Retail automotive saw record profits throughout the past few years as inventory was low and demand remained high, but as inventory slowly returns, could we soon see some fallout? Today on Inside Automotive, we’re joined by Rusty West, the President and CEO of Market Scan, who says the silver lining may be in leasing.
“We got a bunch of turmoil happening,” said West. Lending institutions are beginning to emphasize leasing options, signaling change for dealers. For instance, Toyota stated that leasing is their primary focus, and the data indicates that aggressive leasing efforts are increasing the number of possible purchases for buyers. Repossession rates are also increasing, which has a domino effect on the used-car market and the equity position that customers are currently in.
Potentially, the leasing department is setting dealers up for a ‘saving grace.’ “We observe a seven to ten-year cycle,” says West, in which the percentage of transactions increases to around 30 to 40% before falling down as a result of a triggering event. September 11 was the first significant event that fully disrupted leasing. “0% financing was available, and leasing merely stopped.”
Leasing doesn’t come without risk. The value in the area of price dynamics is a problem for the residual risk of repossessions and finance buyers. There are two significant areas in the used car market: affordability and rising repossessions. These include the market’s structure, the dynamics of vehicle supply and demand, and the price of buying a new car.
“We will see a number of Carvana repossessions arrive, and after the 2021 vehicles have their chips, they will be marketed,” according to West. As a result, the dynamic of declining used-car values will change.
If dealers don’t lock buyers into a seven- or eight-year lease, this negative equity is going to be difficult to deal with. Consequently, the vehicle’s value will decrease. Dealers claim that the leasing penetration rate has decreased by 20% overall, and the general anxiety regarding the market’s future has increased.
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