Auto Industry Could ‘Get Scary’ if Coming Off-Lease Supply Isn’t Managed

The party can’t last forever, Joseph Derkos, director, consulting & analytics, Power Information Network (PIN) said at the Standard & Poor’s Auto Industry Hot Topics conference earlier this month.

Derkos was referring to the continued growth and recovery the auto industry has experienced since the recession. The seasonally adjusted annual rate (SAAR) has grown to record numbers, and 2015 is poised to end at 17.2 million new vehicles sold, up from 16.4 million in 2014. However, the rate of growth is expected to slow in 2016, with only 17.5 million new vehicles predicted in 2016.

On the finance side new-vehicle sales are forecast to rise, but longer loans are “ubiquitous” and lease maturities are growing significantly, according to PIN, a division of J.D. Power.

As average transaction prices on vehicles climb higher, consumers have increasingly opted for longer-term auto loans and leasing, Derkos said. Auto loans with terms of 72 months or longer have risen to 34% year to date, up from 23% in 2010, according to information provided by PIN. The percentage of cars leased so far this year has also grown to 28% of cars sold, from 19% in 2010.

Leasing, in fact, has become so popular post-recession, that 3.1 million leases are expected to mature in 2016, the highest volume since 2.4 million cars came off lease in 2010, according to PIN.

That rising popularity of leasing will result in steadily increasing influx to the used supply, according to Jonathan Banks, vice president of vehicle analysis and analytics at NADA Used Car Guide, who also presented at the conference.

The pool of off-lease vehicles in particular is projected to grow by 58% by 2017 versus 2014. The off-lease growth will be highest in non-luxury segments as well, Banks said, with the number of units for large pickups, compact utility vehicles, and compact cars projected to be significantly higher in 2017 versus 2014.

Conditions do have the potential to “get scary beyond 2016,” Banks warned.

“If the industry is not ready to take in that volume, it could run into trouble,” he said. “And if gas prices remain low.”