The Great Auto Renting Bubble

[planosteve]

When it comes to signs of a US "recovery" nothing has been hyped up more than US auto companies reporting improving, in fact soaring, monthly car sales. On the surface this would be great news: with an aging car fleet, US consumers are surely eager to get in the latest and greatest product offering by your favorite bailed out car maker (at least until the recall comes). The only missing link has been consumer disposable income. So with car sales through the roof, the US consumer must be alive and well, right? Wrong, because there is one problem: it is car "sales" not sales. As the chart below from Bank of America proves, virtually all the growth in the US automotive sector in recent years has been the result of a near record surge in car leasing (where as we know subprime rules, so one's credit rating is no longer an issue) not outright buying.

From BofA:
Leasing soars: Household outlays on leasing are booming at a 20% yoy pace - a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.

Chart 1: Households go for the low capital option: leasing soars
(yoy growth rate, inflation-adjusted)
http://www.zerohedge.com/news/2014-08-06/mystery-behind-strong-auto-sales-soaring-car-leases

It could also translate into even higher leases, which in turn bottlenecks real, actual sales.

Of course, the problem is that leasing isn't buying at all. It is renting, usually for a period of about 3 years. Which means that at the end of said period, an avalanche of cars is returned to the dealer and thus carmaker, who then has to dump it in the market at liquidation prices, which in turn skews the ROA calculation massively. However, what it does do is give the impression that there is a surge in activity here and now... all the expense of a massive inventory writedowns three years from now.

Which is precisely what will happen to all the carmakers as the leased cars come home to roost. But what CEOs know and investors prefer to forget, is that by then it will be some other management team's problem. In the meantime, enjoy the ZIRP buying, pardon leasing, frenzy.

[GFB]

This is really stretching to find a crisis.

..and meaningless.

[planosteve]

This is really stretching to find a crisis.

..and meaningless.

But, then you didn't think the middle class loosing over 1/3 of their wealth in the last 10 years was a big deal either.
The prices of new cars has gone up a huge amount since then. I know because the last time I bought one was 11 years ago. And I won't be buying another.

[GFB]

This is really stretching to find a crisis.

..and meaningless.

But, then you didn't think the middle class loosing over 1/3 of their wealth in the last 10 years was a big deal either.
The prices of new cars has gone up a huge amount since then. I know because the last time I bought one was 11 years ago. And I won't be buying another.

If they go up too high..no one will buy them..and then the car companies will fall all over themselves to lower prices.

..or people will lease..which is meaningless. All of those leased cars are eventually sold to smart people that know a 3 year old car with low miles is a much better plan then buying new.

[crocmommy]

Then why are used car prices still so high?

[GFB]

Then why are used car prices still so high?

Well..you can complain about ANYTHING being too high priced, can't you?

But..to answer, I'd say..high demand.

[crocmommy]

Well, that is what I've heard listening to the car shows. It sounds like dealers are hurting for used cars.

[ann jusko]

I won't lease a car any more. I LOVED my Windstar and wanted to keep it. Called to see how much and the price was ridiculous. My lease was up and a truck with a trailer came to get it. I was offended! The car was in immaculate shape. He said "I have to trailer every one of them." So we bought a Toyota Sienna since Ford no longer made the Windstar. I tried hard to like the Freestar but just couldn't. THEN the person who would have had a sale had she not gone on vacation leaving us with that ridiculous price. Oh no, she calls back with a reasonable offer that we would have snapped up. No more leasing for me! Husband has leased his last 3 cars but decided to buy the Tundra. So we're back to buying.

[Red Oak]

Cash for Clunkers is part of what killed the used car market.

[Sangersteve]

Leasing never made any sense to me, it's a forever car payment. We don't need a new car every two or three years.