Positive equity car leases should continue in 2023

Maturing leases are likely to continue yielding a profit to consumers buying the vehicles, according to a company that helps consumers finance lease buyouts.

"We see there being equity next year," Lease End COO Zander Cook said in November regarding vehicles whose leases conclude in 2023.

However, he cautioned this hypothesis was contingent on a used-vehicle market with strong prices like today.

A Lease End study of customers from February to October determined the average leased vehicle was worth about $7,000 more than the amount the consumer would pay to buy the vehicle at lease end.

Cox Automotive data tells a similar story. The Cox Automotive Lease Equity Position calculates the equity on a 36-month lease by comparing the difference between the vehicle's lease residual value and its wholesale Manheim Market Report price at maturity.

Before the COVID-19 pandemic, a lease typically had about $1,500 to $2,000 negative equity at its end, and three-fifths of lease vehicles were returned rather than purchased, said Jeremy Robb, Cox Automotive senior director of market insights and business solutions.

But leased vehicles from the 2017 model year that matured in the U.S. COVID-19 ground zero year of 2020 were only underwater by an average of $990.

Lessees of 2018 models hit the jackpot, with a positive equity that reached as high as $9,705 in late 2021 and averaged $5,516 for the year.

Leases stopped ending up at auction, Robb told the Auto Finance Summit in Las Vegas in October. "They all dried up," he said.

Either the customer or the dealership bought the vehicle at the end of the lease, he said.

Leased vehicles from the 2019 model year have averaged $7,970 in positive equity in 2022 through the week ending Nov. 12, according to Cox. Three-year leases of 2020 models maturing in 2022 have averaged $8,536 in that time.

However, equity has fallen as the year has progressed. Vehicle leases that matured in the week ending Nov. 12 on 2019 models returned $6,029 in positive equity, while 2020 model-year leases ending that week carried $5,598 in positive equity.

Robb said Cox felt the trend of off-lease vehicles failing to reach auction would continue until positive equity dropped to the $2,000 to $2,500 range on average.

Cook said he hadn't seen lease contracts carry significantly higher residual values than before the used-vehicle market went "crazy," despite the rise in positive equity.

"They're up a little bit, but not nearly like everything else," Cook said. "They're pretty similar to three years ago."

Robb said 3-year-old vehicle leases maturing today had been written at residual values of 56 to 58 percent of sticker, but three-year leases scheduled to end in 2024 and 2025 set 66 to 67 percent residuals. "The market's moved up," he said.

Cox also gave the conference a sense of equity trends within the loan market.

Robb showed data on 18-month-old auto debt with interest rates of 12 percent or higher, a segment chosen because of the likelihood of the vehicles ending up at auction after a repossession.

Before COVID-19, such loans carried about $5,000 in negative equity at that point in their life.

But when vehicle values rose in 2021, consumers began to owe less than their vehicles were worth by that year-and-a-half mark.

The pool of loans aged 18 months had positive equity for four quarters in a row, from the third quarter of 2021 to the second quarter of 2022, reaching as high as $2,696 on average in the fourth quarter of 2021, according to Cox.

Vehicles winding up in repossession "was just not gonna happen," Robb said.

However, 18-month-old loans were back to being underwater last quarter, with $1,493 on average in negative equity.

Robb said many financed vehicles still had positive equity, but "it's not as many as there were last year."