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Volume double 2011 rate, leasing could rise even higher

September 9, 2016
Consumers are leasing nearly one of every three new cars manufactured in the U.S. — record levels that are keeping industry sales at all-time highs.
Leasing accounted for more than 31 percent of new-car transactions in the first half of 2016, according to the latest available data from Experian Automotive. Once reserved mainly for luxury vehicles, leasing of mainstream vehicles has taken off.
Car-shopping website Edmunds.com said 2.2 million vehicles were leased in the first half of 2016, double the volume of the same period in 2011 and up 13 percent from the first half of 2015. Edmunds.com predicts consumers will lease 4.5 million vehicles this year, led by growth from millennials and those 75 and older.
Steven Szakaly, chief economist for the National Automobile Dealers Association, believes there is plenty of room for growth. "I think this could easily be 40 percent of the market," he said.
The reason is simple: monthly payments are cheaper. Lease payments on average are 23 percent less than monthly auto loan payments, according to Edmunds.com.
Jessica Caldwell, Edmunds.com senior analyst, said leases are attractive to young people because it’s a lot like a cellphone plan: payments are relatively low and they know in two years they can get a new model with the latest features.
"I think it (leasing) has propensity to go higher because consumers really like it," she said.
Monthly lease payments are based on residual values, or the predicted value of cars at the end of leases. When cars retain a larger proportion of their value at the back-end of leases, dealers can offer lower monthly payments. Leases typically run for three years or less and require a down payment. Drivers must stay within certain mileage limits or face fees.
Patrick Min, senior industry analyst for ALG, a TrueCar company, said automakers have taken advantage of elevated residual values created by a depleted supply of used cars coming out of the economic recession.
"We’ve seen automakers really kind of leverage heightened residuals and look to leasing as a new sales outlet," Min said, adding carmakers are using leasing to mitigate price increases on cars.
Average loan amounts for new vehicles hit a record $30,032 in the first quarter, while the finance term also hit a new record of 68 months, Experian said. The average monthly payment for a new-car loan reached a new record of $503 in the first quarter.
A low monthly payment convinced Shari Stein of Michigan to lease a 2016 Chevrolet Trax LS subcompact crossover for her daughter, Hannah, 17.
"This was the best option for us without putting a lot of money down," said Stein, who wanted a safe and reliable car for the high school senior. "When we compared it to the used cars, this is a much better deal."
Stein wouldn’t say how much they are paying monthly for the two-year, 10,000-mile-a-year lease. The selling dealership is advertising a lease special for the Trax LS for as low as $77 a month with $999 down.
"Everybody wants a lower payment," said dealership sales consultant Brittany Danna, who said 95 percent of her business is leases.
Owner Greg Brown said the dealership retains a high percentage of lease customers and can sell the returned vehicles as certified pre-owned vehicles. Those cars usually are a bit more expensive, but have gone through extensive evaluations and include warranties.
While leasing is aiding sales now, some in the industry are worried a glut of leased cars will hit the used-car market and drive prices downward. "They’ll swamp the market, they’ll force residuals down," said Sean McAlinden, chief economist for the Center for Automotive Research, during an automotive conference in August.
And that, in turn, will reduce leasing’s popularity because monthly payments will go up, making it less attractive.
Edmunds.com said used-vehicle values already are starting to soften because of increasing lease returns and the relative unpopularity of cars. Tom Webb, chief economist for Cox Automotive Inc., said 2.55 million vehicles came off lease last year. That figure is expected to grow to 3.1 million this year and to more than 4 million by 2018. He thinks new leasing has likely peaked.
With the high numbers of vehicles coming off lease, automakers may have to take additional measures to sell them and to increase car values.
Luxury carmakers may increase their certified pre-owned sales and choose to lease used cars to keep residual values up, Szakaly said. Lexus, for example, already is offering two- to five-year leases on certified pre-owned vehicles through Lexus Financial Services.
General Motors Co. also has been reducing sales to rental car fleets to boost residual values. It’s also putting some used vehicles into its Express Drive program, allowing Lyft drivers to rent vehicles on a short-term basis. The Detroit automaker earlier this year also launched a "factory pre-owned collection" of used vehicles — former company cars, leases and rental vehicles. GM has the cars available to view online and is selling them through dealers instead of sending cars to auction.
 
"One of the reasons that we’re so focused on building Express Drive, reducing daily rental and everything else is because we know that lease returns are going to increase, the used car market is going to normalize," GM chief financial officer Chuck Stevens said this summer in a call with analysts. "And we’re taking proactive actions to improve our residuals, improve our used-car values."
 
 

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