Vehicle leasing has had a somewhat turbulent history in the United States. Automakers and lenders promoted it in the mid-1990s as an alternative to purchasing, but inflated residual values and lower used vehicle prices resulted in monumental losses for manufacturers and financial institutions.
Leasing is again on the rise and has heavily contributed to the post–Great Recession recovery of the new vehicle market. While lease prices have grown moderately over the past few years, higher subvention has kept monthly payments in check. To keep the momentum going as new sales growth slows and current leases mature, automotive professionals must learn from leasing mistakes of the past and prevent history from repeating itself.
An expanding pool of used vehicle supply, spearheaded by off-lease growth, will gradually compress used vehicle prices as time passes. The supply effect on used prices will be most pronounced on subcompact cars, compact cars, compact utilities and midsize utilities — both non-luxury and luxury. Utility and truck prices will be cushioned somewhat from supply’s blow by low gas prices and stronger consumer demand, while car segments will enjoy no such buffer.
Should used vehicle prices fall by an average of 2.5% per year over the next 3 years — which is a conservative estimate given the expected rise in supply — prices would end 2018 7.3% below 2015 levels. Under this assumption, prices would be at their lowest point since 2010.
The outlook for lower used prices means that retained value will also move lower and, by extension, so too should residual values. Complicating matters, an accelerated rate of depreciation, combined with loan terms that have increased from an average of 63 months in 2010 to more than 67 months CYTD, will increase the time it takes for consumers to accrue positive equity. This will affect a consumer’s ability to meet down payment requirements on both new vehicle loans and leases. The percentage of new vehicle transactions with a trade-in where the trade payoff exceeds the trade-in actual cash value has grown to 29% CYTD from 27% in 2014 (negative equity share stood at 24% in 2012).
Considering these points, important decisions must be made regarding lease penetration, subvention and residual value planning moving forward.
For more details and data regarding leasing trends, download the new NADA Used Car Guide white paper, “New Vehicle Leasing: Facts, Figures and Future Considerations.”