Expert says leasing is higher but also smarter

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When leasing peaked in 1999 at 26 percent of new-vehicle sales, it severely damaged residual values, Tom Webb, Cox Automotive chief economist, said in the Manheim 2016 Used Car Market Report released in February. Leasing is back to that level and beyond, but this time, Webb says, leasing is smarter. That’s because lenders have been more careful when setting residual values and there are fewer players in leasing, other experts say. Today, only automakers’ captive finance arms and a few banks offer leasing.

In 2015, leasing accounted for 28 percent of new U.S. light-vehicle sales, the highest level ever, the report said, citing data from J.D. Power and Associates’ Power Information Network.

Webb: Values took hit in ’99.

That’s 2 percentage points higher than in 1999, when residual values took a big hit. So what makes leasing safer this time in terms of impact on residuals? The lenders, experts say. 

The most significant change today is that few banks not backed by an automaker are involved in leasing, said Mike Buckingham, senior director of J.D. Power and Associates’ automotive finance practice. 

Chase and Ally, for example, act like captives for some manufacturers. 

“When [more] banks were in, many were manipulating residual values. There was a lot of one-upmanship,” Buckingham said. “They would increase residuals to make payments more attractive. Their lease offerings were more attractive” than those of the captives. 

Leasing was oversaturated in 1999 and 2000, says Tom Libby, industry analyst for IHS Automotive. “There was a downward pressure on prices,” he said. “Now, the industry is healthier. You don’t have the huge pressure to move units no matter what it takes.” 

Those years were a difficult time for leasing, agrees ALG analyst Pat-rick Min. “Similar to what we’re coming up with now, there was a huge number of [lease] vehicles starting to flood the market. That eroded used-car value,” Min said. In 2000, the residual value was only about 39 percent, but today’s residual value is 50 percent, he said. 

About 3.1 million off-lease vehicles are expected to return to the market in 2016, up from almost 2.6 million in 2015, according to Manheim’s report. The glut of vehicles is expected to grow to almost 3.6 million in 2017 and almost 4 million in 2018, potentially putting downward pressure on used-vehicle prices.

“The [automakers] and captives don’t want residual problems down the road.”

Barrett Teague
Black Book

Today, however, there’s a lot more on the back end of a lease than in the past, Min said. For example, automakers have robust certified pre-owned or remarketing programs that “help maintain healthy resale values,” he said. 

And lenders realize they should be careful with enhancing residual values, Buckingham said. “The market can move up or down.” 

“The [automakers] and captives don’t want residual problems down the road. They want to avoid situations with large residual losses and to move the customer to a light vehicle or something else in the brand with a small change in payment, not a major change,” he said. 

Barrett Teague, vice president of lender solutions for Black Book, says that in 1999, depreciation wasn’t considered. 

“Today, lenders are doing a better job paying attention to what the future will look like because they have access to data that says this vehicle is lasting 10 years,” he said. 

Historically, a vehicle may have just a 36-month value, he said. “After that, you couldn’t predict what would happen to a vehicle.” 

Now, there are more predictive data. For example, Black Book suggests auto lenders look at collateral data to determine how incentives and leasing fit together. That could mean adjusting lease-term spreads. “Don’t be stuck in 24- or 36-month terms,” Teague said. 

Some vehicles benefit from pull-aheads or extended leases, depending on the vehicle. Lenders should offer incentives to get consumers to pull ahead or extend the lease if the vehicle will be more valuable before or after the lease is scheduled to end, he said. 

That way, longer terms can spread out off-lease return schedules. 

For instance, Teague said, if a lease on a vehicle is due to end in six months but the collateral data show that in three months, the vehicle will significantly depreciate, it would be best to work with the lessee to terminate the lease early.

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Expert says leasing is higher but also smarter