Worrisome Trends Taking Hold for Automotive Retail

April 1, 2016

Automotive News reports that Thomas King, a consultant at J.D. Power, is warning of risk factors that should be on the radar of the auto industry.

These risk factors include the rise in new-car incentives, the growing popularity of 84-month car loans and the rapid shift toward leasing – which he said has a multibillion-dollar risk if leased cars do not hold their expected value.

Incentives on new cars rose to an average of 9.6 percent of sticker price in 2015, King said, nearing the recession-era peak of 11.1 percent. The share of auto loans lasting 84 months or longer rose 1.4 percentage points to 5.4 percent, while the share of buyers with FICO credit scores below 650 rose to 17.6 percent.

Perhaps most dangerous was an increase in leasing. Nearly one-third of retail transactions in 2015, 31.4 percent, were leases, up 3.6 percentage points in a year.

King said an existing oversupply of cars could be worsened by a higher-than-usual number of cars coming back from leases. For every percentage point that automakers overestimate the residual value of leased cars at the end of their leases, he said, the industry stands to lose $1.8 billion in aggregate.

“There is considerable risk that these vehicles may simply not be worth what they were planned to be worth,” King said. “If we start to see significant misalignment – one, two, three, four, five points – we could easily find ourselves in the same situation as the late ’90s and early 2000s,” he added. “This is why it’s so important that we try and get discipline around the car portfolio.”

King said despite its concerns, J.D. Power sees the 2015 sales pace as sustainable, if only barely. The consultancy forecasts that retail sales will tick up from 14.2 million cars in 2015 to 14.5 million in 2016, then to 14.7 million in 2017.