Surge in End-of-Lease Cars Seen Pressuring Prices in Record Year

  • U.S. light-vehicle sales projected to accelerate from January
  • Additional 800,000 off-lease vehicles will boost used sales

A surge in cars and SUVs coming out of leases have analysts predicting pressure on prices of both used and new models, curbing investor enthusiasm over sales records projected for this year.

Increased availability of of two- and three-year-old models with modern safety and technological features should pull used-car prices down from record highs and provide more competition for new vehicles. More than 3 million autos will reach the end of their leases this year, a 35 percent jump from last year, according to the NADA Used Car Guide, which uses data from J.D. Power’s Power Information Network. It’s the most off-lease vehicles since 2003, according to Manheim Consulting.

To prepare for the increase, many brands and dealers are ramping up their certified pre-owned vehicle programs, which allow them to attach an extended warranty and other perks to late-model used vehicles and sell them at a premium. Those sales jumped to a record 2.55 million in 2015, said Tom Webb, Manheim’s chief economist, who added that they’ll “certainly” hit another record in 2016.

That influx of used vehicles won’t be enough to threaten the auto industry’s recent strength, buoyed in 2015 by low gasoline prices, available credit, rising discounts and a strengthening job market. For now, those forces seem here to stay -- the Federal Reserve left borrowing costs unchanged last week. And AAA forecasts gasoline prices to remain cheaper than or comparable to last year’s average of $2.40 per gallon. Analysts said all that will help boost new car and light truck sales in the U.S. to 17.8 million units in 2016, topping the record set last year, according to a survey by Bloomberg.

“As that used-car price softens and falls, it will increase the number of folks who would switch over to a used vehicle instead of a new car,” said Joe Derkos, a senior director at J.D. Power. “We’ll see a slow, steady adjustment back away from these historical highs, but by no means will it jeopardize the strength and longevity of the industry.”

Good Start

The year is off to a good start. Though winter storm Jonas forced many dealerships to temporarily shutter their doors in January -- with Toyota reporting that 200 of its East Coast dealers suspended operations -- America’s renewed love for pickups and sport utility vehicles likely prevailed, boosting the annualized selling rate, adjusted for seasonal trends, by half a million to 17.2 million last month, according to analysts’ projections in a Bloomberg survey. All major automakers are projected to report at least a small decline from last January, attributable to the 2016 month including one fewer weekend.

Automakers will probably still push their leasing programs, which are attractive because they force buyers to return to showrooms at the end of the lease term, said Eric Lyman, vice president of industry insights at the vehicle valuation firm TrueCar Inc.

“Even though we see some of these headwinds -- in terms of higher financing, in terms of softening values in the used market, and more supply out there in the used market -- the leasing strategy has really become a fundamental part of the automakers’ overall sales strategy,” Lyman said.

Consumers’ Luck

The incoming surge in used-vehicle supply couldn’t come at a better time for consumers -- the Manheim Used Vehicle Value Index, which measures used-vehicle pricing, reached 125.7 in December, its highest since July 2011.

After turning in the Hyundai Elantra she was leasing, Theresa Beam is really hoping her car-buying search will end with her driving away in a certified pre-owned vehicle. The 22-year-old resident of Phillipsburg, New Jersey, said she likes the look of Honda’s Civic, Kia’s Sportage and Mitsubishi’s Lancer Evolution.

“Certified pre-owned cars are my first choice, but, if I come across a great offer, I might think about it,” said Beam, who’s hoping her decision to shop for a used vehicle will allow her to find an affordable option with heated seats. “I haven’t found the right car, yet, but the prices have been in my price range and the cars look like they are in good shape. The mileage hasn’t been too bad.”

Future Decline

Though record used sales aren’t expected to hamper new light-vehicle sales this year, it could become a problem down the road. Annual sales could decline for the first time since 2009 in 2017 -- ticking down to 17.6 million -- according to the average of eight analysts’ projections in a Bloomberg survey. Investors are certainly worried about the potential sales and profit decline -- the Standard & Poor’s 500 Automobiles Index fell 13 percent in January, its biggest monthly drop since June 2010.

The Manheim used-vehicle index moved less than 2 percent in 2015, the fourth year in a row for a change that small in either direction, representing the longest period of price stability in the index’s 20-year history. The index’s recent steadiness is more about a lack of used-vehicle supply than anything automakers did, said Mark Wakefield, an analyst at Alix Partners. As more off-lease vehicles come to market this year, the firm sees used prices falling, hurting automakers’ sales and pinching their recent strength, Wakefield said.

“This will be the first year we’re back to normal in the used-car supply and we’re worried about what that means,” Wakefield said. “It’s a big risk, but it’s a risk that gets worse the next year and worse the year after.”

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