Ex­perts: Now is a good time to buy used cars

In­dus­try brac­ing for record 3.6 mil­lion off-lease ve­hi­cles.

Austin American-Statesman - - MONEY & MARKETS - By Rick Popely Chicago Tri­bune

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.

RICHARD B. LEVINE / SIPA USA

For con­sumers, the flood of off-lease ve­hi­cles could lower the prices on cer­ti­fied pre­owned cars and used cars in gen­eral.

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