Between 1/95 and 12/08, these two series had a simple correlation coefficient of .54, but it is lowered to .40 if you add in the data points for 2009.This decoupling is confirmation that supply (or rather, lack thereof) – not demand – has been the driving force behind strong used vehicle pricing.
The numbers.GMAC wrote one thousand lease contracts in the third quarter of 2009.That sounds like a paltry number – and it is –, but it is significant given that GMAC wrote no leases in either the first or second quarter.In the third quarter of last year, GMAC wrote 53,000 leases.And, as recently as 2006, GMAC was writing 624,000 new lease contracts a year.
At Ford Motor Credit, lease placements totaled 11,000 in the third quarter of 2009, down from 15,000 in the second quarter.Lease placements for the first nine months totaled 46,000 this year and 287,000 last year.Part of that decline reflects the transfer of Jaguar, Land Rover, and Mazda to other finance providers.
Toyota Credit wrote 56,000 lease contracts in the third quarter of this year up from 43,000 in the second quarter and only 38,000 in the first quarter.The nine month total was 137,000 this year and 234,000 last year.
The trend.New vehicle lease penetration rates bottomed out this summer and a gradual recovery is now underway.Edmunds.com projects that lease penetration will soon get back to 20%, up from a low of 10% in the first half of 2009.
Clearly, the unfreezing of the auto-backed securitization market through the TALF program, accommodative monetary policy, and, in the case of GMAC, direct government assistance played a role.But, the increase in wholesale used vehicle values has also been important.Leasing is once again profitable.Note the two graphs below.The first depicts GMAC’s end-of-term sales proceeds as a percent of the ALG residual used at contract inception.In the fourth quarter of last year, losses of close to 25% were being taken.Today, there is a gain of nearly 10%.
The second graph shows the average price of vehicles coming off 24-month and 36-month leases at Ford Credit.Note that, in the third quarter, these mixed-adjusted prices were up 32% from their fourth quarter low for both 24-month and 36-month leases.
The importance.Leasing, when done right, shortens the new vehicle trade cycle and generates greater loyalty to the vehicle brand and the dealer.And, simply put, leasing emphasizes the need to protect residual value and take a longer-term perspective with respect to customer management and vehicle brand equity.
From an analytical standpoint, leasing illustrates the various interactions that occur between the new and used vehicle markets better than any other segment of the industry. Indeed, leasing, as a business model, is based on the assumption that residuals can be predicted with a measurable, and insurable, level of risk. Thus, true success in leasing is achieved only when lessors fully understand how current and future vehicle values are influenced by:
•lease subvention and other incentive activity - both theirs and their competitors;
•vehicle-specific factors such as condition, options, mileage, and color;
•industry trends and seasonal factors;
•macroeconomic conditions; and,
•the lessor’s ability to utilize Intelligent Remarketing, combined with professional end-of-term remarketing processes, to save both time and money.
And, from the consumer’s standpoint, leasing makes clear that total vehicle ownership cost is dominated by the depreciation factor. After all, depreciation, plus the money factor, determines the monthly lease payment.
For all these reasons, we welcome the coming rise in leasing.