Lease returns to power used-car sales

U.S. used-vehicle sales will rise in 2018 on swelling off-lease returns, while new-vehicle volume will decline modestly, forecasters say.

Because dealerships typically generate bigger margins selling used vehicles than new ones, U.S. franchised dealers will be better positioned for the change than the manufacturers and suppliers of new vehicles. The most challenging environment in 2018 may be for independent dealers specializing in older used vehicles, which are in relatively short supply.

The conditions favoring used-vehicle sales — more volume coming off retail leases, falling prices and a richer mix of the crossovers and SUVs most in demand — make them more competitive against new vehicles with higher price tags.

"In 2018, we're going to see used vehicles become more competitive with new," said Jonathan Smoke, chief economist for Cox Automotive.

Interest rates have risen about 100 basis points in the past year, although auto loans to consumers with excellent credit have not risen as much, at least so far. But Smoke expects interest rates to rise about as much in 2018, driving auto loan rates higher. And he expects auto lenders to continue raising loan rates and charging borrowers with nonprime and subprime credit scores significantly higher rates than prime and superprime customers.

"Borrowers who would have qualified for a new loan or lease a few years ago are now more likely to buy used," Smoke said. "As rates go higher, we expect this trend to continue."

Through November, U.S. sales of new light vehicles are 1.4 percent below the year-earlier pace, which ended 2016 with a record 17.54 million units.

The National Automobile Dealers Association and Cox Automotive estimate U.S. sales of new light vehicles in 2017 will be 17.1 million, down just less than 3 percent from 2016. In contrast, ALG forecasts 2017 sales at 17.27 million, based on expectations of a strong December marketing push by automakers.

In 2018, NADA and Cox forecast new-vehicle sales of 16.7 million while ALG expects a stronger 17.08 million. Smoke says extensive lease pull-ahead deals, which many automakers have offered since this autumn, have pulled some 2018 sales into 2017, while the tax overhaul could boost sales by 100,000 units.

On the used-vehicle side, NADA forecasts volume will top 40 million in 2018. It expects the franchised new-car dealers it represents to retail 15.3 million used vehicles in 2018, up from an estimated 15.1 million in 2017.

Eric Lyman, chief industry analyst at ALG, said growth will be heaviest in 1- to 5-year-old vehicles. Within that age category, ALG expects 11.7 million sales in 2018, up nearly 9 percent from 10.8 million this year.

Vehicles coming off leases are the biggest contributor to that surge. Cox Automotive calculates off-lease returns at 3.6 million in 2017, up 8.1 percent from 2016. In 2018, that will rise another 7.4 percent to 3.9 million.

Fewer vehicles returning to the market from daily rental fleets may offset some of the off-lease growth, Lyman said. "We expect a further softening in all used-vehicle values in 2018," he said. "Not so much on cars because they're already relatively low, but more on full-size pickups and SUVs."

The 2018 used-vehicle marketplace will be more challenging to independents than franchised dealers, Smoke said.

Supplies of the 5- to 8-year-old vehicles that independents specialize in are tighter than late model vehicles, he said. That age span includes the Great Recession years when automakers' production and sales tumbled. Independents also pay more for credit and their customers are often credit challenged, Smoke said.

"The irony for independent dealers is that they face credit access problems and pricing pressure on a limited supply of vehicles," Smoke said. "They have to pay more for stock but their customers can't pay more."