Off-lease used cars are flooding market, pushing prices down
DETROIT (AP) — In 2014, Infiniti leased more than 28,000 Q50 luxury sedans for as little as $329 per month in a growing U.S. market. The leases accounted for more than three-quarters of Q50 sales.
Now they’re coming back to haunt the automaker.
Like many companies that juiced sales with sweet leases during the past few years, Nissan’s luxury brand now faces a hefty supply of nice, low-mileage used cars at a time when most people want SUVs. 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. These are huge numbers when you consider that leasing all but came to a halt during the Great Recession about a decade ago.
The numbers signal three shifts in the market:
— Lease deals are starting to wane as many companies cut back to control the used car supply.
— You can get a great late-model used car for a bargain price.
— Competition from used cars likely will push down the price of new ones.
Since the lightly used cars are entering a market that favors trucks and SUVs, the prices will fall, says Jim Lentz, Toyota’s CEO in North America. “It’s more difficult to get rid of them,” he says. “You’re going to have very attractive certified used passenger car payments relative to new passenger cars.”
Three years ago, automakers leased about 3.3 million vehicles, just over 23 percent of U.S. sales to individual buyers. The business was good. Cars were holding their values and automakers expected to sell them at a tidy profit when leases ended in two or three years. Cars were still popular, making up half of the nation’s sales.
Leasing continued to grow, hitting a record of over 30 percent of sales earlier this year. Meanwhile, buyer tastes shifted to SUVs and demand for cars faded. Car sales are now about 38 percent of the market. As a result, used-vehicle prices tumbled 7 percent during March compared with a year ago, according to an NADA Guides index. The organization expects them to fall 6 percent for the full year.
Data collected by Kelley Blue Book shows leasing dropped to under 30 percent of sales in April after three years of increases.
Toyota started to reduce leasing in 2015. General Motors cut sales to rental car companies last year to control the used car supply, Chief Financial Officer Chuck Stevens says. Now GM is reallocating incentive spending away from leases toward conventional financing, as new-car sales are expected to back off slightly from last year’s record 17.5 million.
Eric Lyman, lead analyst for Automotive Lease Guide, advises consumers now is a good time to lease a car, before leasing cuts become more widespread. Although he expects the number of vehicles leased this year to stay flat, payments are likely to rise as automakers offer less generous terms.
But it will be difficult for automakers to stick to a strategy of raising lease costs unless they all go along. For example, if Honda leases a midsize Accord for $229 per month, Toyota will have to match the price on the Camry, the Accord’s prime competitor, Lyman says.
Jake Winfield, a math teacher in Phoenix, considers himself a beneficiary of the car oversupply. Late last year he bought a 2015 Accord with under 15,000 miles that he believes started life as a lease. He paid just under $20,000 for the certified pre-owned car with aluminum wheels and a moon roof that stickered around $25,000 when new. It was inspected and comes with a warranty. “I was able to get a higher-end car by buying used than by buying new, with my budget,” Winfield says.
Infiniti likely will take a big depreciation hit on 3-year-old Q50s coming back as used this year. An all-wheel-drive premium model with about 36,000 miles on it was listed on Autotrader.com this week for under $24,000. It originally stickered around $40,000. Nissan says it has plans to manage the influx of Q50s.
Lyman predicts used car prices as a percentage of original sticker price will fall for at least the next three years. The number of cars coming off leases each year will grow through at least 2020, when ALG expects more than 4.1 million lease cars to be returned.
The off-lease cars are attracting even customers with the high credit scores, according to Experian. A decade ago, roughly 49 percent of prime credit buyers bought used. That’s now up to almost 55 percent.
Lower used-car prices also can reduce new-car prices because buyers won’t get as much money when they trade cars in, according to Lyman.
In two or three years, the price of popular used SUVs could fall too, because they’re now being leased in large numbers, Lyman says. It may take four years or so, but prices eventually will stabilize as automakers cut new-car production and reduce leasing.
Still, some dealers who sell used cars are skeptical of the falling price forecasts. Paul Ritchie, who runs a Honda dealership in Hagerstown, Maryland, says he and other dealers he recently met with haven’t seen a big decline. “We just don’t think it’s going to drop that much,” he says. “Most of the dealers in our group are looking to buy used cars.”