Used-car glut is a dealer’s dream, automakers’ agony
Three years ago if a customer walked onto Dan Reel’s used-car lot seeking a latemodel off-lease Ford Escape, his answer was short: tough luck. The supply of lightly used-cars and trucks was tight because automakers had drastically cut back on bargain leases during and after the Great Recession.
Recently, though, a computer search for available used vehicles within 150 miles of Reel revealed an eye-popping figure: 668 Escapes.
That’s enough to put more than 40 per cent of the inhabitants of this small northeastern Ohio town, population 1,600, into the popular crossover.
A search for the Chevrolet Equinox, a comparable crossover, showed 461 available. “The automakers have flooded the market,” said Reel, owner of Reel’s Auto in Orwell, Ohio, about 40 miles east of Cleveland.
That deluge is good news for usedcar dealers, auto auction houses and car buyers, who stand to benefit from a bountiful supply of high quality, off-lease vehicles rolling into the US market.
By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim.
That’s helping independent dealers such as Reel, who can turn a quick profit on vehicles bought cheaply from auction companies.
Big players like AutoNation also aim to benefit from selling late-model vehicles at a discount versus brand new cars.
Chief Executive Mike Jackson said rising off-lease car numbers means “a higher supply of pre-owned vehicles at a more attractive price.” Consumers seeking great deals are in luck.
Used vehicle prices at auction fell about 3 per cent last year, according to Carmel, Indiana-based KAR Auction Services Inc, which facilitated the sale of 5.1 million used and salvaged vehicles in 2016.
Used prices should drop around 3 per cent annually for the next couple of years, according to KAR’s Chief Economist Tom Kontos.
General Motors Co and Ford Motor Co say prices for its used vehicles, which consist largely of nearly-new ones coming off lease to consumers, fell 7 per cent in the first quarter versus the same period in 2016.
GM says it expects a 7 per cent decline for 2017 compared to last year.
While many used-car dealers and their customers are spoiled for choice, the glut bodes ill for GM, Ford and Fiat Chrysler Automobiles NV and is one reason the Detroit Three’s share prices are stuck in neutral.
Demand after seven sales.
Meanwhile, carmakers’ discounts on new vehicles have surpassed record levels set during the Great Recession.
Those discounts have been averaging over 10 per cent of a new vehicle’s average selling price, according to industry consultants J D Power and LMC Automotive. Slumping prices also hurt automakers’ in-house lenders.
They price leases using a car’s “residual value” — an estimate of the vehicle’s worth after its lease ends.
If that value is lower than expected when the vehicle is resold, profits suffer.
That risk was highlighted last November when Ford lowered its financial service arm’s pretax profit forecast by $300 million, citing falling resale values for offlease vehicles. Still, carmakers show no sign of abandoning leasing.
In the first quarter, leases made up 31.06 per cent of sales to consumers, just below the record set in the second quarter of 2016 of 31.44 per cent, according to data from Experian. Wall Street is worried carmakers are repeating past mistakes.
Shares of GM and Ford barely budged last month after their earnings both beat analyst expectations.
But when the companies reported disappointing April sales last week, GM’s shares fell 3 per cent and Ford’s 4 per cent.
Automakers contend there is little cause for alarm. In late April, GM Chief Financial Officer Chuck Stevens said offlease vehicles were “an issue,” but insisted that “overall the used-car market is absorbing that supply.” for new vehicles is slowing consecutive years of rising