People are leasing more cars than ever before, and used car shoppers are benefiting.
New car sales rates have increased 68% — from 10.4 million in 2009 to 17.5 million in 2015 — since the recession, leading more people to leaseinstead of buy. The rate of people leasing cars rose 26% year-over-year from 2012 to 2013, according to the Edmunds.com 2015 Used Vehicle Market Report. Since most leasing agreements are for three years, that has created a glut of vehicles in today’s used car market. As a result, prices for used cars have dropped, with prices for 3-year-old vehicles discounted by about 4% year-over-year in 2015, according to the Edmunds.com report.
This trend is still in its early stages — the number of lease deals was at its highest level ever in 2015, according to car auction company Manheim’s 2016 Used Car Market Report, meaning off-lease levels will remain high at least through 2018 — so customers will be able to enjoy lower used vehicle prices as long as monthly lease payments remain attractive, says Larry Dixon, senior analyst for the National Automobile Dealers Association’s Used Car Guide. “It’s the first time since the recession that [used vehicle] prices have come down,” Dixon says, citing high vehicle supply as the primary driver of low prices.
The popularity of leasing picked up in 2010 after dropping to a low of just over one million deals in 2009, according to Manheim. The number of deals have increased steadily each year, reaching just under four million in 2015. When a new car is leased, it is owned by a finance company — typically one under the ownership of the auto maker — which determines the monthly payments based on the expected value of the car after the lease is up. The pickup in leasing has been attributed to a combination of low interest rates and new cars maintaining their value through the leasing term, says Tim Fleming, an analyst at Kelley Blue Book. These factors have made it easier for dealers to offer lower monthly leasing payments, making it more attractive to lease than buy. The average monthly lease payment offered in February was $425, compared with the average car payment for that month, which was $542, according to data from J.D. Power.
High leasing levels compared with ownership rates also mean a greater number of younger vehicles are being added to the market, offering a wider selection for car buyers. The average mileage of cars at auction in 2015 was at its lowest point since 2002, according to Manheim, and about half of used cars sold in 2015 were three years old or younger, estimates Jessica Caldwell, director of industry analysis at Edmunds.com.
The quality of these younger cars has improved across most brands in recent years, so shoppers who opt for discount nameplates are still getting more bang for their buck at used car lots. “In terms of technology, fuel efficiency, engine power and features inside the vehicle, everyone is putting out some really great cars,” Fleming says. Cars coming off leases also tend to be in better shape than those that were previously owned by the driver since most lease agreements include “wear and tear” penalties and maximum mileage amounts.
Used sedans will see greater discounts because of consumer preferences trending toward crossovers and SUVs, Caldwell says. While the demand for crossovers and SUVs in turn will cause a larger secondary market for the segment, demand is also expected to remain high, having little effect on used prices. “There have been significant jumps in the volume of utility vehicles,” Dixon says, adding that the market for compact SUVs just off their lease increased nearly 60% year over year in 2016.
For shoppers looking for the best possible deal in the used car market, it may be better to hold off as values continue to drop. “We do expect [used car] prices to fall this year, so it’s better to wait if possible,” Fleming says
A similar trend of declining used car prices occurred in the late 1990s and early 2000s. At that time, as the expected value of used cars decreased, automotive finance companies lost billions in leasing deals. The result was a bounce back in used car prices and a decline in leasing levels, bottoming out in the recession. However, recent measures — like Certified Pre-Owned programs, which increase the expected value of an used vehicle by extending warranty offers similar to those available for new cars — have been put in place to decrease the risk of a free fall in the leasing market, Dixon says.
The decline in used car prices is more of a sign of a market returning to healthy levels than a sign of instability, Fleming adds. “The market is relatively stable right now, this is nothing too surprising,” he says. “There’s nothing that says to me prices are going to precipitously drop, but we also don’t know if [the trend] has found its peak yet.”