Wednesday, March 19, 2008

Signs the Automobile Recovery Isn't Nigh

by Tom Bozzo

AutoWeek has a window on the stressed consumer with a report that the automobile financing mix is moving towards leasing. This is because buyers are having a hard time affording car payments on conventional loans, even with the extremely long financing terms that are becoming more prevalent:
"These 84-month loans--the percentage is rising dramatically and it's just unhealthy," [California dealer Dave] Conant told Automotive News. "It's horrible for the buyer and it's not good for the industry."
The level of 7-year loans isn't high — at Toyota's financing arm, it's reportedly 4% of business (up from zero at the start of 2007, though) — but the mean is 64 months, up from 61 in 2003. The W$J's periodic info graphic on fast-selling cars (sorry, no link) recently indicated that six years is the mode even for such vehicles as the Nissan Rogue, an entry-level small-car-based crossover priced in the low twenties.

You'd normally expect the current free-money environment to be relatively good for loan financing over leasing. That makes it relatively cheap for the manufacturers' captive financing companies to offer those low rate deals to move metal. Buyers who expect to hold onto their cars for a good part of their useful lives should prefer to buy. [*] Even luxury makes accustomed to leasing much or most of their output saw big shifts towards conventional purchases in 2003-04, as a graphic accompanying the AW article shows for the case of BMW.

The catch is that the last few years' sales efforts have put a great many people into new cars with upside-down loans. Hence this sort of solution:
a hypothetical customer could roll $150 or $200 a month of negative equity from a previous vehicle loan into the lease and still have an affordable monthly payment.
Maybe it beats a visit from the repo man, but yikes. Assuming a 36-month lease term, the dealer would be looking at someone coming in with several thousand dollars' negative equity on some MOR car. Considering their resale values, this would include just about anyone who financed a domestic-make car with little down and an average term or longer. In any event, add that to the conventional payment on the average new car, and you're looking at the lease payment on a 5'er or thereabouts, which most of the motoring public can't actually afford.

This sort of workout may put some people in cars now, and back on the market in 3-4 years, but even so it puts the manufacturers in the position of assuming the risk that the leased cars will be worth their contracted residual values at turn-in time. [**] I was under the impression that a contributing factor to the lower emphasis on leasing was because some lessors did a bad job forecasting the wholesale market and got burnt. Right now, my impression is that the U.S. automobile product mix is badly out of line with a reasonable expectation of future fuel prices, not to mention the possibility that crazy libruls might try to regulate greenhouse gas emissions, raising more than a little possibility, in my eyes, that nobody in the used-car market in '11 or '12 will actually want a 20-mpg small crossover.

[*] There's nothing wrong with leasing per se; indeed, as someone who's tended to switch cars at relatively high frequency, I lease my current car. [***] At market-rate terms (i.e., without incentives towards one mode or the other), you'd normally expect a lease for a given term to have about the same cost to the buyer as a loan-financed purchase with a trade in at the end of the hypothetical lease term.

[**] If the car happens to be worth sufficiently more than the residual value to cover transaction costs, the lessee should exercise the (standard) purchase option and pocket the gains from resale.

[***] This was, in no small part, intended to keep me out of car dealerships for 3 years. The only problem is that my bike-commuting experiment was too successful, and I'd have been willing to downsize earlier.

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