You know the economy is bad when a house given away for free by ABC’s “Extreme Makeover: Home Edition” is headed for foreclosure. But even though we hear a lot about the mortgage mess, there’s also big trouble afoot in the auto-loan industry.
Turns out, the big three automakers in Detroit want out of the once-lucrative car-leasing business. Last Friday, Chrysler announced it would no longer offer leases for its vehicles. The move represented a sea-change in how the automaker approaches financing.
On Tuesday, both Ford and General Motors leaked word that they, too, were backing away from leasing. Ford suggested that it might stop leasing only trucks and SUVs; GM says cryptically that it is going to make “adjustments” to its leasing regime.
Since the early 1990s, leases have been a common arrangement allowing consumers to take possession, albeit temporarily, of cars they typically couldn’t afford to buy outright. Automakers were thrilled by the lease because it (1) allowed them to expand the pool of potential buyers to include people who couldn’t afford traditional loans; (2) created constant demand for new cars, since leases normally expired after two to three years; and (3) was tremendously profitable: After charging someone rent on the car for a couple of years, the automakers would take the car back and sell it on the secondary market for a hefty profit.
To get a sense of how important leases are, until this week, they accounted for 20 percent of new-car sales for the big three automakers. For now, buyers will still be able to make lease arrangements through third-party creditors, but many of those lenders, including Chase and Wells Fargo, seem to be turning away from leases, too.
What’s going on? A few things, all at once.
First, there are gas prices. Always remember that economic events ripple outward — and $4 a gallon for gas creates a lot of ripples.
One ripple: Over the last year, the price of used full-size SUVs is down 27 percent; the price of used pickup trucks is down 25 percent, according to a recent report in the Wall Street Journal.
Remember that the profitability of the lease depends on the automaker’s ability to resell the used car. So those big price declines on the used market have meant huge losses for the automakers.
Pull back a little, though, and the entire financing side of the auto industry is shaky. Just as in the mortgage world, qualifications for auto loans relaxed earlier in the decade. About $575 billion in new- and used-car loans are made every year and as the downturn set in, the delinquencies began to pile up. Toward the end of 2007 they were at the highest levels since 1992, and it looked as if the auto-finance world might be facing its own crisis.
The bad news is that U.S. automakers may be in a no-win situation. Keep leasing SUVs and trucks, and they’ll keep losing money on the re-sales. But if they cut out leases, a large chunk of customers will no longer be able to afford a new car. And right now they need every buyer they can get their hands on.
Chrysler’s domestic sales are already down 22 percent this year. Eliminating leases that now account for 20 percent of new sales can only hurt demand, creating a vicious cycle.
The good news is that the market for auto loans seems to have stabilized, at least for the moment. The first-quarter delinquencies from 2008 showed improvement over the last quarter of 2007, declining by 18 percent. But even this was a mixed bag: Delinquencies from dealer financing fell, but delinquencies from direct financing — that is, banks and other lenders — rose slightly.
And the further good news is that unlike the housing market, irresponsible lending and borrowing in the auto market shouldn’t directly affect more responsible consumers. Of course it’s the indirect effects that’ll kill you. Let’s see where these ripples go.
Note to readers:
Ellis Henican’s column will return.
Last is a columnist for the Philadelphia Inquirer. Send him e-mail at jlast@phillynews.com.
Automobile Consumer Services, Inc. (ACS), the leader in online direct-to-consumer auto leasing, released a list of the top 10 most requested vehicles from its popular auto leasing