy Silverado with about 100,000 miles on it; the only work the Chevy has needed since new was a replacement water pump.

TemporarySecurity's picture

I still recommend International Harvester.  My odometer died at 500,000 miles so I am not real sure how far it went before I sold it probably 750k.  Never touched the engine or the automatic transmission.  The rest of the car was biodegrading by the time I sold it.  Little things like I had to weld the door back on a couple of times but the scout would just keep going down the road.

GunnerySgtHartman's picture

What year Scout did you have?  I would like to have a late '70s Scout Traveler someday.

mrdenis's picture

Toyota ...where the rust never sleeps ...

Doctor Faustus's picture

2001 Subaru Forester with 525,000 miles. Replaced the short block at 476K miles because the rings had simply worn out and my mechanic stated it was easier and cheaper to replace the block than replace the rings. 

The Subie still gets 28-30 mpg on the highway.

Peterman333's picture

Make sure you get the Rav4 with a V6 so you can put a hitch and actually have a bit of towing power even if it's just for a trailer for Homedepot. The CR-V is nice but no six cylinder is offered. Plus the Rav4 V6 only gets one less mpg than their four banger.

PrayingMantis's picture

... " I gained respect for Subaru...."

... hear here ...

... I've got '06 AWD Impreza 2.5 liter 5-speed manual, black hatchback, with 342k clicks on it and still scoots around like new, orig engine, replaced brakes twice, replaced suspension arms and shocks, regular oil change, no leaks, little rust on wheel well and rear fenders ... and excellent on snow ...

... I've driven for the last 50 years and owned at least 20 different vehicle models and this Impreza takes the cake ( ... no, I have no connection with Subaru, lol;) ...

... my cheap Afghan-born mechanic who checks it regularly, is mighty impressed too ...

Cockoo's picture

Will believe it when i see it, zero hedge is staying on top of the story.  With my luck will miss the great deals but will get stuck paying the debt on the bailout what else is new.

BuddhistAescetic's picture

New cars too expensive.

ThanksIwillHaveAnother's picture

Just like the new Macbook Pros!   Pain coming to Apple!   No Steve Jobs to save it again.

History shows that Cash for Clunkers 2.0 is coming (think farming and burning good crops).   But before that dealers will be pleading for cash sales.  Maybe get 50% off if now how negotiate.  

any_mouse's picture

The Shoe Event Horizon.

yarpos's picture

Someone could make a lot of money shipping these cars out of US either whole or half cut for parts

Manipuflation's picture

Used naked women aren't all that bad. 

Manipuflation's picture

You young men want pussy? 

Than get one of these.  Females are not as dumb as you think.

https://www.youtube.com/watch?v=jDdA_NkMtRk

GreatUncle's picture

Easy to solve no car over 10 year is allowed on the road and enforced recyclement.

Then as the economy gets worse you start reducing the time from 10, 9, 8 .... all the way down to 1 year.

Basically the new world of recycling to cater for production > consumption.

Umh's picture

You work for the government? If not you might want to think about it, they would think you are rational.

Escapedgoat's picture

The new Labour Mayor of London , (Pakistani in Origin) has declared this from October 2017 only LOW EMISSION Cars will be allowed into the already toll paying area of London.

directaction's picture

With a few exceptions, that's how it's already done in Singapore. 

Ten years and they ship the right-hand-drive used cars overseas. 

Last of the Middle Class's picture

Umm kind of like the flood of snowflakes with a college degree each with $100,000 loan debt looking for a job that's been outsourced years ago? Universities, auto manufacturers and brick and mortar stores, all dying on the vine from massive government interference. What possibly could be the lesson here?

silverer's picture

The only way to fix this is a big, destructive war. Don't worry, it's well along in the planning stages.

directaction's picture

A friend leased a new VW expiring in 16 months, just in time for the 2019s.

His residual is set about $4,000 higher than what it'll be worth.

He likes it, planning to turn it in, then offer four grand under residual.  

 

mrdenis's picture

Obama's pay it forward ...coming home to roost 

mydogisprettierthanyou's picture

These auto sales articles are complete garbage.

pizdowitz's picture

How about "organic, green" cars made only from gluten, salt, sugar and fat saved by the diet idiots. Or paper-mache bodies taht disintegrate on the first sign of rain

Stan522's picture

I completely disagree with this guy's assessment of leasing a car and being a "bad deal"....

I sent my son off to college and in his second year he lived off campus and needed a car to go to work, and get around to buy things to sustain his existence in a colder climate. I've never leased before this, but leasing was the least expensive way to use a vehicle for his remaining 3 years. We needed an all-wheel drive car that was reliable, so we chose leasing.

I looked at every possible way to have a vehicle including buying used and it was way more expensive total cost of ownership in those three years. I even included gas, insurance and upkeep in my examination. His miles driven are not a factor, because it is so low. At the end of the lease, we can turn it in with no penalty, buy it and keep it, or buy it and then sell it if market value is greater than the purchase price.

I would not recommend leasing as a means to acquire a car other than the above scenario.

lakecity55's picture

Send all these cars to Africa as foreign aid.

 

Refuse-Resist's picture

Only if you replace every airbag with a combination of grapeshot and milsurp bayonets -- that are propelled toward the passenger with a small explosive on impact.

 

America? Can I get a FUCK YEAH?

 

 

ali-ali-al-qomfri's picture

FY,

can we put an air-bag under the passenger seat?.......James Bond style?

northern vigor's picture

"...leasing is the worse possible deal..." I think leasing can be a good way to take advantage of the manufacturers stupidity. 

I usually buy my vehicles but in 2015 I leased. The reason I did it was because I guessed there would be a huge bunch of leased vehicles turned in in 2019, or a possible recession. I did not want to trade in my vehicle competing against a flood of cheap trade ins. This way I just dump it and perhaps even buy one of those trade ins with low mileage,cheap. 

cosmyccowboy's picture

it works well on higher end cars such as bmw with the supported residuals set high, especiallyif you like to trade every 3 years! the plunging used car prices kills the car dealer because the valule of all theused ones he bought 3,4 or 8 months ago has plumeted, so the amount he can get financed has dropped! now when the custmer comes in with his upside down trade and nothing down you have to switch him to a new car with the rebates to sell him a car at all!

  cars are a complete waste of money, only drive what you can pay cash for... thats what i learned after 15 years selling cars!

manich's picture

I know any positive talk about EV's get lots of thumbs down here, but a 2 year old Nissan Leaf is one of the best deals out there. If you are married/partnered and have a gas vehicle for road trips, get a 80 mile range commuting car, with less than 15,000 miles, for $8k. We got one sitting next to our Accord in the garage, and my wife and I fight on who gets to drive it, instead of the Honda.

Refuse-Resist's picture

That's all well and good till the batteries need replacement.

I haven't run the numbers but I wonder if the money saved in fuel and related I/C engine maintenance compensates for the expense of the batteries?

For now I'll keep my oldies running as long as possible.

 

sacredfire's picture

I think that speaks volumnes about you and your wife... ,

_SILENCER's picture

I buy lease returns.

I found it the best way to get into a German spaceship for a hell of a lot less. The lease clients usually take care of them, keep the miles low.

I swoop in at the end of the year, score a decent price. Then I add an ECU tune and other performance goodies, whch turns it into a monster, then drive it until it hits 200K.

sonya55's picture

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.

I am confused, leasing a $23,000 auto $0 down first month free, 35 x $260 with a payoff of $13,650 is one of the few good deals I have done. Auto blue books at $16,000

 I just was badly injuried and cannot work, lease is up. 

 Cannot afford car or insurance no problem, I have neither.