NADA Report Suggests Off-Lease Supplies to Boost Used-Car Sales

Philly Murtha | Dec 11, 2015

The next three years could be a “golden time” to buy a used vehicle—especially a late-model compact SUV or compact Car. Consumers interested in purchasing a nearly new certified pre-owned (CPO) vehicle—typically off-lease cars, trucks, and SUVs that are 3 to 4 years old—will have a much larger selection to choose from as those vehicles come off lease in 2016-2018, according to the latest analysis by NADA Used Car Guide, a division of J.D. Power. As a result of this glut of pre-owned vehicles hitting the market, used-vehicle prices may dip to levels not seen since 2010, the report suggests.

Off-lease late-model vehicles have a number of benefits. They often have low mileage and are in good condition, with proper maintenance. Some are from corporate fleets. Many qualify for automaker’s CPO programs and come with the added assurance of a detailed inspection and extra 1-year warranty.

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In a recent white paper, “New-Vehicle Leasing: Facts, Figures and Future Considerations,” the NADA team looked at the history of new-vehicle leasing and discussed how current and near-future lease maturity trends will impact used-vehicle prices and the used-vehicle market. A few highlights are summarized.

History of Leasing and Impact on Used-Vehicle Prices
Leasing grew rapidly during the ‘90s, when automakers were after high sales and revenues, which led to inflated residuals,* lower used-vehicle prices, and losses for automakers, their captive finance companies, and banks. That ended in a major slowdown in leasing during the Great Recession (December 2007-June 2009).

Recently, leasing has taken off again. According to data provided by the Power Information Network® (PIN) from J.D. Power and referenced in the NADA white paper, 3.5 million new vehicles were leased in the United States in 2014—a record—and this year’s lease volume could be even higher. Leasing has surged in the past few years due to an exceptional rise in used-vehicle prices and retained value that has reduced the risk for lenders as well as trimming monthly payments for consumers, the report details.

Until recently, there was a dramatically reduced supply of used vehicles—due to stronger demand for new vehicles, which pushed used-vehicle prices up by more than 18% during the past eight years (from 2007). During those years, retained or residual value of vehicles improved—an average 3-year-old vehicle’s retained value in 2007 was just 45%, but that increased by 9 percentage points to 54.4% during the past seven years.

PIN data reveals that leasing in the U.S. increased by more than 5.5 percentage points, from 13.5% at the end of the Great Recession in 2009 to 19.1% of sales in 2010. It remained fairly flat for the next two years before rising another 3 points in 2013 to 24% of new-vehicle retail sales (not including fleet deliveries). In the past two years, leasing has burgeoned, growing to 27.8% of sales through the first nine months of 2015, which already tops the all-time high for leasing of 27.4% in 1997—18 years ago.

Some key points about leasing are highlighted from the NADA Used Car Guide report that may help used-vehicle buyers better understand the market and to know what segments will be best to consider for the best deals for future purchases:

  • Non-premium segment vehicles, such as midsize cars and compact SUVs, made up 76% of the lease volume in the first 9 months of 2015—up 1 point from 75% in 2014.
  • Through the first 9 months of this year, 28% of compact SUVs, such as the Chevrolet Equinox or Toyota RAV4, have been leased. That’s up 10 percentage points from the lease percentage in 2012. Midsize SUV leases (such as the Hyundai Santa Fe or Ford Edge) have increased to 27% of new-vehicle deals this year—up 6 points from 2012.
  • Premium leasing actually slipped this year to 24%, from 25% in 2014.
  • Nearly half (49%) of niche-market small premium SUVs, such as the Land Rover Range Rover Evoque or BMW X1 models, were leased this year—up from 24% in 2012.
  • Lease share for compact premium cars, such as the Mercedes-Benz CLA or Lexus CT-Series, rose 10 points this year, to 65 from 55% in 2012.
  • Lease prices of new vehicles have increased by about 4%, or $1,500, from 2012 to 2015.
  • Consumers paid an average of $34,316 for leased new vehicles this year, up from an average $32,843 in 2012.

Leasing’s Effect on the Used-Car Market

  • In 2016, large numbers of vehicles that were leased from 2013-2015 will begin to come back onto the used-car market. NADA Used Car Guide predicts a decline in retained values due to a much larger stock of used cars, which could mean better deals for used-vehicle buyers. A few more observations about the off-lease market:
  • PIN projects that lease maturities will grow by 4% (up nearly 95,000 units, to 2.3 million) this year.
  • 2016 will feature a much sharper increase in off-lease vehicles as maturities will rise by 800,000 units—up by 33% from 2015.
  • In 2017, off-lease supplies will grow by an additional 285,000 units, to 3.4 million.
  • In 2018, supplies of off-lease vehicles will rise again significantly—based on new leases taken out this year.
  • During the next two years, the off-lease vehicle segments to hit the used-vehicle market with the greatest number of units will be: compact car; midsize car, compact SUV, and midsize SUV categories.
  • Lease maturities for compact SUVs will more than double (+116%) in 2017.
  • Used midsize SUV (+57%), compact SUV (44%), and midsize car (+23%) off-lease supplies will grow substantially in 2017.

Used Car Prices Will Likely Fall
An expanding inventory of off-lease used vehicles will gradually reduce used-vehicle prices during the next few years. Consumers may be able to find great deals on subcompact and compact cars as well as some compact and midsize SUVs. NADA Used Car Guide’s team also suggests that some used SUV and large pickup prices will be cushioned by lower gasoline prices and strong consumer demand. It’s estimated conservatively that used-vehicle prices could fall by 2.5% per year over the next three years. That would be down 7.3% in 2018 from 2015. This drop would mean that used-vehicle prices would be at their lowest point since 2010.

*Residual value is the automaker’s finance company or bank’s best guess of what a vehicle will be worth at the end of a lease. For a lessee, it’s the amount needed to buy the car if the lessee decides to purchase that vehicle when the lease is over.

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