Take automakers’ inability to finance leases, combined with gas prices, the weak economy and other problems facing the industry, and you have the makings of what could be one of the worst months for auto sales in more than 15 years.Auto companies report their U.S. sales for July on Friday, and the results are expected to continue the downward trend that has plagued the industry all year. Auto consulting company J.D. Power and Associates predicts the industry will see its worst July since 1992, with little chance for a recovery in the next 12 months. That forecast is shared across the industry.
“There doesn’t appear to be any indication that we’re going to have a second-half recovery to any great extent,” said George Pipas, Ford Motor Co.’s top sales analyst.
Jesse Toprak, the chief economist for the automotive information site Edmunds.com, predicts industry sales will tumble 3.3 percent in July from a year earlier, and that Honda Motor Co. will be the only major automaker reporting a sales increase thanks to its stable of small, fuel-efficient cars. Honda could even overtake Ford as the second-largest carmaker by U.S. sales behind General Motors Corp.
Still, even Honda has been affected by the brewing trouble in the auto leasing sector, recently taking a $230 million charge because of the decline in value of leased vehicles returning to the company. High gas prices have accelerated the decline in value of large pickups and sport utility vehicles, making automakers’ lease portfolios less attractive to banks and captive finance companies and leaving automakers to chalk up big losses when they try to sell their off-lease vehicles.
On Tuesday, Chase Auto Finance said it would stop financing leases for Chrysler vehicles after the close of business Thursday, joining Wells Fargo Auto Finance, which stopped accepting lease applications from all automakers July 15.
Also Tuesday, GMAC Financial Services, GM’s finance arm, said it would stop offering lease incentives in Canada, which offer lower monthly rates by subsidizing the cost of financing the vehicle, although GMAC will still offer standard lease rates. Ford Motor Credit also said it would raise leasing prices on some models. And Chrysler LLC announced last week that its own finance arm would get out of the leasing business by the end of the month.
Leasing makes up about 20 percent of the U.S. market, much of it concentrated in luxury vehicles. That amount has been rising steadily in the last five years as automakers have cut back on other financing offers, making leasing look like a better deal.
But now, automakers find themselves with trucks and SUVs that are worth much less at the end of their leases than originally forecast. Ford said its credit arm took a $2.1 billion charge during the second quarter because of the drop in the residual value of leased vehicles, while BMW AG took a similar, $372 million charge in the first quarter.
Automotive Leasing Guide, a service used by banks and automakers’ finance companies, lowered its predicted residual values for trucks and SUVs this week. The Chevrolet Tahoe SUV is now forecast to be worth 31.9 percent of the manufacturer’s price after 36 months, down from 42 percent, while the Ford Expedition dropped to 32 percent from 45 percent. At the same time, ALG forecast residual values will rise for compact cars with high fuel efficiency, including hybrids.
Despite the turmoil, analysts don’t think leasing will go away entirely. Mark Warnsman, an auto analyst with Calyon Securities, predicted that most automakers and banks likely will cut leasing by raising prices rather than exiting the business completely like Chrysler Financial and Wells Fargo.
Falling values on used pickup trucks and SUVs mean consumers will have to pay more for leases, to the point where buying may make more sense, Warnsman said.
“The truth of the matter is the market is adjusting to the fact that now there’s significant overcapacity for producing trucks and SUVs,” Warnsman said. “There’s just far too many trucks and SUVs on the road for what Americans want to drive.”
Lenders have limited capital and are choosing to spend it in other areas, he said.
Toprak said the actions at JPMorgan Chase & Co. and Wells Fargo & Co. won’t have much of an effect, since the vast majority of auto leases were handled by the automakers’ finance companies. He expects Chrysler will be the only automaker to stop leases entirely.
“They had the highest percentage of trucks and SUVs in their portfolio, and they got hit the worst when these vehicles came back from their lease terms,” he said.
Toprak said many luxury makers, including BMW, Jaguar and Audi, continue to do more than half of their business in leasing, and he doesn’t expect that to change. He also expects an uptick in leasing for Japanese brands.
“Some brands will suffer and see lower lease rates going forward, but overall it’s not a big impact in the short term,” he said.
Tom Libby, senior director of industry analysis for J.D. Power’s Power Information Network, agreed that leasing rates will likely maintain their current level unless automakers offer zero-percent financing or other major offers designed to boost sales and cut lease rates.
Chrysler already has said it will be sweetening sales incentives to make up for lost leases. Libby said a flattening or lowering of gas prices also could slow the depreciation of big vehicles, making leasing more attractive to automakers.