My wife is a huge Ford Mustang fan. Me? I’m more inclined to go for an Explorer or other SUV when it’s time to trade in my current vehicle.
Since I rack up a lot of miles behind the wheel, leasing isn’t an option for me. But as the Wall Street Journal noted recently, leasing is exactly what many of today’s vehicle shoppers are doing.
Indeed, almost a third of current buyers are leasing rather than purchasing cars with cash or auto loans. That’s the highest leasing market share ever, and roughly four times the level we saw in the depths of the Great Recession.
I’ll leave the debate over whether it’s financially wiser to lease vs. buy for another time. For investors like you, the real issue is what the leasing boom means to auto makers like Ford (F), General Motors (GM), Fiat Chrysler Automobiles (FCAU) and the foreign producers who sell into our market.
|Auto leasing is booming — but what does it mean for the car industry in the long run?|
It has clearly helped to goose sales in the short term. That’s because leases typically feature lower payments than car loans, making ownership more affordable to a wider universe of consumers.
But in the long term, I think it’s going to be a profit killer. That’s because a massive glut of off-lease used cars is going to flood the market in the next couple of years.
Get this: The used-car auction company Manheim predicts that 3.1 million cars and trucks will reach the end of their lease terms in 2016. That’s a huge 20% rise from 2015, but it’s just the start of a multi-year surge. Another 3.6 million expired-lease vehicles will hit the market in 2017, followed by 4 million in 2018.
All of those vehicles will subsequently hit the nation’s used car lots. They’ll have relatively low miles on them, and they’ll look almost new. That means they’re going to offer stiff competition to the brand new cars and trucks coming off production lines. As a result, carmakers will have to pile on the incentives and cut prices to compete — a one-two punch in the profit gut.
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Heck, the process may already be underway. Manheim, the prominent auto auctioneers, found the average used car sold at a wholesale price of $12,300 in February, down 1.5% from a year earlier. That was the second straight annual decline, with sedans and compact cars getting whacked particularly hard.
And while it’s true that February new car sales were relatively healthy, you have to look behind the headlines. When you do, you find that manufacturers had to jack incentives up 11% from a year ago to move metal, per TrueCar.
If you throw in the credit-market turn I’ve been discussing for a while now, and you can see why I’m far from enthused about auto stocks. They’ve bounced along with the broader market … and that’s giving you a great opportunity to head for the exit ramp!
Until next time,
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