Summary
When the domestic auto business was booming before the 2008 crash, leasing provided much of the lift, accounting for about one-in-five new vehicle transactions. But in June, leasing sank to its lowest rate in more than a decade: about one in 10 sales.
Analysis
Cutbacks in lease financing have made it tough for domestic auto dealers to compete, and, in the luxury end of the business, almost impossible.
In June leasing accounted for 1.10% of all General Motors transactions, Chrysler dealers came in at 1.90%, with Ford the highest of the Detroit Three at 4.00%
A few years ago, 70% of Cadillac's new vehicle customers choose leasing when the lease was subsidized by the factory.
But in June, leasing sank to its lowest rate in over a decade: about one in ten sales. Some import brands, such as Honda, Nissan and Toyota continue to use leasing heavily, and leasing remains an important factor in the luxury market. Only a boost in resale values for domestic vehicles and an easing of credit will cause an increase in overall lease rate. Meanwhile, dealers try to adjust.
Chrysler Financial and GMAC, formerly two of the nation's top auto leasing companies, stopped writing leases over a year ago. Chase Auto Finance, Wells Fargo and Huntington Bank also stopped leasing last year.
Lenders are struggling to raise funds to lease. There's a cost to leasing that can come back to haunt you if you are not conservative enough up front.
Lenders also suffered horrendous losses when higher fuel prices caused sharp deprecation on many lease vehicles-particularly large cars, trucks and SUVs. In 2008 Ford Motor Credit took a $2.1 billion charge to cover losses from deep drops on lease vehicle values while GMAC set aside more than $1.2 billion to cover lease depreciation for premium brands.
Depressed residual values make leasing uneconomical. For instance, Automotive Lease Guide's projected residual value for a Cadillac CTS last year ranged form 52% to 55% for a 36 month lease, but that has dropped to about 36%. The residual value, the estimated value of the vehicles when the lease expires, is used to calculate monthly payments.
This can make a payment on a similar vehicle go up $100 to $150 more than it was a year ago.
Honda, Toyota and Nissan typically benefited from higher resale values. Domestics, on the other hand, suffer from lower resale values.
With used vehicle values rising this year, and assuming it continues, leasing could rebound within two years. However, we will not see the crazy numbers of the '90s. Leasing could inch up as much as 5 percentage points from the current 10% to 12%.
Jack Sayer consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
