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My wife is a huge Ford Mustang fan. Me? I’m more inclined to go for an Explorer or other SUV when it’s time to trade in my current vehicle.
Since I rack up a lot of miles behind the wheel, leasing isn’t an option for me. But as the Wall Street Journal noted recently, leasing is exactly what many of today’s vehicle shoppers are doing.
Indeed, almost a third of current buyers are leasing rather than purchasing cars with cash or auto loans. That’s the highest leasing market share ever, and roughly four times the level we saw in the depths of the Great Recession.
I’ll leave the debate over whether it’s financially wiser to lease vs. buy for another time. For investors like you, the real issue is what the leasing boom means to auto makers like Ford (F), General Motors (GM), Fiat Chrysler Automobiles (FCAU) and the foreign producers who sell into our market.
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| Auto leasing is booming — but what does it mean for the car industry in the long run? |
It has clearly helped to goose sales in the short term. That’s because leases typically feature lower payments than car loans, making ownership more affordable to a wider universe of consumers.
But in the long term, I think it’s going to be a profit killer. That’s because a massive glut of off-lease used cars is going to flood the market in the next couple of years.
Get this: The used-car auction company Manheim predicts that 3.1 million cars and trucks will reach the end of their lease terms in 2016. That’s a huge 20% rise from 2015, but it’s just the start of a multi-year surge. Another 3.6 million expired-lease vehicles will hit the market in 2017, followed by 4 million in 2018.
All of those vehicles will subsequently hit the nation’s used car lots. They’ll have relatively low miles on them, and they’ll look almost new. That means they’re going to offer stiff competition to the brand new cars and trucks coming off production lines. As a result, carmakers will have to pile on the incentives and cut prices to compete — a one-two punch in the profit gut.
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Heck, the process may already be underway. Manheim, the prominent auto auctioneers, found the average used car sold at a wholesale price of $12,300 in February, down 1.5% from a year earlier. That was the second straight annual decline, with sedans and compact cars getting whacked particularly hard.
And while it’s true that February new car sales were relatively healthy, you have to look behind the headlines. When you do, you find that manufacturers had to jack incentives up 11% from a year ago to move metal, per TrueCar.
If you throw in the credit-market turn I’ve been discussing for a while now, and you can see why I’m far from enthused about auto stocks. They’ve bounced along with the broader market … and that’s giving you a great opportunity to head for the exit ramp!
Until next time,
Mike Larson
P.S. The death of the American dream is coming. Nothing will ever be the same again for you or for your family. The America we know and love will be no more. The fallout of this historic event will be horrific for the unprepared. It will trigger all-out panic — first in the U.S. bond market … and later in the stock market. It will destroy millions of jobs … sentence most Americans to a “dark age” of depression and poverty … send gold and silver prices careening higher … and push the U.S. government to the brink of collapse. Click here to learn how to protect you and your family in the upcoming crisis!
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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Thanks Mike again its a case of analyzing the numbers reading the entrails. What looks good on the surface as in car sales sways investors into thinking things are good when maybe they are not so. Enlightening.
Mike,
Your wife is truly a wise woman. When I purchased my 2009 Mustang convertible off lease in the January 2010 I got a fair deal on a low mile car. Detroit iron has a habit of depreciating faster than other sources of iron. When you can get a year old vehicle for half of it’s sticker price, I’ll call that a ‘fair deal.’ This car has been trouble free and since I tend to keep them a long time further depreciation is not an issue -acquisition cost is the issue.
So true. I worked for Auto makers for 40 years. You will have 40 – 50 % depreciation after 1st 2 years. If you look you can get the 1/2 off deal with low miles and save big time and the warranty will still be in effect till your mileage is met.
I believe you are right on Mike. I was in a car accident last June that totaled my minivan. So I have cash to be able to buy another vehicle. Going to the dealers in my area, there are hundreds of used vehicles on their lots. But they are not giving good deals yet. So I will sit on my cash (we have another vehicle) until terms are more favorable to me. I have patience. I hope the dealers and private sellers don’t.
I’ve got to get another auto also. Going looking today. Thanks, John
Your observations are sensible and common sense. I agree with you. The problem I have is that we have been hearing similar comments for twenty years from people that know a lot more about it than we do. Fiat money printing, our jobs going overseas, horrendous trade deficits, and the like, but the bad things these are supposed to cause haven’t materialized. Instead of the dollar crashing it rallies big time. By every standard measurement the economy is improving. Same goes for Europe. They are supposed to be bankrupt but continue to chug along like they always have. I guess my real question is WHEN?
In the UK most cars new are purchased in some kind of lease plan where the buyer does not own the car and is leased usually for a three years.
There are all kinds of fancy terms for this arrangement and it means someone of low savings can get a high spec brand new car on their drive that would otherwise be out of the question, as long as they can make a monthly payment. According to my local new car dealer the rate of new car sales is 85% in a leasing deal.
One nasty side effect of this is that as cars seem to become more affordable then the price goes up to meet the plentiful borrowed funds available for them, so cash buyers lose in having to pay more than would otherwise be the case. The second hand market is more natural so prices fall dramatically 50% or more from new. In European countries and the USA prices are much lesser than the UK, we tend to pay the same numerical ammount in GBP to USD or Euro but of course our currency is higher in exchange rate numerically. Easy credit is a curse to people that are sensible with their cash even when they never use credit because it bumps up prices. In a recession when credit dries up prices fall dramatically.
Adrian,my late Father would agree with you–He was always of the firm belief that easy credit tends to drive the price of everything up,because,as you say,”borrowed” money chases the same good and services that hard-saved cash does-Also,as a GM retiree I would seriously hope this trend isn’t too detrimental in the long term (Emphasis on “Hope”)
I imagine the Cash for Clunkers deal, which artificially raised used cars prices dramatically, had a lot to with the run up as well. Now used car stock is fully returned, the decline should be imminent…. Unless of course the currency crashes.
My 2000 Dodge van is still rolling right along despite being a victim of German engineering. The transmission took a dump at 110,000 miles. When it was rebuilt at an ‘outside’ sop they put in the redesigned by Fiat/GM parts. If you carefully notice the fine print in the ads the leases quoted are for people who have a higher credit rating, higher than the buyers and there is a very low mileage allowance, under 10-12K per year. Do forget the no deductible insurance. In addition Budget rent-a-car claims to be the largest seller of used vehicles, and rentals typically have lower mileage still and all the recalls answered. How about a car that has a base price of $8600 new, yeah under ten grand. It is also projected to get 84mph highway and eventually hit 100 mph. Seats two, three cylinder engine five speed transmission and the company claims to have fifty thousand paid reservations. I’m writing about Elio Motors, plant is in Shreveport La. The financing is designed to be your gas savings for people who drive a lot of miles.
So how do we take advantage ? buy Manheim stock ? Buy Leasing Company stock ? Mabye short some Auto Mfgr ?
If you do the math, leasing always costs more than purchasing even when the stiff up charges are not applied for going over the maximum allowable milage at the end of the lease. Automobiles tend to decrease in value as much as 50% after not long after leaving the showroom (i.e Cadillac). Perhaps the best value to the consumer would be to purchase a previously leased vehicle from an independent dealer when the inventory of leased vehicles hits the market at the end of 2016. G.M. should have been left to chapter 11 versus our government bailout costing us taxpayers over 30 billion.
Not necessarily so! I, too, used to be a high mileage driver and usually purchased my vehicles. But I leased for the first time in 2000, a new built-to-order Audi A6, because the sales representative [who had already won multiple national awards and who was highly recommended to me by co-workers] and dealership was very transparent in revealing the lease v. purchase numbers and bank and Audi Finance rates for leasing [15k miles per year] and purchase. At that time, Audi was aggressively trying to increase its volume in USA, thus their internal financing rate for a lease was $2500 by leasing and purchasing this vehicle and received an extended CPO warranty as well.
More recently I’ve switched to buying Certified Pre-Owned vehicles. Many of the luxury brands offer extended warranties to 6 or more years [Audi, BMW and M-B;Porsche is 8] and up to or even beyond 100k miles. Thus, a high mileage driver can acquire a ~2 year old vehicle with 20,000 to 25,000 miles at a significant discount to its new purchase price yet obtain 4 years of warranty that extends over a greater total mileage than if a new vehicle of the same brand and type is purchased.
Hi Mike
As many on your site already know, there are a broad number of catalysts at work sending up danger signals to those who choose to listen. For me I am receiving an increasing number of warning references that point to the growing urgency of preservation of capital. It is becoming timing critical.
Thanks Mike for the solid information. My question today is this: About 3 months ago you stated thar “On March 16 will be blood in the streets” Where does this prediction stand now? Would appreciate your comment
Unless I missed something, the people who are turning in their lease vehicle will probably lease a new one, as I would. So the new car sales should not be diminished. The used vehicle market will probably tank due to the massive number of nice vehicles available.
Not necessarily true Bob. Buyers that do not lease is where the reduced sales come from. A flood of cheaper lease resales will draw buyers who do not lease away from buying a new car because of the big discounts on the lease resales. It is the outright sales to buyers outside the lease world who realize the increase in supply in the form of bargain prices for resales (used cars).
The 3% total of a second straight annual decline over 2 yrs is not a true indication of what is really happening at the present time…..There are late model cars at auction with high millage…rolling by line after line at Manheim,..with no buyer interest and they are collecting dust..add that to the #’s Mike supplied…we are in for an auto industry collapse…oh wait ..I mean bailout.
Good article, and if you have followed the leasing industry, leasing always ticks up when the economy ticks down which it is and has been for several years. When you look behind the BS curtain of government, the phony unemployment reports, never mind shrinking incomes, economic uncertainty, people will turn to leasing because they have no savings for a down payment. This is not a sign of a healthy economy, it is the direct opposite. As incentives increase, used car prices decrease, these are all bad signs for economy, and as with all bubbles, they eventually pop. You can only kick the can down the road for so long hiding the truth that the U.S. will have to file for bankruptcy once again, and this time not caused by a war, but this time for total ruination by our losers and liars in government. PERIOD
There’s one flaw in your reasoning.
We are currently undergoing a huge transformation in the safety features offered by auto manufacturers such as Side Air Bags, Adaptive Cruise Control, and Blind Spot Warning. By the time many of these leases expire, the features offered on new cars will be even more compelling to safety-focused drivers, and people will stop wanting older cars with fewer features.
I recently traded in my 2007 car, which was perfectly fine and in running order, just to get new safety features. I leased the new car, because I expect in 3 years, I will want to upgrade to a new, even safer vehicle.
So I think the problem will not be selling new cars, but getting rid of the old car inventory.
Look up “Substitution” in any Econ 101 textbook.
That’s how the “problem” you refer to will be resolved.
now’s your chance to sell the rally, mike. what are you waiting for?
Cool. I’m planning to buy a late-model used compact SUV later this year. We got a great deal on a low-mileage, used lease minivan in 2012. I expect to do the same in 2016.
I worked for GM from 2000-2008 and I remember the incentive wars after 9-11. GM started the “Keep America Rolling” campaign and it was ultimately devistating to the big 3 because it lead to a HUGE incentive war (GM offered the employee discount to everyone at one point). I remember the senior leadership talking about the resulting negative price retention and how they were going to combat it with “must have” products. But unfortunately the only “must have” products built by Ford and GM with any sort of real profit are full size trucks and utilities as the mid size segment is too competitive and the small car market isn’t profitable to the large manufacturers. So as long as truck sales hold strong, they’ll be able subsidize the losses from car sales, the cost of CAFE requirements and a gluten of used cars. We’ll see how long they can Keep America Rolling…
Mike,
Just a quick note re leasing, it may be lousy for the manufacturers, but it is great for the consumers. You may want to reconsider this option for yourself as you can buy additional miles for a lot less than the vehicle would depreciate when it comes at trade in time.
(ex) If you put 50,000 miles on a vehicle / year, get yourself into a 2 year or 3 year lease, buy the extra miles which will reduce your lease end value(LEV), and I guarantee the LEV will be higher than the actual trade in value you would have received. You walk away owing nothing, and the manufacturer takes the loss
i just bought a new 2015 chevy silverado $39,000, dealer wanted $32,000 for used 2011 with 30,000,miles they would not budge on the used price, mile for mile the new is much less than the used, they said texas is truck country & they could get the 32,000 for it i got $3,750 off list on new in dallas area
2 Chevy truck paid for I could not get new truck again
I worked for GM for 30 years, from its prime to its bankruptcy. The one point you are missing is that as the leases run out, those people are not going to all of a sudden start walking everywhere, they are going to either purchase the vehicle that the lease has run out on, or they are going to lease a new vehicle. Leasing over the decades has been a real profit maker for automakers, and will continue to be. Maybe you should buy stock in Manheim. But you are wrong on leasing being the downfall of automakers.
Dax
Kospi close no
Not all leased cars are returned–a goodly number extend the lease, especially if the mile
age is above the allowance.
every 3rd vehicle off the assembly line is pure profit. GM throws away thousands off cars every year at the proving grounds alone! I know, I did it for them for 40 years.
Back when I was still living in the States, the concept of leasing was considered more suitable for work related transport where some added luxury presented some value from hauling clients around in the latest and greatest. My guess is that today leasing is enhanced more from present day orientation as a consequence of revised mind set from easy money policies. When the future looks frustrating you might as well flip luxury every three years to better live the moment. Thanks Yellen for taking care of everyone’s future.
Mike,
Absolutely, for the reasons you mention as well as the lengthening and ease of loan terms etc…It is starting to look a little like the housing sup-prime crisis building, except substitute cars for houses….
What follow a recession is a depression then recovery then growth then a boom. This usually takes place over a ten to 15 year cycle. So it takes place over a very long time.
As a person that has been in the auto business for over 30 years, I will tell you that you really don’t know what your talking about with regards to leasing’s affect on the automakers. Leasing is a win – win for the factory. Why? The factory usually has WAY fewer incentive $ on a lease than it does a retail sale. Additionally, for folks like us who would normally only by a new car every 5 to 10 years, leasing brings us back to the show room every two to three years like clock work. Third, leasing increases consumer loyalty. Forth, lease customers are more likely to return to the dealer for normal maintenance. Fifth, customer are more satisfied with their leased vehicles than ones that they’ve purchased. I could go on, but I’ll stop here. Don’t use lease penetration as a reason not to buy auto stocks.