Automakers return to leasing

Leasing is making a comeback.

The same factors pushing up today's used-car values are supporting higher estimated residual values for vehicles being leased. Higher residual values mean customers need to borrow less, lowering monthly payments and making leasing more attractive.

Not only that, several automakers are currently offering lease deals, Toyota, Honda and Hyundai to an especially unusual extent.

"I'm sure the first quarter (lease) numbers will show an increase," said Tom Webb, chief economist for Manheim Consulting in Atlanta.

Back in the game

Automakers realize they need to get back into leasing, said Matt Traylen, chief economist at Automotive Lease Guide,which sets suggested leasing residual values for the auto industry.

Leasing is "driven on two things: You've got to have the product and you've got to have the residual values," Traylen said. Lack of new product, for instance, is inhibiting Chrysler from getting back into leasing, although it does have some success leasing the Town & Country minivan, he said.

Chrysler was an exception to the rule. In the first quarter of 2010, leasing accounted for about 25 percent of transactions financed through dealerships versus 75 percent loans, according to the Power Information Network.

That was up from 20 percent leasing and 80 percent loans in the year-ago quarter. Leasing hit a recent low of about 15 percent penetration in the third quarter of 2009. Those figures don't take cash transactions into account. Nor does PIN typically publish detailed results broken out by manufacturer.

Supply and demand

Fundamentally, used-vehicle values are up because the supply of late-model used vehicles is down. People are keeping their cars longer, which is why new-vehicle sales dropped so much in 2008 and 2009. U.S. light-vehicle sales fell by about 2.9 million units from 2007 to 2008, and another 2.8 million from 2008 to 2009.

While the number of trade-ins fell, automakers also slammed the brakes on new-vehicle production. So far, they are being conservative about adding back production.

Taken together, those factors make off-lease cars that are two or three years old more scarce and therefore more valuable. And because projected residual values are based on recent history, that's raising residuals on vehicles that will come back from leases two or three years from now.

For instance, Ford said recently that the projected resale value of 2010 Ford, Lincoln and Mercury vehicles after 36 months in service increased by an average of $1,310 per vehicle compared with 2009 models.

If the entire difference were passed along to the consumer, that would be about $36 per month off the monthly payment - without adding any extraordinary incentives, such as artificially inflating the residual value or buying down the customer's interest rate, which are the usual means of adding incentives to leases.

Inflating residual values backfired badly on auto lenders in 2008, when gasoline prices spiked and used-vehicle values fell, especially for pickups and SUVs. Automakers and their finance companies make it a practice to set aside reserves to cover losses on residuals, but if the losses are greater than expected, that can generate bigger problems.

Happier endings

The Detroit 3 posted billions in losses on residuals in 2008, but used-vehicle values since then have recovered. According to Adesa Auctions, the average wholesale used vehicle in March was $10,549, up about 7 percent from March 2009.

Meanwhile, Ford Credit reported that the average auction value for 36-month lease returns was $14,280 for the fourth quarter of 2009, an improvement of $3,260 versus the year-ago quarter.

Ford Credit isn't alone. For the last six months of 2009, sales proceeds from remarketing off-lease vehicles for GMAC Financial Services topped 100 percent of Automotive Lease Guide's projected residual values. That hadn't happened for almost two years, according to GMAC's fourth-quarter earnings report.

George Pipas, U.S. sales analyst for Ford, says that higher resale values are a big customer benefit. "Improving resale values not only improves the cost of doing business, it's also great for the customer, when they're coming back to the market and they're not disappointed what their car is worth," he says. "It's a real owner loyalty tool if that's not a negative experience."

You can reach Jim Henry at