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The substantial uptick in off-lease vehicles returning to the market this year will put downward pressure on late-model used-vehicle prices and residual values, analysts agree.
It’s anyone’s guess when used-vehicle prices will drop appreciably. Many analysts had thought it would happen last year, but strong new- and used-vehicle demand and low interest rates buoyed prices.
But when used prices fall — and they will — lease residuals and trade-in values will follow them down, robbing some consumers of the equity in their trade-ins. And some automakers will have to recalculate the costs vs. benefits of the leases they have been subsidizing through their captive finance companies.
To compensate, automakers likely will either boost the amount they spend on new-car incentives and subvented leases or pull back on leasing through their captives.
Joe Spina, director of remarketing at Edmunds.com, predicts that leasing will either plateau or dip a bit this year. He says competitive one-upsmanship among automakers to gain and keep market share will keep leasing from falling dramatically, but it won’t continue to grow.
Spina believes that finance companies are expecting higher residual losses based on the higher number of vehicles expected to return to the market. Though they have set aside funds to cover those losses, he said, the companies will want to mitigate future losses. Also putting pressure on finance companies is that they are financing more vehicles in general.
Scale back leasing?
“I think they will start decreasing residuals in their forecast to intentionally scale back a little bit on the leasing penetration; that’s a lot of leasing,” Spina said. “At the same time they are financing more cars, and some of those deals aren’t great, so they’ve got credit risk, too. So they’ve got these two big buckets of risk.
“If you look at those two things as a stand-alone item, that sort of forces their hand to ratchet back [on leasing]. We definitely expect them to do that this year.”
Eric Lyman, vice president of industry insights at TrueCar and its ALG division, sees it a bit differently.
Lyman said ALG’s residual value forecast for 2015 model-year vehicles returning to the market in 2018 is in the 48 to 49 percent range, which is higher than the typical 45 percent range the company has seen over the years.
He also said he expects the supply of 1- to 5-year-old used-vehicles to increase 10 percent year-over-year in 2016, 2017 and 2018, reflecting the industry’s strong sales in recent years.
Lyman agrees that used-vehicles prices will soften this year, but he expects residual values to remain “well above long-term historical averages” and leasing to remain strong.
He said leasing benefits the auto industry because manufacturers know exactly when lease consumers will be back in the market and the dealership for a new vehicle. That promotes customer loyalty, he said.
So automakers are purposely engaged in aggressive leasing strategies, part of which involves shifting funds to cover possible residual shortfalls from their traditional marketing budgets to their variable marketing budgets, Lyman said.
Funding leasing
“That means throwing money that you otherwise would have used on another TV advertising campaign or some sort of dealer campaign and using it to support a higher residual to get a lower payment for a lease customer,” he said.
“Not only am I getting that person into the showroom today to lease that vehicle, I’m going to get that person into the showroom in three years. I might have a new product for them in the same segment or another segment to dangle in front of them to get them into another vehicle from my brand.”
It’s not just lease customers who are impacted by falling used-vehicle values. More finance customers are likely to be “upside down” — a term for owing more on the loan than the vehicle is worth — on their trade-ins.
Zabritski: “Many possibilities”
Melinda Zabritski, Experian Automotive’s senior director of financial solutions, said there are “many possibilities” for those consumers.
Some consumers may have to switch from a new vehicle to a used one, or manufacturers may have to up the new-car incentive ante to keep buyers in the fold. Consumers may have to dig a little deeper for heftier down payments, too, she added.
Though loan-to-value ratios have loosened a bit, don’t expect many lenders to finance negative equity that pushes those ratios over 100 percent, she cautioned.
“You’ll readily see LTVs over 100 percent to allow for taxes, titling and licensing, aftermarket services and warranties, but many lenders have policies that the amount that pushes it over 100 percent cannot be negative equity,” Zabritski said.
“Some lenders will finance it, but many lenders will not.”
More for less
Dealers are keeping a watchful eye on leasing, too.
Rick Case, CEO of Rick Case Automotive Group in Miami, predicts that new-vehicle sales will grow, though at a slower pace than we have seen in recent years, and that leasing will remain strong, as a result of manufacturers’ incentives. That’s a good thing for lease consumers “who can drive more car and pay less per month,” he said.
It’s not bad for dealers such as Case, either.
He operates a robust used-vehicle operation and buys “virtually every” off-lease vehicle that rolls back onto his dealership lots, he said.
The used vehicles he sells are warrantied either under an automaker’s certified used-vehicle program or his own in-house program, which covers most noncertified used vehicles — all domestic and Asian brands plus Volkswagen — that are up to 8 years old and have fewer than 80,000 miles with a 10-year/100,000-mile powertrain warranty.
Case said: “One great thing about a lease return is you [have the opportunity to] sell another new car.”
Used-car values, residuals, leasing linked
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