We all remember the shutdown of just about everything at the end of the first quarter of 2020, including auto sales and lease originations. As lease returns are a key cog in the engine driving the used car market — and looking broadly at a 36-month lease term — the market could be in for a new disruption by the end of March 2023. Or will it? Will the lack of lease originations back in 2020 cause a supply crunch of used cars coming soon?
Jonathan Smoke, chief economist for Cox Automotive, said there are many factors complicating this picture.
“While it is true that a key source of retail vehicles will soon be dropping at the top of the funnel because of declining lease maturities, the broader market has already experienced the drop in off-lease units in the wholesale market, and we don’t expect the volume to fall further in 2023,” said Smoke, in an email exchange with Automotive Fleet.
Record-high lease-equity positions have resulted in more consumers opting to buy their leases at maturity, Smoke continued. And when consumers don't, the grounding dealer is buying most of what's left. As a result, lease returns (leases that make their way to the auction market from finance companies) have already plummeted.
To give some perspective of this, Smoke said that lease maturities peaked at 4.1 million in 2019. And indeed, because of declining new vehicle sales and declining lease penetration, lease maturities in 2023 will only reach 3.5 million. “But the bigger market issue impacting the availability of off-lease returns in wholesale market is the decline in the return rate, which was 62% in 2019 and likely a historic low of 9% this year.”
With used values declining, equity positions are declining but remain well above historic norms. “We expect little improvement, but the net effect for the average dealer is that availability will be little changed next year,” Smoke says. However, franchise dealers will have fewer opportunities to purchase off-lease units at grounding for the next three years, so they will have to adjust to acquiring and selling older model years to keep growing used retail sales.
From a days' supply perspective, wholesale supply is normal now, Smoke said. October could see some abnormal demand because of hurricane damage replacement activity, but values are likely to be lower, not higher, by year’s end. “In this kind of environment, most dealers would prefer to keep inventory tight and buy only as needed,” he said. “That is a more prudent strategy than buying heavily now.”
“With rising prospects of a recession in 2023 and with vehicle values falling, I would urge dealers to be cautious about used vehicle inventory,” Smoke said. “We will likely see a disappointing spring market as interest rates may reach 20-plus year highs and the average tax refund is likely to fall.”
Originally posted on Automotive Fleet