If your current vehicle is starting to become expensive due to age and mileage and you’ve begun to think about buying a new pre-owned vehicle, you’re in luck. It’s a buyer’s market out there due to a trend that started in 2016 and shows no signs of abating just yet. The reason behind the glut of used vehicles and an accompanying dip in prices is that consumers are returning their leased cars to dealerships and signing new leases.
The off-lease supply of vehicles has nearly doubled since 2012 and is expected to rise by another 25 percent over the next two years. The reason for this upward trend in the supply of used vehicles as the most leases last an average of 36 months. When the lease term ends, most consumers trade up for a new vehicle and the off-lease vehicle is checked, cleaned up and goes onto the dealer’s lot for resale. The auto industry is bracing for a record 3.6 million vehicles to come off lease in 2017, glutting the market even further, while that figure is expected to increase to more than four million in 2018.
Why Leasing Has Become Popular
The number of new vehicles leased instead of purchased outright by consumers reached a record 4.4 million in 2016. That figure is triple the number recorded in 2009 when auto sales were at their lowest due to the recession. When the economy started to turn around, sales of new and used cars increased for seven consecutive years, a phenomenon that has not been seen since the 1920s.
Leasing has become popular for one reason: the price of monthly payments. Most consumers base their ability to get a vehicle based on how their loan will fit into their monthly budget. In the wake of the recession, most auto manufacturers made it much easier for consumers to lease a vehicle. Let’s say your budget allows for a $600 monthly car payment. Buying a vehicle outright may get you a $30,000 Ford sedan, however, if you lease a vehicle, you may be able to get a $40,000 BMW for $560. In other words, as long as you are approved for the monthly payments, most consumers believe it makes sense to get a nicer vehicle with more bells and whistles and save money in the process.
Lease payments are predicated on the residual value of the chosen vehicle. If that value starts to decline, then lease payments will increase. If leases become more expensive, then that option will become less attractive for consumers. In 2016, leasing accounted for about 25 percent of total vehicle sales.
Murky Sales Picture Ahead
Both Edmunds and Autotrader believe that leasing contracts will decline in 2017. Autotrader also believes that sales of new cars will also drop from 2016’s record 17.5 million units, a statistic that many dealers indicate has begun to bear out during the first several months of 2017. Analysts also believe that many buyers are likely to cross-shop new vehicles against the glut of late-model used cars coming off leases, some of which will become certified pre-owned vehicles that have an average price that is about $1,500 higher than similar cars.
Prices Already Declining
The auto industry is already seeing evidence of a decline in prices across the board. Ford Motor Company has already adjusted its profit forecast for its financial division downward by $300 million due to sluggish sales in the first quarter of 2017. In the second half of 2016, used vehicle prices declined each month, according to the National Automobile Dealers Association. If prices continue to decline, the situation may lead to losses across the auto industry.
Morgan Stanley paints an even bigger reduction in used vehicle prices. A recent report indicates that prices could fall by as much as 50 percent over the next four to five years. Not only is off-lease inventory responsible, so are extended credit terms and an increase in sub-prime financing that often means borrowers are technically underwater when they trade in their vehicles. Another unexpected factor is the shift in the car rental market where firms are facing stagnant growth, weak pricing and too many cars going unused on the rental lot. These vehicles, too, will eventually go to auction, impacting the market even more.
What If You Want an Older Used Vehicle?
Certified pre-owned cars generally apply to vehicles that are six years old or less. For the next few months, that extends back to the model year 2011, however, you may have difficulty finding an older vehicle. Automakers simply didn’t manufacture as many units from 2009 to 2011, the height of the recession for the car industry, so you may have difficulty finding that less expensive vehicle that still has more safety features than the 10- or 15-year-old car you may now own. However, if even only a portion of the price decreases in the used market occur, you may not have to worry. Keep a close eye on the pre-owned market. You may soon be able to buy more car for your money.