The one-two punch of record high new vehicle prices and short supply due to the global semiconductor chip shortage may keep some shoppers in their corners, but the situation is presenting a lucrative opportunity for those whose leases are about to end.
Indeed experts say these unusual conditions make it a great time to buy out a lapsing lease and hang on to your current vehicle rather than turn it in and try to find something new. The reasons are two-fold—thin selection and rising vehicle values.
“In your monthly lease payment you paid for depreciation that never happened,” Pat Ryan, founder and CEO of vehicle research and insurance marketplace app CoPilot told Forbes.com. “You’re probably sitting on incredible profit that you paid for.”
As an example, Ryan notes his buyout on a leased 2019 Chevrolet Tahoe would be $17,000 less than the SUV is worth today, which the dealer, he said, pegged at $45,000.
“My monthly payment paid for depreciation that never happened,” he said, noting he was actually sitting on a big profit. So by buying out the lease, “it was the only way I could have recovered for having over paid. If I turn that car in either my leasing company or the dealer I turn it in to was going to get that profit and there’s no way for me to get my money back.”
The CoPilot site features an online tool to help lessees make a decision on their next moves.
CoPilot’s Ryan assessment squares with analysis by Cox Automotive director of data strategy Eric Ibara. He notes since vehicles coming to term in 2021 were typically leased in 2018, their residual values would be significantly lower than current market values, due to the current inventory shortages.
“If the buy-out value for the vehicle is based on its 2018 residual value—which it should be—then consumers can save thousands of dollars if they stay in their 2018 model year vehicle rather than buying a 2021 or 2022 model year version, and any current buy-out value is likely less than a retail used vehicle of similar pedigree,” Ibara said in emailed remarks to Forbes.com.
Chalk up the current opportunity to an upward trajectory for vehicle pricing that began prior to the onset of the Covid-19 pandemic in early 2020 and hasn’t yet abated with demand high, inventories low and incentives scarce.
In November new vehicle prices were up 25% year-over-year to almost $47,000 and used vehicle prices jumped more than 34% to about $31,000, according to Kevin Roberts, Director of Industry Insights & Analytics at leading vehicle research and shopping site CarGurus.com.
The second main reason for staying with a current vehicle is the dearth of selection caused by production disruptions and caused by the semiconductor shortage.
“OEMSs (automakers) shift to more of their profitable vehicles and more profitable trims,” said Roberts.
According to CarGurus data, new vehicle inventories in November decreased 4.9% from October and down 72.7% year-over-year. The falloff for used vehicles wasn’t as severe edging down 1.4% in October and 11.3% year-over-year.
Not only are fewer vehicles being produced, but those that are coming off the line may not include chip-dependent features consumers desire. Plus, the wait for just the right vehicle could be as long as three-to-six months.
It all adds up to sticking with the status quo rather than paying more for less.
“The lease car you’re turning in may have features like wireless charger or heated seats you may have gotten on your 2019 that are not available on your 2022 car because of the chip shortage,” said Ryan. “Not only will you wait a long time there’s real risk you’ll get a car less well-equipped than the one you leased three years ago. On top of that you’ll be paying record high prices— usually sticker or sticker-plus.”
That’s if you’re lucky enough to find the vehicle in your sights. Those with the highest demand features aren’t sitting long on dealer lots. Where new vehicles would generally spend a couple of months on the market that “days on market” number has dropped to about 45 in November from 80 in November, 2020.
Some don’t even make that far.
“We’ve seen OEMs start to switch to where they’re showing on websites not only what vehicles are available on dealer lots but what vehicles are in transit, what vehicles are being built and these vehicles are being purchased before they reach dealer lots,” said Roberts
Overall, leasing as a percentage of sales is down this year. According to Ryan, during the first quarter of 2019, leasing represented 33.4% of the market while that proportion dropped to 26% in the second quarter of this year. Part of the reason, he said, is low inventories mean automakers aren’t subsidizing leases to boost sales figures. There’s simply not much metal to move.
Cox Auto’s Eric Ibara also notes the supply of off-lease vehicles at Manheim wholesale auctions is “down significantly” this year. He speculates that’s due to more consumers buying out their leases or dealers not sending off-lease vehicles to auctions—a practice known as “grounding.”
As automakers find new sources of semiconductor chips production is gradually increasing. But for those who are currently leasing the best strategies are making, or planning their next moves right now.
“If an owner has a lease ending soon (in the next six months) and intends to lease another vehicle or buy another vehicle, they would be wise to begin working with the dealership as soon as possible,” warned Ibara. “Getting a replacement vehicle will take some time. In this environment, no one should expect to end a lease and easily find a replacement car. This is a market that rewards planning ahead.”