low interest rates, high resale values fuel auto leasing rebound
Friday , March 09, 2012 - 9:56 AM
DALLAS -- A perfect storm in the leasing business recently blew a new GMC pickup into Roger Cade's driveway.
"I wasn't really in the market for a new truck," said Cade, 58, who lives on a ranch outside Terrell, Texas. "But it made it possible for me to consider a vehicle that was $10,000 more than the one I had previously."
Leasing roared back to life last year, fed by an ideal -- and unusual -- combination of low interest rates and high trade-in values.
Before the 2008 recession, when leasing nearly collapsed, it accounted for about a fourth of new-vehicle sales in the U.S. and was a critical tool for automakers and dealers.
"Now there is a potential for it to go to more than 30 percent of sales, we think," said Jesse Toprak, vice president of market intelligence at TrueCar.com, an online auto-buying service.
One of leasing's biggest attractions is that it typically offers lower monthly payments than a sale.
In fact, some analysts think that the growth of leasing could help propel sales in the U.S. past 14 million this year. Automakers sold 12.8 million vehicles last year.
Leasing works this way: Let's say you are looking at a loaded $30,000 midsize sedan and considering a lease.
If the car is estimated to be worth $18,000 in three years, you would pay $12,000 plus interest on a three-year lease -- about $350 a month.
"You pay for the portion of the car you use," Toprak said. "Consumers always want to get a lot for their money, and this can be one way to do it."
At the end of the three-year lease, the consumer can buy the vehicle or turn it back to the bank or company that financed it.
"My phone is ringing again," said David Thomas, director of sales and service operations for Reagor-Dykes Auto Group, based in Lubbock, Texas. Last November, Thomas opened an office in North Dallas for Prime Capital Auto Lease, a subsidiary of Reagor-Dykes.
"We've grown from two people in November to five now," Thomas said. "We're growing into the shoes."
With fuel prices once again threatening to spike past $4 this summer, leasing may be the best way for consumers to buy large vehicles and be covered if their residual values drop, Thomas says.
In 2008, for example, the resale value of full-size SUVs plummeted when gas hit $4 a gallon and panicked owners dumped them for smaller vehicles, flooding the market with used SUVs.
"If you're buying anything bigger than a Honda Accord that gets less than 30 mpg, a lease is probably the best way to go," Thomas said. "On a lease, the residual (trade-in value) is set, and you are covered no matter what happens with fuel prices."
Former Ford dealer Jerry Reynolds, host of the Car Pro advice show on WBAP-AM, won't be surprised if leasing accounts for 35 percent of new-vehicle sales "in short order."
"It's not for everybody," Reynolds said. "But for a lot of people -- even someone who can pay cash -- it's got a lot of options."
The downside is that consumers can typically put no more than 12,000 to 15,000 miles a year on their vehicles without paying penalties.
Five years ago, automakers -- particularly the domestics -- got themselves in deep trouble by setting residual values artificially high, enabling low monthly payments.
When high fuel prices ruined SUV resale values, causing lenders to lose millions, leasing quickly fell from favor.
Toprak of TrueCar.com thinks there is little risk of that happening again. "The manufacturers are not overproducing like they once were," he said.
Al Hearn, founder of LeaseGuide.com, agrees.
"Leasing is coming back, but in more sensible ways," Hearn said. "I think the 25 to 30 percent range is a natural plateau."
Nonetheless, many in the business expect to see some reduced lease rates this spring and summer. Automakers can subsidize a lease vehicle's resale value, which results in lower monthly payments.
"One that I'm watching right now is a lease for a Smart Fortwo (car) for $99 a month," Hearn said.
With leases, automakers can hide their incentives.
"You never look like you're running a fire sale," said George Hoffer, professor of business at the University of Richmond and a longtime observer of the auto industry. "It's not as apparent as putting $5,000 cash on the hood of a vehicle."
Leases also guarantee that dealers will get vehicles back in two or three years -- lightly used late-model cars and trucks that they can put directly onto their lots.
"We will see more two- and three-year leases, and that means we'll see more fresh cars returning off lease," said Paul Taylor, chief economist of the National Automobile Dealers Association. "That's good for the industry."
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At the Land Rover dealerships in Dallas, Frisco and Austin -- where sales last year increased an average of nearly 28 percent -- owner Jim Snell hopes to see his lease rates double.
Leasing accounted for a "large part" of Snell's sales increases last year. But lenders are still somewhat hesitant to aggressively fund leases on big SUVs -- which is primarily what Land Rover sells.
Leasing is "back up to 35 to 40 percent of sales," Snell said. "It was about 60 percent, and I'd like to see it go back. Maybe this will be the year."
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