Experts: Now is a good time to buy used cars
Industry bracing for record 3.6 million off-lease vehicles.
The number of new vehicles that were leased hit a record 4.4 million last year, triple the number in 2009, when auto sales were at their low point during the recession.
New- and used-car sales have increased seven years in a row as the economy has improved, a streak not seen since the 1920s, but industry analysts worry that the usedcar market may not be able to easily digest a record number of vehicles with expired leases being listed for sale.
Most leases are for 36 months, so three years after they leave dealerships they come back as used cars, and in 2017 the auto industry is bracing for a record 3.6 million off-lease vehicles.
Michelle Krebs, senior analyst at Cox Automotive’s Autotrader, said she expects new-car sales to drop from a record 17.5 million in 2016 and for prices on used cars to soften. She says more buyers are likely to cross-shop new vehicles against the glut of late-model used vehicles coming off of leases, many of which will wind up as certified pre-owned cars, which can cost on average about $1,500 more than typical used cars.
“The market really expanded to accommodate the used cars on the market as well as record new-car sales, but now all that is softening. When we have newcar sales softening and this glut of used cars, we have an increased supply and lower demand, and used-car prices will be down,” Krebs said.
For consumers, the flood of off-lease vehicles could lower the prices on certified pre-owned cars and used cars in general, a boon for budget-conscious shoppers. That, however, also could cut into new-vehicle sales and force manufacturers to hike incentives, which have been rising already.
“It’s hard to know how the nearly new or certified preowned cars will play against the new cars. We see a lot of cross-shopping between the two on our website, so will the consumer take that over a new car or will the incentives get richer on new cars so that it makes more sense to buy new rather than nearly new?” Krebs said. “There are just a lot of dynamics going on, and we don’t know how it’s going to shake out.”
The flip side for consumers is that the glut of off-lease vehicles also could make buying or leasing a new vehicle more expensive. An oversupply of used cars could diminish the value of a vehicle they plan to trade in. If they’re leasing, lower used values translate to higher lease payments, Jessica Caldwell, senior analyst for Edmunds, said.
“The lease payment is predicated on the residual value, so if those start to decline, then lease payments will go up. If the payments go up, that will make it less attractive for people to want to lease. That is what we might see happen, that leasing will stagnate a bit this year,” Caldwell said.
Leased vehicles accounted for about 25 percent of total vehicle sales in 2016 and 31 percent of retail sales. Edmunds and Autotrader see leasing declining slightly this year to 30 percent of retail sales as manufacturers back off as a hedge against declining used prices. Manufacturers project what a leased vehicle will be worth after three years — the residual value. If the actual resale value is lower at the end of the lease, they lose money.
The flood of off-lease vehicles will continue to grow to more than 4 million vehicles in 2018.
In addition, Manheim, a major used-car auction company, says more than 1.8 million used rental cars will enter the used market this year, mainly 1- and 2-yearold vehicles.
With so many late-model used vehicles that could poach new-car shoppers, Krebs said Autotrader is forecasting that new-vehicle sales will fall into a range of 16.8 million to 17.3 million, at the lower end of most forecasts.
For consumers, the flood of off-lease vehicles could lower the prices on certified preowned cars and used cars in general.