A surge in cars coming off leases will likely mean lower prices for consumers buying used cars in the next three years.
The NADA Used Car Guide, a vehicle information publisher, estimated in December that 2.3 million new-vehicle leases matured last year nationally, up about 4 percent from 2014. That number will surge this year by 33 percent to more than 3 million vehicles, by another 9 percent in 2017 and still further in 2018, the guide predicted.
The jump in returned vehicles means dealers on Long Island and elsewhere will find themselves with a much larger stock of used cars and SUVs to sell — and that larger supply will translate into lower prices for used car shoppers, dealers said.
Industry experts and large local dealers said the impact is apt to be particularly acute on Long Island, where leases account for almost six in 10 new-vehicle transactions, according to the worldwide consulting firm IHS Automotive. That’s about twice the national average.
“The oversupply will drive down used-car prices anywhere from 5 to 7 percent,” said Mark Calisi, who owns the Eagle Auto Mall on Route 58 in Riverhead selling Chevrolets, Kias, Mazdas and Volvos.
At the 23-store Atlantic Auto Group, based in West Islip, Long Island’s largest dealership chain, co-owner Michael Brown expects 700 or 800 leased cars coming back to his dealerships this year, a 35 percent to 40 percent increase over last year. He agreed it will have an impact on used-car prices.
“It’s simple economics. I would think you’re definitely going to see prices on some of the used cars coming down just because there’s going to be a higher supply,” Brown said.
Recession rebound a factor
The auto industry’s strong recovery from its near-death experience in the recession is behind the rising numbers of leased-car returns.
Americans bought or leased a record 17.5 million vehicles last year, up 68 percent from a low point of 10.4 million in 2009 — the year General Motors and Chrysler were bailed out by the U.S. government. Roughly one-third of those transactions were leases.
On Long Island, registrations of new vehicles, which include sales as well as leases, rose to nearly 224,000 last year, up 42 percent from 157,000 in 2009. And nearly two-thirds of those transactions were leases.
In Nassau and Suffolk, there will be a further bump in the volume — from the return of cars leased in late 2012 and early 2013 to replace vehicles destroyed by superstorm Sandy. A total of 230,000 vehicles in Sandy’s path were damaged or destroyed, though there’s no breakdown for the number on Long Island. Leases usually run for three or four years.
The NADA Guide, which is owned by market researcher J.D. Power & Associates, said in an April 19 report that its seasonally adjusted used-car wholesale price index fell 3.6 percent in the first quarter of this year from a year earlier, marking the first year-over-year decline for the quarter since 2009’s recession-induced slide. NADA’s December report predicted an average price drop of 2.5 percent a year for the next three years.
While the surge of used car inventory will challenge dealers, both with downward pressure on prices and the need to store many more vehicles, it will also offer them an opportunity: All those drivers who return their vehicles at the end of their leases will be shopping for their next autos, too.
Ripple effects seen
In addition to lower prices on late-model used cars, consumers will likely see other benefits, dealers said.
With so many off-lease cars coming back to dealerships, “dealers are keeping the real nice vehicles to resell,” said Denis Dagger, general manager at Smithtown Toyota. Less desirable used cars will be returned to car lenders — most often, the finance arms of the major carmakers — and usually are auctioned. “So people shopping for a used car will tend to be getting a used car in better condition,” Dagger said.
Those shopping for new cars should benefit as well. At Smith Haven Chrysler Jeep Dodge Ram, principal Brett Saslow said the high volume of returned cars will also put downward pressure on new car prices.
When used-car prices drop, the gap in cost between buying a used car and a new car increases, he said. That wider gap could encourage more buyers to opt for used cars instead of new ones, “and that could hurt the new-car market,” he said.
That, in turn, could force manufacturers to offer more sales incentives on new cars, such as rebates, said Lee Certilman, owner of Nardy Honda Smithtown in St. James.
Already, incentives — especially on new passenger cars, as opposed to SUVs and pickups — are at levels not seen since the 2007-09 recession, according to J.D. Power.
“There’s no question that if these [used] vehicles are worth less, that’s an impediment to buying new, and that’s one reason we see the pattern of growth in new-car sales slowing down,” said Thomas King, a vice president at J.D. Power leading a team that advises carmakers on marketing issues.
In a strange twist, lower purchase prices on used cars could make the cost of leasing a new car go up.
In a lease, a consumer is paying the difference between the price of the new vehicle and what the car is projected to be worth at the end of the lease — that is, the car’s “residual value.” If the gap between a car’s new value and its projected used-car value is wider, the monthly lease payments will be higher in order to pay for that added depreciation in value.
Storage space scarce
One thing’s for certain: With thousands of off-lease cars being returned, Long Island dealers are going to have to find a place to put them. Some dealers are securing more space to hold the influx.
Calisi, of Eagle Auto Mall, said he has just purchased 2 acres next to his 12-acre site to store the additional vehicles until he can resell them or the lending institutions that wrote the leases collect the vehicles for sale at auctions.
At Security Dodge Chrysler Jeep Ram Gem in Amityville, co-owner John J. Vigorito is trying to add storage room for another 250 cars in three parcels to augment the space he has now for 500 vehicles, but his plans have raised concerns among some village residents and officials.
“Storage space is a growing problem across Long Island,” Vigorito said.
Smith Haven dealer Saslow said the problem is compounded by dealers’ tendency now to keep larger inventories of new vehicles.
Because dealers don’t own the new cars on their lots, but rather are financing them, just like an individual buyer might finance a car purchase, low interest rates reduce the cost of maintaining their showroom inventory. “All dealers are stocking new cars more aggressively,” Saslow said.
To help get used cars off dealers’ lots and into drivers’ hands, Atlantic Auto Group’s Brown wants manufacturers’ finance arms, who write most car leases, to encourage the leasing of used cars by offering more attractive interest rates.
Used-car leasing is limited now, in part because setting residual values — the amount a car will be worth at the end of the lease — is more difficult on a used car than on a new one.
Toyota’s Lexus unit already is providing better used-car leasing terms, Brown said.
But while used Toyotas are available now with better leases than before, the practice is not that attractive because the price is still fairly close to leasing a new car, said Smithtown Toyota’s Dagger.
For example, a certified used 2013 Camry LE priced by the dealer at $15,495 can be leased for $163 a month with $3,400 up front — including tax and a down payment or “capitalized cost reduction,” an acquisition fee and the first payment. The three-year lease has a limit of 15,000 miles per year.
Under a New York regional Toyota incentive program, a new Camry LE can be leased for three years, 15,000 miles a year, for $192 a month with the same money down. The monthly payments are so close because the new-car lease carries a slightly lower “money factor” — or interest rate.
Chance for more sales
At newly renovated Sayville Ford, Long Island’s largest Ford dealership, chief executive Melanie J. Spare-Oswalt says she’s been taking back 50 or 60 off-lease cars a month so far this year, about 20 percent more than last year, and she expects that to rise to about 85 a month next year.
She sees the added volume as a plus for her business, giving her more cars to sell. “I don’t expect it to adversely affect us,” she said.
Nardy Honda’s Certilman agreed. He said he is taking in about 100 off-lease vehicles a month now but doesn’t anticipate storage issues because there’s a strong market here for used Hondas, and because Honda’s credit arm tends to quickly pick up cars that dealers don’t want.
“I would think more dealers will look at this as a blessing, not a curse,” he said.