A rising tide
Today's average predicted residual value for a 36-month lease is 42.2 percent of suggested retail, according to the November-December ALG Residual Value Guidebook, a widely used industry benchmark. A year ago, it was 39.7 percent. On a $25,000 sticker price, that represents an increase of about $618.
Residuals for some brands and product segments have rebounded a lot more from the credit crisis, as well as from a drop in used-vehicle values when sales turned down in 2008.
For 2010 models vs. 2009 models, Ford's average residuals are up about 4 percentage points, to almost 45 percent for 36 months. For 2011 models vs. 2010, Ford trucks are up 5.8 percentage points; Chevy trucks, up 5.3 percentage points, ALG said. “The domestics are up, year over year,” Matt Traylen, ALG's chief economist, said in a phone interview. “That's partly a rising tide. Everybody's doing better.”
In contrast, the average residual for the Toyota brand is up only about 1 percentage point from a year ago, to about 45 percent for 36 months. However, Toyota residuals were higher to begin with.
Perfect (positive) storm
In leasing, the customer in effect borrows the difference between the upfront cost of the vehicle and the predicted residual value at the end of the lease. If the residual is $618 higher, for instance, the customer has to borrow that much less -- if the lender chooses to pass along the entire increase.
Several factors support higher predicted residual values for cars and trucks being leased now:
• Higher auction prices for used vehicles today. To cite an extreme example, Ford says the average resale value for the redesigned 2010 Ford Taurus has jumped 39 percent vs. the 2009 model. That's an increase of $7,100 for a 1-year-old unit, according to a press release Ford issued Aug. 16. That works out to a value of about $25,305 for the new model. ALG said that on a 36-month lease, the new Taurus residual is 40.2 percent in its latest guide, vs. 32.2 percent a year earlier.
• A predictable shortage of newer used vehicles in the future, which implies even higher values going forward. That echoes the drop in new-vehicle sales in 2008 and 2009. U.S. light-vehicle sales fell about 2.9 million units in 2008, and another 2.8 million in 2009. That represents fewer units going into used-car sales down the line.
Better borrowing power for auto lenders themselves. The credit crisis in late 2008 and early 2009 drove a lot of auto lenders out of leasing. Now that auto lenders can raise money again, for instance by selling asset-backed securities, there's more money available to create new leases.
“Leasing is a lot more available,” said Kevin Bartolo, general manager for Scarsdale Ford in Scarsdale, N.Y. He said that to get back into leasing, Ford Motor Credit Co. has taken the approach of adding leases for a few particular models at a time.
“When they first started doing leasing again, they started with the Fusion, the Flex and the Edge. Then they added the Focus and the F series, and now they're going to be leasing Explorers again,” he said.
According to the Power Information Network, leasing made up about 17.9 percent of U.S. retail volume for all brands in the third quarter through Aug. 15, after falling from 22.1 percent in the first quarter of 2009 to a recent low of 10.2 percent in the third quarter of 2009.
Cash for clunkers exaggerated the drop in that particular quarter, but the average lease penetration for 2009 was under 15 percent. Not only that, since sales were falling, leasing was a smaller percent of a smaller number.
Bartolo said Ford Credit seems to be putting the improvement in residuals toward making leasing available again, as opposed to lowering monthly payments with incentives like it used to do.
Traylen of ALG said Ford Credit and Ally Financial are both being “disciplined” with regard to pricing and incentives. Incentives on new vehicles typically hurt ALG's predicted residuals for those vehicles. Ford Credit doesn't break out its lease penetration. Ally, which serves both General Motors Co. and Chrysler Group dealers, reported leases made up 10 percent of its U.S. originations in the second quarter, up from almost none in the year-earlier quarter.
Bartolo of Scarsdale Ford said leasing makes vehicles more affordable, even without a big incentive. “When leasing went away, the person who leased an Explorer for $350 to $400 a month was faced with $800 a month (for a purchase) because there was no leasing. It's a $38,000 vehicle; the payments are pretty high,” Bartolo said.
However, he said the salad days for leasing are in the past. “People used to come in and get (incentivized payments of) $400 a month, no money down,” he said. “That's not an option any more.”