Drop in incentives, resale values hits leases; some models hard to sell
The car leasing bubble has burst as auto companies withdraw leasing incentives and resale values of gas-guzzlers drop quickly.
That has prompted car dealers to turn from lease incentives to sales incentives. And it leaves their lots occupied by vehicles loaded with expensive options that can be difficult to move. As manufacturers were being hit with big losses at lease end, residual values - resale amount at the end of the lease - were adjusted downward, said Steve Demers, general manager of Cueter Chrysler Jeep Dodge in Ypsilanti. SUVs and trucks were hit first.
"Residuals had been somewhat overinflated to generate new sales," he said. "Now, residual values have been adjusted to be more in line with their true value." So the cost of leasing has increased an average $100 to $150 a month, Demers said. "They were ridiculously low. You could lease a $30,000 SUV for $199. Now, it's closer to $350."
The shakeout has seen the lease-to-sale ratio at Cueter move from 80 percent leases in 2007 to just 20 percent in August, Demers said. Chrysler Financial, which had handled 99 percent of all leases, moved out of leasing in early August, Demers said.
It's not that manufacturers have eliminated leasing. It's that they've removed the incentives, making leasing much more expensive, said Russ Baltazar, general manager at Jim Bradley Pontiac-Buick-GMC.
A $250 lease from three months ago would cost $425 today, he said. Until the summer, about 60 percent of activity at Jim Bradley was through leases. That dropped to less than 10 percent last month, Baltazar said.
Leasing won't disappear. "You can still lease a car (through other banks)," said Angela Butler, lease coordinator for Naylor Chrysler Jeep in Ann Arbor. "It's just not as attractive." While leases have accounted for 70 to 80 percent of activity at Naylor, that is shifting to retail, she said.
Automotive Lease Guide, a Santa Barbara, Calif., firm that forecasts resale values for the car industry, decreased residual values for most SUVs and trucks an average of 8 percentage points over the year, while values on compact cars with high fuel economy increased 5 percentage points.
For example, if a $15,000 compact car had a 36-month residual value of 45 percent a year ago and is now expected to retain 50 percent of its value after three years, monthly lease payments would be about $20 lower, all else being equal. For a full-size SUV with a $42,000 sticker price and an 8.5 percentage point decline in its residual value, monthly lease payments would rise about $100, all else being equal.
Carmakers are shifting incentives from leases to sales, including low-financing rates and rebates, depending on the vehicle. So there is a silver lining, Demers said.
"You can buy retail for a similar price of a lease. There are rebates and incentives to offset the decline in leasing." And consumers don't have to worry about mileage ceilings and wear and tear when they buy.
But there are challenges on the lot, Demers said. Some vehicles were packaged for lease with expensive options such as leather, sunroof, DVDs and navigation systems.
"There were leases where it was less expensive to go with leather than with cloth," Demers said. "But to buy, they have a more expensive sticker price."
With stressed consumers looking for value, that can make for a hard sell. "We're stocked," Demers said.
"We have a full compliment of inventory to run us to the end of the year." SUVs were popular for leases, said Jim Bradley's Baltazar, and they are the vehicles most affected by the shift. "We either have to wait for GM to incentivize them or wait for buyers who aren't affected by rising fuels costs," he said.
However, not all dealerships are feeling the same pain. Leasing has held steady and is even expected to increase, said George Davis, general manager of Howard Cooper Imports, which sells Honda, Volkswagen, Audi and Porsche. The resale value of leased imports has remained high, and leasing continues to account for 40 to 75 percent of business across the dealership, depending on incentive programs, Davis said.
"Leasing is as strong as it's ever been. ... Resale value is key." At the same time, as the cost of leasing American-made cars rises, Davis said, he expects consumers to take another look at imports as the price gap closes.
Davis said Howard Cooper likely will see a surge in leases within 90 days. "I don't see anywhere how this could not be good news for us," he said.
And there's another silver lining, at least for consumers. The demand for SUV leases on the secondary market has increased 24 percent this year, according to John Sternal, spokesman for Leasetrader.com, which matches customers who want to assume a Car Lease with customers looking to get out of one.
Some people aren't bothered by rising gas prices and like the idea of taking over an SUV lease that has no down payment, he said.
They aren't locked into a two- or three-year lease, either. Secondary leases run six to 30 months, but average 18 months, Sternal said. Buyers can also negotiate the cost of a lease with the seller, sometimes shaving off $200 a month.
This story posted by LeaseTrader.com, the automotive service company that lets people transfer out of their Car Leases early. If you're looking to swap a lease or transfer out of your car lease, please visit www.leasetrader.com