Used-car supply, especially off-lease, to feel pinch in long term

There is likely to be a shortage of used vehicles some three years down the road, as automakers halt production amid the COVID-19 pandemic, cutting the would-be off-lease volumes hitting the market in 36 months.

There could also a supply impact much sooner in the off-rental sector, says Black Book’s Laura Wehunt, who outlined short- and long-term used-car supply scenarios in a phone interview Tuesday.

“Long-term, we’re going to end up with a shortage 36 months from now in the used market,” said Wehunt, who is Black Book’s vice president of automotive valuations. “At this point, with production being shut down for the majority of the automakers, we are going to have a shortage. That’s inevitable. 

“Short-term, again, there will be a shortage of new vehicles … it will help used values, but I think there’s also going to be a pent-up supply once things start to open back up,” she said. “Right now, we’re really seeing the sellers holding to their floors. We’re seeing large no-sell rates, but we’re seeing the supply at the auctions.”

The supply is there at the auctions, as sellers try to sell the inventory through simulcast, where available, she said.

“Each week, what’s being offered for sale is going up. And we’ve got these really high no-sell rates,” Wehunt said. “So, I think once things really get back going, there is going to be this increased supply of vehicles there for dealers to choose from.”

But again, the long-term impact is different, as 36 months out, the market won’t see a strong crop of lease returns coming back. 

Wehunt also expects to see some supply impact in the 12- to 24-month range on the off-rental side.

“They will likely pull back on some of their buying,” she said of rental companies, who aren’t going to have a strong supply of cars to buy from this year, amid OEM production cuts.

“But I think your largest reduction will come in 36 months when you’re not getting those off-lease vehicles,” she said. “And that’s part of what you saw in our forecasting.”

Wehunt added: “By 36 months, we’re not going to have that the negative impact on the values that we’re going to see in the short term, just because you will have the lack of supply to balance out what’s going on right now. 

“We should get back to normalcy by then,” she said. 

So, what about off-lease volume for 2020, which analysts projected to be another year of more than 4 million off-lease units hitting the market? What’s happening with leases that were initially scheduled to end?

The automakers “are encouraging and offering programs for the consumer to just hold on to their lease right now and to defer returning it for a time,” Wehunt said.

There are some lease returns being brought to the auction, but others are extending lease terms.

“Traditionally, that would mean you’re going to end up with a higher-mileage unit,” she said. “Right now, nobody’s driving, so I don’t know that we’re going to see that big of an impact there that you normally would expect by extending a lease term.”

It could be an interesting scenario to watch play out, particularly as J.D. Power indicated Thursday in its 2020 U.S. End of Lease Satisfaction Study that 1.8 million leases are slated to mature between March and July.

“Retaining lease customers is crucial for dealer and lender profitability as they navigate a constricting market and economic downturn,” Patrick Roosenberg, director of automotive finance intelligence at J.D. Power, said in a news release. “Communication through customer-preferred channels is paramount as dealerships temporarily close and lease customers navigate an unprecedented event, uncertain of their available options to defer payments, extend or terminate their leases.

“The market will recover and competition from banks and captive lenders will be fierce for the 1.8 million returning lease customers scheduled to turn in their vehicles in the next five months. Aggressive retail programs, some of which have already launched with 0% financing and deferred payments up to 120 days on extended term loans, will create more obstacles for lease retention.”

The last off-lease slowdown

Any off-lease shortage would not unprecedented. In 2009, amid the Great Recession, lease volume was just 1.4 million and lease penetration had dropped to 17%, according to data provided by Edmunds last year.

Off-lease volumes had dropped to 1.5 million by 2012, after having reached 2.5 million just three years earlier, according to data shared by Cox Automotive.

It has been moving upward even since. The company shared a year-by-year off-lease volume count since 2007, noting that pre-2011 data used a different calculation methodology:

Source: Edmunds

Going back to the Black Book data, Wehunt agreed that it’s also possible to see a repeat of a dozen years ago on the trade-in side, when dealers held on to trades — because they need to retail them — instead of wholesaling them.

“Already, even right now what we’re seeing sell at the auction is your lower-condition vehicles, older vehicles, those cheaper units,” she said. “So, I think there will be a demand for good trade-ins, good lease returns — those nicer quality units. They don’t have to go to the auction and pay the transportation, pay the buy fees … they’re going to hold on to those.”