Industry Should Lease More, Not Less, Manheim Economist Says

NEW ORLEANS – Leasing is rebounding, and some fear an impending glut of returning vehicles that will plunge used-car values sharply and ultimately impact bottom lines for automakers and dealers.

But Tom Webb, chief economist for vehicle-auction specialist Manheim, says U.S.-market lease penetration isn’t too high, it’s too low.

“There are people in retail (purchases) who should be in a lease,” he says during a media briefing at the NADA Convention & Exposition here.

Webb says concerns of an off-lease glut are premature, pointing to 2016 as the year when a flood of returning 2- and 3-year-old vehicles may impact the market, primarily because industry new-car demand could be weaker by then.

About 2.1 million lessees are expected to return to showrooms in 2014. That will escalate to 2.5 million in 2015 and 3 million in 2016, Manheim estimates.

“This year the industry can handle it and handle it well,” Webb says. “Overall, vehicle prices will go down some, but they won’t collapse. There’s a great appetite for dealers to sell (these vehicles) and for their customers to buy.

“The real issue is 2015-2016,” he adds. “And that’s a good thing, because it gives us time to reduce the risk.”

Webb says more new-car buyers should be in leases, because that would benefit both the industry and customer.

For automakers and dealers, leasing represents the best opportunity to sell a new vehicle to the same customer every two or three years. And a growing number of buyers would be better off in a lease than financing a purchase over 72 months or more, Webb contends.

“They’re probably not going to keep the car that long,” he says, noting payments would be lower and residual values better sustained if cars were coming back to the used-vehicle market in a more orderly way off-lease.

Webb believes dealer F&I  managers may have forgotten how to sell leases following the 2009 recession that froze credit and took a huge bite out of that part of the business. He also contends too many dealers have staff-compensation plans that pay more for a retail sale than a lease.

Experian Automotive says leasing accounted for 23.7% of new vehicles sold last year and 28.3% of all purchases made other than by cash. Domestic automakers posted an 18.3% lease penetration, while import brands recorded a 27.8% rate.

Loan terms of 73-84 months accounted for 19.4% of new vehicles financed last year, more than double the 8.8% penetration of 2009, Experian says. The bulk of loan rates remain at 61-72 months, 42.1% in 2013.

“There’s a lot of growth in 84 (-month loans),” notes Melinda Zebritski, senior director for Experian. “But 72 is the new norm.”

Manheim’s Webb also dismisses much of the concern around escalating subprime lending, saying the practice won’t come back to haunt the auto industry unless “aggressive credit clashes with the economic cycle,” a scenario he doesn’t see on the horizon.

“We’ve already paid the price of admission,” he says. “We might as well play it out.”

Experian says subprime buyers purchased 3% of new vehicles last year, up from 1.4% in recessionary 2009, and the company expects that volume to grow. FICO scores for buyers of new cars averaged 715 last year, down from 738 in 2009.

Those leasing often have lower credit scores, Experian notes, because average payments are $100-per-month less than when a vehicle purchase is financed.

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