The rise in leasing during the last few years has been one of the drivers of the record sales automakers have enjoyed during that time. However, leasing has its downside and that part of the equation is about to hit automakers — hard.
Three years ago, automakers leased 3.3 million vehicles, accounting for about 23% of U.S. sales to individual buyers, according to Automotive Lease Guide. As long as the vehicles hold their value, this isn’t a problem. In fact, it’s a good thing because it gives automakers a steady stream of higher-profit used cars to sell.
This is good for cars because they made up about half of vehicles leased at that time. However, now that the popularity of cars has fallen, this is likely to cause problems for the makers.
Automakers are at the precipice of an influx of off-lease vehicles that will be filling their used car lots. In fact, because leases, which hovered around 20% of new vehicle sales for until their steady climb began three years ago, are now beginning to expire, those lots may soon be overflowing with used vehicles.
(Crossover sales rage may be hitting its peak. Click Here for the story.)
For the U.S. auto industry, about 3.5 million vehicles will come off lease this year, after 3 million returned last year, according to Automotive Lease Guide. Cheap, almost new, used cars that are likely to put a crimp into already slumping new vehicle sales in the U.S.
To make matters worse, the cars coming off lease will be worth less because the market prefers trucks crossovers and sport-utes.
“It’s more difficult to get rid of them,” Jim Lentz, Toyota’s CEO in North America, told the Associated Press. “You’re going to have very attractive certified used passenger car payments relative to new passenger cars.”
Leasing hit a record of over 30% of sales earlier this year and car sales are now just 38% of the market. As a result, used-vehicle prices fell 7% in March compared with a year ago, according to an NADA Guides index, which expects them to fall 6% for 2017.
(Click Here to see more about sliding new vehicle sales last month.)
So falling profits on car sales. What could be so bad about that? Well, according to Bank of America Analyst John Murphy, plenty.
After a recent Automotive Press Association luncheon in Detroit, Murphy said the glut of off-lease cars that will likely be sold at lower prices could combine with falling demand for new vehicles as well as the ongoing popularity of leasing to cut profits on new vehicles.
As the demand for autos wanes and the supply of new models increases, automakers may feel pressured to cut prices or raise incentives — and not just on car cars, but those currently popular trucks and utes.
“It’s a very significant risk,” Murphy told the Detroit Free Press.
(To see how crossovers/utes could account for half the U.S. new vehicle market, Click Here.)
It’s a risk, he believes, because more and more consumers are shopping monthly payments more than vehicle prices. And often they can lease that more appealing crossover or sport-ute for more than $100 less a month than what they can buy it for.