Used cars flood the market
About 3.5 million vehicles will come off lease this year, pushing prices down.
In 2014, Infiniti leased more than 28,000 Q50 luxury sedans for as little as $329 a 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 last few years, Nissan’s luxury brand now faces a hefty supply of nice, low-mileage used cars at a time when most people want sport utility vehicles.
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, considering that leasing all but came to a halt about a decade ago during the Great Recession.
The numbers signal three shifts in the market:
Lease deals are starting to wane as many companies cut back to control the usedcar supply.
You can get a great latemodel used car for a bargain price.
Competition from used cars probably 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, said Jim Lentz, Toyota’s North America chief executive.
“It’s more difficult to get rid of them,” he said. “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% 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 the nation’s sales.
Leasing continued to grow, hitting a record of more than 30% of sales earlier this year. Meanwhile, buyer tastes shifted to SUVs and demand for cars faded. Car sales are now about 38% of the market. As a result, used-vehicle prices tumbled 7% in March compared with a year earlier, according to a NADA Guides index. The organization expects them to fall 6% for the full year.
Data collected by Kelley Blue Book shows that leasing dropped to less than 30% 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, GM Chief Financial Officer Chuck Stevens said. Now GM is reallocating incentive spending away from leases toward conventional financing, as new-car sales are expected to back off from last year’s record 17.5 million.
Eric Lyman, lead analyst for Automotive Lease Guide, advises consumers that 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 a month, Toyota will have to match the price on the Camry, the Accord’s prime competitor, Lyman said.
Jake Winfield, a math teacher in Phoenix, considers himself a beneficiary of the car oversupply. Late last year he bought a 2015 Accord with fewer than 15,000 miles that he believes started life as a lease. Winfield paid just under $20,000 for the certified pre-owned car with aluminum wheels and a moon roof; the car’s sticker price was about $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,” he said.
Infiniti probably will take a big depreciation hit on 3year-old Q50s coming back as used this year. An allwheel-drive premium model with about 36,000 miles on it was listed on Autotrader.com this month for less than $24,000. Its original sticker price: about $40,000. Nissan said it has plans to manage the influx of Q50s.
Lyman predicts that 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 Automotive Lease Guide expects more than 4.1 million lease cars to be returned.
The off-lease cars are attracting even customers with high credit scores, according to Experian. A decade ago, about 49% of prime credit buyers bought used. That’s now up to almost 55%.
Lower used-car prices also can reduce new-car prices because buyers won’t get as much money when they trade cars in, Lyman said.
In two or three years, the price of popular used SUVs could fall too, because they’re now being leased in large numbers, Lyman said. 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, Md., said 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 said. “Most of the dealers in our group are looking to buy used cars.”