By Ray Birch
ATLANTA—While new car sales numbers continue to decline from the banner year 2016, lenders are seeing their overall auto lending dollars increase as a result of a decline in leasing and growing consumer interest in used cars, reports Equifax.
“We are seeing a lot of things coming together now,” said Gunnar Blix, deputy chief economist for Equifax. “We are seeing interest rates go up and dealer incentives declining, including 0% financing going away. I think when consumers go to dealerships they are getting a little bit of sticker shock on new car prices and new car leases, as well. All this is making the used car market more attractive.”
As CUToday.info reported earlier, rising prices and rising rates have consumers showing a greater interest in used cars, with demand also shifting away from leasing a new car. The nearly two-million auto leases, totaling $32.4 billion, originated through the first half of 2018 reflect a 1.2% decrease in accounts and a 2.9% decrease in balances from the same period last year. Auto leases accounted for only 13.8% of all auto accounts originated through June 2018, and 10.4% of balances, Blix said. Carmakers have been cutting back on leasing incentives and adjusting residual values, leasing monthly payments are heading higher.
Beneath the Shift
“This is underlying the shift from new to used cars and also underlying what we see in the shift from leases to loans, because used cars tend to be more loans than leases,” said Blix. “We are seeing a slight decrease in the total number of auto loans, but an increase in the financed amount. When you shift from leasing to buying a used car, there are more dollars financed, because with a lease you are not financing the entire value of the car, only the amount the car depreciates over the life of the lease. And, we are seeing cars just get more expensive.”
What may also be leading to declining consumer interest in leasing is automakers’ moves to shorten leasing terms. Blix explained the volume of vehicles coming off lease in recent years has resulted in used values falling at a faster pace than manufacturers predicted when they wrote many of the leases for the vehicles that have recently returned to the market.
“They got burned a bit by the residual values,” said Blix.
In turn, carmakers are moving away from four-year leases and focusing mostly on three years, Blix said, which makes it easier to project residual values.
A Surprise
As CUToday.info reported, used car prices have been rising this year due to increasing consumer interest in the category.
“I admit I have been a little surprised by used car values this year,” said Blix. “As we see interest rates increase, we will see cars become less affordable for
Gunnar Blix
consumers, especially new.”
As several other analysts have told CUToday.info, Blix agreed greater consumer interest in used vehicles plays into the “sweet spot” of credit unions that are traditionally strong used car lenders. Acknowledging the steady, record growth of credit union auto lending market share, both in new and used, Blix said some of the share gains can be attributed to the big banks.
“Some of the big banks are pulling back or pulling out of the auto lending market, which has left an opening for credit unions,” said Blix. “I think, too, that credit unions being local lenders, they have a better sense of what they should offer in terms of financing. Credit unions have really stepped up and taken a bigger piece of the market.”
Looking ahead, Blix said the overall auto lending market is healthy, noting that predictions of new car sales falling off dramatically from their 2016 level have been off the mark.
“We had a banner year in 2016, and 2017 was not that far behind,” said Blix, adding that U.S. new car sales units this year are tracking near 2017 levels. The last time I checked the average age of vehicles on the road today is 12 years. So there remains a lot of demand to replace cars. As long as consumer confidence holds and the economy is doing well, cars are something people have to buy.”
No Concerns…Yet
While Blix said he does not have any concerns for the auto market at present, he acknowledged that delinquencies have been rising among subprime borrowers.
“There are pockets in the deep subprime where we are seeing high delinquencies, but we don’t see any issues in the prime space,” he said.
Blix noted the impact of the natural disasters in the past two years—hurricanes and wildfires that are forcing consumers to replace countless numbers of vehicles. He said Equifax is currently examining how natural disasters have impacted the auto market.
“Last year we got a one-two-three punch with hurricanes hitting Texas, Florida and Puerto Rico, and then again the hurricanes this year and all the wildfires,” he said. “We do see a very clear market effect when these disasters happen. The month when they hit, we see almost no vehicles being replaced as a result of natural disasters. But then the following month all the activity starts.”