The car market’s comeback kid

Hey, everyone — Nissan dealers are not having a great year so far. Profits have nosedived by a mind-boggling 70% compared to last year, forcing the closure of 8 stores as nearly 40% of its U.S. dealerships bleed red ink.

Why? A mismatch between price and product mix is slowing down sales. On top of that, Nissan doesn’t have a model in its lineup to capitalize on “hybrid fever.” Leaving market share wide open for competitors like Toyota and Honda.

Looking ahead, the automaker has some tough decisions to make to get profitability back in check.

—CDG

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Leasing has always been a popular tool for car buyers (especially those with champagne taste on a beer budget). But these days, the mega decline of affordability has forced car buyers and dealers to lean hard on leasing and volumes have been the healthiest I’ve seen in years.

Rewind: During the pandemic, leasing fell off a cliff. 

Due to production shortages and manufacturer shutdowns, new vehicles were scarce and selling for MSPR and higher – meaning incentives and lease deals all but vanished. 

But today the market looks very different: Aggressive auto loan rates have barely budged in recent months and vehicle prices have been elevated for a while, resulting in high monthly payments which many consumers can’t keep up with.

To bridge the affordability gap, car dealers and buyers are zeroing in on the leasing market.

Lenders are also jumping in, eyeing the potential to boost profits through leasing fees, interest rates, total vehicle costs, and acquisition fees. While leasing doesn’t provide that instant cash boost like outright sales, the steady stream of lease payments adds up nicely over time.

Remember: Leases are typically more expensive for consumers over the long term than traditional car ownership, but in this economic environment, lower monthly payments are too good for many to pass up.

Let’s roll the tape:

• In Q1 2024, leasing activity shot up to 714,000 cars from 539,000 in the same period a year ago. This recovery is bringing leasing figures close to pre-pandemic levels. 781,000 leases were signed in early 2020.

• Stellantis Financial Services now sees 45% of its financing through leases.

• Lease share increased at GM Financial to 36.5%, up from 33.5% a year ago.

As leasing volume continues to climb, there are 3 trends I’m watching closely…

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1. Lease deals and incentives could further shrink F&I profits.

New vehicle inventory rebounded at the start of July to 2.91 million vehicles – a 52% increase year-over-year and it’s driving dealers’ average days’ supply to triple digits.

Average incentives climbed to $3,383 in July, a 59.1% jump against last year and the most generous level since early 2021.

And a lot of those incentives are making their way to the leasing market in the form of instant cashback and subsidized interest rates. Some brands may also artificially prop up residual values to make leases even more attractive.

But some public dealership groups are already seeing leasing eat into their profits. 

• “With [subsidized] leasing—and that’s where a lot of the incentive dollars are still going—we’re basically at a normalized state of incentive dollars in leasing, which obviously is in flat fees. So, it does impact our F&I,” said Lithia Motors CEO Bryan DeBoer told Wards Auto.

One prominent dealer in the northeast told me that while leasing is less profitable than traditional financing at his stores, too, he isn’t taking his foot off the gas. He’s thinking about the long game. 

Customers are returning to the habit of leasing and upgrading to a new vehicle every 3 years. This keeps customers engaged with the dealership and ensures a steady flow of trade-ins for the used car department.

Which brings me to my next point…

2. The used car market supply will rebound (slowly but surely).

The more leases taken out and returned, the more 1-to-3-year-old used cars become available to resell. 

But it could take until 2027, 2028, or even 2029 for the used car market to recover the supply of 3-year-old off-lease vehicles it had before the pandemic. That’s almost 10 years of impact. 

In the immediate future, as lease deals with low monthly attract more consumer demand to the new car market, used car prices will likely dip but probably not to pre-pandemic levels (with the only exception being affordable vehicles with low days’ supply).

And the third trend I’m focused on?

3. EV leases rising faster than the rest of the market.

• In Q2 2024, 48.7% of all EV originations were leased, up from 20.9% in Q2 2021.

• Ally Financial reported that 64% of its EV originations in Q2 2024 were leases—a significant jump from years past.

Leasing is now the preferred way to get into an EV, thanks to – you guessed it – subsidies. This time from the U.S. government in the form of instant $7,500 tax credits. 

Yes, financing EVs with a loan can get consumers a similar credit, but the criteria to qualify is much looser if they decide to lease.

But it’s not just subsidies… After EVs suffered a whopping 30-39% decline in value over the past year, leasing EVs is the best hedge for someone who wants to drive an EV without taking residual risk (e.g. predicting what the vehicle will be worth at the end of the lease term).

Rapid EV tech advancements and volatile prices (aka Tesla price cuts) make it even more difficult for leasing companies to accurately forecast resale values.

All said and done, normalized auto leasing is about as close to a win-win in the car market as you can get right now. The outlook for dealers is still pretty positive, even if profitability is a little harder to come by. As for consumers, this may just be the long-term path to affordability.

Dealership law expert: The most costly mistakes dealers are making
The FTC is coming for car dealers. From stricter regulations to cybersecurity and A.I. consent… dealers are under the microscope like never before. In this edition of the podcast, I recently spoke with Brad Miller, Head of Legal at ComplyAuto to find out the biggest regulatory missteps dealers are making, the top 3 "sleeper" risks in the car biz, and how dealers can keep up with the FTC. Listen here.

Andy Elliott on life, success, his past, and what makes a leader
500,000 salespeople trained. 3+ million followers. 1 FBI investigation. That’s right. I cover it all with Andy Elliott – the master of reinvention. Andy is a sales trainer, business coach, and CEO of The Elliott Group. In this episode, we discuss how an F5 tornado changed his life, getting raided by the FBI, walking away from a $1M salary, and why everyone should sell cars for at least 1 year. Stream it now.

Listen to the episodes here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to Uber for Business, Cars Commerce, Auto Hauler Exchange, Private Auto, and CDK Global for making these episodes possible.

• Braman Miami is seeking an experienced auto technician to work on Hyundai models.

• Edmunds is looking for an account executive in Seattle.

• Ron Marhofer needs to fill three dealership positions including sales, BDC, and F&I.

Looking to hire? Add your roles today—it’s 100% free.

• Texas sues General Motors for allegedly violating drivers' privacy.

• Half a million American drivers are ignoring a major car Issue that could kill them.

• Polestar just made its first electric SUV in the U.S.

• Hundreds of brand-new Teslas are roasting under the Florida sun in an overgrown field.

• GM issues Cadillac Lyriq recall for software issue affecting braking system

Thanks for reading. See you on the next edition…

—Car Dealership Guy

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