Off the Lot: 2025 predictions on performance, leasing, EVs

As the dog days of the sweltering summer heat begin fading into the rearview mirror and the fall color palate appears in the windshield, it seems like a good time to review earlier expectations of the automotive industry and how to prepare for the rest of the year. My initial “Off the Lot” projections in January have held up as the year has progressed. Projections on unemployment I predicted that used-vehicle prices would fall as new inventory production normalized and manufacturer incentives picked up. . The Manheim Used Vehicle Value index declined 3.9% year over year in August to 203.9, according to Cox Automotive. I expected unemployment to remain below the 5.7% average since 1948 due to continuing labor shortages and job availability. . Although the market has tightened to 1.1 jobs for every employed person from nearly two jobs, at 4.2%, unemployment is well below the average and indicates most consumers still can pay their bills. . Many markets saw significant wage increases, as projected, for lower-tier essential workers in fast food, delivery and other occupations, adding to purchasing power. Eyeing credit performance There are clouds on the horizon with increasing charge-offs and delinquencies , so the question is: “What’s the next step and where do we go from here?" It’s clear that consumers have largely used the incentive and stimulus funds they banked during the pandemic. Credit card balances are at all-time highs , however incomes continue to rise , driven by increased minimum wages and pressures driven by worker shortages. Lenders are still experiencing the overhang of the losses incurred from 2022 originations and fighting for profitability during periods of higher interest rates. Consider why the performance of 2022 portfolios wasn’t dicey and somewhat out of the norm. . Most owners benefited from equity in their vehicles during the extreme shortages and then, as prices and book values rose, lenders had to maintain their advance rates to obtain business. Now, as valuations are coming back down and normalizing, those customers no longer have equity. . When the vehicle breaks down or they want to trade, there isn’t the equity to allow for a fluid transaction therefore, the customer is more likely to default, especially at the lower end of the credit curve. What's ahead Where to go from here? Lenders, fighting for volume and profitability, must consider carefully how to proceed. . It’s likely that vehicle valuation impacts are not over yet. . Caution in setting loan-to-value (LTV) tolerances, even in the face of lower volumes, may become the best path to survival. Vehicle valuations are significantly driven by availability. . Slower new-car sales in the 2020-2023 period and their high acquisition cost due to the shortages in that period is leading to less availability. . This year is projected, according to a Black Book report from August, to see 15.9 million units sold, with the most optimistic projection year being 2026 at 16.7 million units. . This is still well below the over 17 million units of 2018 and 2019. In the same Black Book report, new inventories are increasing and expected to return to pre-pandemic levels in 2025. . This is likely to lead to higher manufacturer incentives , which negatively impacts used-vehicle values. . As incentives grow, used-vehicle pricing must decline to maintain a value spread between the new and used units. . This is confirmed by manufacturer incentives being at the highest rate since January 2021, driven by the aforementioned rising inventory and negative trade-in equity . The wild card The wild card is leasing. . There was a severe decline in leasing between 2018-2023. . Leasing pulled back from 29.8% of the industry in 2019 to 18% in 2022. . It is forecasted to reach 23% in 2024 and not return to pre-pandemic levels until 2027, according to Black Book. Federal EV tax incentives are limited by income, unless a vehicle is leased , so leasing as a percentage of the overall industry in EVs is likely much higher than internal combustion engine (ICE) vehicles, which are still in demand. . Since leased vehicles are destined to be returned and sold, there may be a continued oversupply of EVs for several years while ICE vehicles may be in shorter supply. The average age of a vehicle in operation in the U. .S. is currently 12.6 years, the highest on record. . This reflects fewer lease returns; vehicles likely to be traded will be much older with higher mileage as they become exhausted and the owners need to replace them. . While they may be trading, these vehicles are not as merchantable as with a normally flowing market of 2- to 4-year-old lease and fleet returns being purchased and then traded at 7 to 8 years old. It's likely that the 2- to 4-year-old ICE vehicles will hold their values better than EVs since a large percentage of EVs are leased and due to the lower supply of ICE cars. Older used vehicles are likely to start coming into the market in larger numbers, driving prices down. . Black Book’s retention index projects the overall market retention percentages on 2- to 6-year-old vehicles to decline through 2025 from historically high, pandemic-era levels. Stabilizing the portfolio So, for lenders looking to stabilize portfolios, maintaining solid discipline on LTV valuations is going to be critical in the next two years as the markets normalize and inventories re-rationalize. However, it’s not a one-size-fits-all solution, and consideration should be given to basing LTVs on the vehicle type and the projected levels of availability and sales in the next two to three years, rather than specifically on the product type, credit tier or other criteria typically relied on. The market is normalizing, but there is a transformation in market demand for electrified and ICE vehicles and, in the short run, this could exacerbate the complexity of setting prudent LTVs for the next two to three years. Bruce Newmark , formally chief adviser of Vroom and United Auto Credit Corp. , is retired and a consultant to the industry. . Newmark has more than 45 years of experience in automotive retail and finance. . Before joining Vroom, Newmark’s tenure spanned leadership roles at Fimanco , Ford Motor Co. , Hankey Automotive Group and Westlake Financial . Auto Finance Summit, the premier industry event for auto lending and leasing, returns Oct. 7-9 at Wynn Las Vegas. . To learn more about the 2024 event and register, visit www. .AutoFinanceSummit.com.

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