Why The New Car Bubble’s Days Are Numbered

Having recently detailed the automakers’ worst nightmare – surging new car inventories – supply; amid rapidly declining growth around the world (EM and China) – demand;

Automakers just unleashed a massive production surge to keep the dream alive…

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With inventories at record highs (having risen for 61 straight months)…

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Which would be fine if sales were keeping up – but they are not…

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It appears the bubble in new car sales is about to be crushed by yet another unintended consequence of The Fed’s lower for longer experiment.

Edmunds.com estimates that around 28% of new vehicles this year will be leased – a near-record pace…

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Which means…

13.4 million vehicles (leased over the past 3 years in The US) – compared with just 7 million in the three years to 2011 – are set to spark a massive surplus of high-quality used cars.

Great for consumers (if there are any left who have not leased a car in the last 3 years) but crushing for automakers’ margins as luxury used-care prices are tumbling just as residuals have surged.

As The Wall Street Journal explains,

Consumers focused on the dollar amount of their monthly payment have taken advantage of low interest rates to sometimes buy more car than they might otherwise be able to afford.

But, aside from the actual cost of the vehicle, rates are only part of the equation determining monthly payments. The other is what auto makers and their financing arms think the residual value will be once a typical 36-month lease is up.

Those values surged after the financial crisis.

Now, a surfeit of off-lease vehicles is starting to depress prices, particularly for expensive vehicles.

Three-year old, used premium luxury-car prices are down by nearly 7% from a year ago, according to Edmunds.com data. Along with Fed interest-rate increases, that would make leases less of a bargain and used cars more attractive.

That new-car smell may soon involve more of a splurge.