Falling residuals threaten leasing
Overall, lease penetration is expected to hold flat this year, although the number of leases could rise in 2013, ALG says.
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After two years of nearly across-the-board increases, ALG has trimmed predicted residual values for most of the top-selling U.S. auto brands this year.
Lower residuals are a concern for dealerships because they represent a headwind to growth in leasing. Lower residuals mean higher monthly payments. In leasing, the customer in effect borrows the difference between the upfront cost of the vehicle and the predicted residual value.
Indeed, Thomas King, a senior director for J.D. Power and Associates, said that he expects lease penetration to hold flat overall this year, although he says the number of leases could rise in 2013.
Eric Lyman, director of residual solutions for ALG, said, "We made some changes" to the economic models ALG uses to make its forecasts. He said the slow economy is the biggest reason for the cuts. He also said that used-car values are predicted to decline from recent highs.
'Really slow' recovery
"It's mainly that the economic recovery is slower than anticipated. There's recovery, but it's really slow," Lyman said.
ALG, of Santa Barbara, Calif., produces a widely used industry guide to predicted residual values.
For example, ALG cut its predicted values for new vehicles 36 months after purchase for Ford, Chevrolet, Toyota, Honda and Nissan brands. The size of the reductions ranged from 1.2 percent of sticker prices for Ford to 3.2 percent of sticker prices for Nissan.
ALG also trimmed residual values this year for luxury brands Acura, Audi, BMW, Lexus and Mercedes-Benz.
The cuts came in ALG Guides' forecasts through August of this year, vs. the same period in 2011.
Among the seven top-selling brands in the U.S. market, Hyundai and Kia are exceptions to the rule because their residuals increased. But even Hyundai and Kia got smaller increases in 2012 than they did in 2011.
Lyman said the outlook for leasing is still much improved compared with what it was during the last recession, when leasing all but stopped cold. But he said some positive factors are losing steam.
"We have seen a little bit of softening in used values. They're still very strong by historical levels. But they have kind of sustained themselves for the last two, two-and-a-half, years beyond what we expected, sort of defying gravity," he said.
He said it's important to note that predicted residual values are based on what ALG thinks used-car values will be at the end of a lease, not what they are today. Having said that, today's used-car values have begun to subside.
Used prices ease
Tom Kontos, executive vice president of customer strategies and analytics for auction firm ADESA Inc., said that in May, the latest available month, the average wholesale used-vehicle price was $10,271, down 1.8 percent from a year ago.
That was the third such decline out of five months so far this year. In a written report last month, Kontos said, "Used vehicle prices have probably seen their cyclical, as well as seasonal, peaks."
Leases have grown in absolute numbers as U.S. light-vehicle volume has grown. However, overall industry lease penetration has declined a bit this year, after bottoming out in 2009 and growing in 2010 and 2011. Experian Automotive said industrywide lease penetration in the first quarter of 2012 was 24 percent, down from 25 percent a year earlier.
ALG's Lyman said that compared with recent history, automakers have been sparing in their use of lease incentives.
"We're seeing a lot more discipline, a lot more sophistication on the part of the stakeholders. They are more sophisticated, more cognizant of the drivers of residual values," he said. Incentives on new vehicles drive down the price of used vehicles.
J.D. Power's King said that he expects lease penetration to stay flat overall this year, outside of some monthly ups and downs. He expects an uptick in leasing in 2013.
King pointed to the ongoing recovery in the subprime market this year, as well as growth in long-term loans of 72 months or more. Those customers aren't likely to qualify for the best lease deals, he said.
Fewer leases maturing
Meanwhile, returning lease customers continue to be scarce by historical standards this year, reflecting the falloff in leasing a few years ago, and that's a big factor, King said.
"One of the big variables is the recovery in lease maturities," he said. "When you've got a lease maturing, as a customer you've got to do something. Now without that, you don't really have the same motivation; it's a discretionary thing. There will be more lease customers coming back in 2013. That will provide a natural lift in leasing."
You can reach Jim Henry at email@example.com.