"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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
A rope leash's picture

The vast majority of cars in southern California are black, white, or some version of gray.

 

What the fuck is up with that?

ThanksIwillHaveAnother's picture

So what happens when WW3 starts and there has been a great reduction in service facilities due to bankruptcy and parts supply problems b/s cannot import?   These new techno cars will sit disabled and rot? 

Stan Smith's picture

I've leased one car in my time, and it was when I got my first job outta college.    I had virtually no up front money, and I could afford it.    It was a Camry and I ended up buying it,  but paid over 6 years I figure I paid a good 10+% more on top of the financing.    That said,  I kept that car for 200k+ miles and other than the routine and regular stuff, that car never had issues.    Despite financing it for a longer team, I had enough time with it (14 / 15 years) I'd argue my money was well spent.

After that, it's either cash or tons down with a 2-3 year term to pay off, I dont even like doing that.    And I if I cant cover the costs on those parameters,  then I cant afford it,  and it's move on to the next one down.    I'd say Cash is King,  but I get how not everyone can or will go that route.    It's still the smartest play though.   Of course no one would ever accuse the American consumer with going the smartest route very often.

 

Cassandra.Hermes's picture

I used to buy off lease cars, but since i switch to Nisan Leaf i can't go back to combustion, i hate driving my 2009 BMW x5, but unfortnatly i have to, the Leaf is good just for 100miles round trip, 

disagreeableness's picture

I can commit to spending 3k today on a car/truck whatever, and I'll have a dozen or so running options within 10 miles of me. Sure, it won't have a touch screen thingamajig, but it'll run and drive, be in reasonably good shape, climate control...... the works. I just done see the sense in financing a vehicle. I just buy one every two years or so. My reg is under two hundred bucks for three years, my insurance is four hundred a year. FMJ is shiny too, doesn't mean I want one heading my way. 

Grandad Grumps's picture

Looks like an opportunity, not a problem.

Shpedly's picture

What this article fails to mention is, many of these used off lease vehicles will find new owners in other countries. Most people don't realize that US car auctions like Manheim and Adesa are open to the entire world. Many of these used vehicles are worth double or triple than what they bring in the US. With regard to the likes of BMW, Mercedes and Audi, the manufacturers make the least amount of profit per car selling new in the US. The manufacturers make it in the volume of American buyers. In the last heydays of the physical auction, some 10 plus years ago, the Russians, Chinese and Arab's were all there next to you in the lanes buying cars in person. Now that the auctions are able to put 90% of all off lease cars on live simulcast, foreign buyers need do nothing but watch the auction in real time and bid with a click of the mouse. All of what I just said means, don't expect any crash of the used car market anytime soon. Not gonna happen.

I miss the old days, when you stood in the lanes, breathing exhaust fumes mixed with smell of the popcorn machine in the back. It was exhilarating. Back then it was man against man, kinda like the bond pits of old. There was a hierarchy to the regular players, the low ballers, the the dumb ass high rollers using the owners checkbook, the newbie and finally, the savvy main players. Back then you made money by your wits and your knowledge of the current market. There was no auction sales data. There were no cell phones you could call somebody who knew better. The value books were and still are a joke. You had to know what something was worth because you traded it every day. The regulars all knew each other and helped each other. If a car was coming down the lane that everybody knew was his bread and butter, all the regulars would lay off. Brash newbies and high rollers got shut down real quick. We wouldn't have any interest in the car at all but we would bid it to the moon while reading the guys face. At the last second, shake your head no and bury that cocky prick with a car he's not going to make any money. Ahh the good old days. Now it's like trading potato chips.

RafterManFMJ's picture

I upvoted you because you sounded high

Shpedly's picture

Lol. High as in weed high? No but thanks for the upvote. I just see these bullshit "end of the world" articles and it makes my head want to explode. It particularly hit me because it's my business. I'm 55 years old and have been a licensed car dealer for 31 years. I only mention that so you don't think I'm some old fart reliving the 60's.

roddy6667's picture

According to ZH, if car prices go down, the sky is falling.

According to ZH, if car prices go up, the sky is falling.

So predictable.