SANTA MONICA, Calif.—Is leasing’s growing appeal actually hurting leasing’s future?
That’s possible, according to the latest data from Edmunds.com, which shows residual values on leased cars are falling, which in turn will likely drive up the price of leases, the company is forecasting.
“Leasing has been a major force supporting new car sales over the past three years. But as the used vehicle market begins to see a higher number of lease returns, residual values are beginning to drop, which will likely mean higher lease payments for many new car lessees,” Jessica Caldwell, senior analyst, told CUToday.info.
Leasing’s appeal has grown significantly in the last three years due to the climb in the average price of cars, now over $30,000, with much of that due to vehicles being loaded with new technology. As prices have risen, consumers are turning to leasing as a way to keep the monthly payment affordable. Leasing now represents about 33% of all new car sales.
Quality Returns
The quality of used cars coming back off lease is also a concern for residual values, added Caldwell.
“A lot of high-quality used cars are now available, which does not bode well for residual values,” she said.
Caldwell said that if the price of leasing increases to where the difference between the cost of leasing and financing a new car is not that significant, more people will choose to own their car.
“Automakers know that, all things being equal, consumers prefer the ownership experience,” said Caldwell. “More people who are leasing customers today will go back to financing.”
Jessica Caldwell, Edmunds.com
But Caldwell said that automakers are “scrambling” to find ways to keep the price of leasing from rising.
“I think you will see automakers do different things to help residual values,” said Caldwell. “They will likely lower the mileage limits on a lease to keep payments down and the customer happy. We are seeing luxury car companies, like BMW, heavily content their vehicles so when they come back off lease these cars still have the amenities people want. We’ve also seen a push toward used leasing. Toyota is getting into that. It’s another option and it also gives people who are turning in their leased car the opportunity to lease that same car again.”
As for the rest of the car market, low gas prices are turning consumers away from small and compact cars, whose used values are slumping and where the new sticker price is becoming a bargain, noted Caldwell. CUToday.info has previously reported that small car used values are falling at a faster pace than the values of trucks and SUVs.
“It is now an SUV, crossover and truck market,” said Caldwell. “There is not a lot of demand for smaller vehicles, especially compacts.”
Small Car Prices Suffering
Prices of used small cars continue to drop, even as overall used car prices soar, noted Caldwell. Edmunds’ Q2 2016 Used Vehicle Market Report indicates that the best values for used car shoppers can be found in the subcompact category, where prices are down an average of 6.3% year over year. Compact cars are down 2% year over and midsize cars are down 1.%.
“Used car prices are up 2.7% year over year to an all-time high of $19,367,” said Caldwell, attributing the increase to the average age of used cars getting lower as consumers who have held ono their used car during the recession are buying late-model vehicles.
“And used car shoppers are generally buying larger, and therefore more expensive used cars,” she said.
Caldwell added that the appeal of electric vehicles continues to fall in this period of low gas prices, and that the used EV market is suffering the most.
Some used car segments that have seen their prices grow significantly year over year: Used compact trucks are up more than 10% year over year; large traditional SUVs (+8.9%) and premium luxury SUVs (+7.7%).