Auto leasing is at its most popular, accounting for a record 24 percent of new car sales nationwide during the past year (Q2 2013 through Q1 2014). This reflects the improving economy, including expanding credit markets and more confident consumers. Leasing has recently grown in nearly every Designated Market Area ("DMA"), in a number of segments beyond luxury, and to older and less affluent consumers. In the New York DMA, leasing has surged even beyond already high levels. But, headwinds to continued leasing strength lie ahead. In particular, currently competitive monthly lease payments could rise as interest rates increase and residuals fall, threatening to slow leasing momentum in one of its traditional strongholds.
Leasing: A New York State of Mind
New Yorkers love to lease. A whopping 53 percent of new cars purchased for personal use were leased in New York during the past year, compared to 24 percent nationwide. In fact, during the past five years, only Detroit has had a higher leasing rate than New York. What’s more, leasing does not appear to be maxed out in New York. The New York leasing rate has grown 29 percent since 2008, even as overall sales recovered from the recession and expanded.
High leasing rates can be explained in Detroit and many other top leasing DMAs by employee leasing programs offered by automaker employers in the area. In New York, however, leasing popularity can be more readily attributed to features of the New York lifestyle that are more conducive to leasing. For one, New Yorkers drive less. Residents of the New York DMA average fewer vehicle miles traveled per capita than residents in any of the other top 75 urban areas in the U.S. and that number has declined in recent years. In addition, the high cost of living in New York — more than twice the national average in Manhattan and 60 to 80 percent higher than the national average in Queens and Brooklyn — suggests a greater need for residents to minimize their monthly car payments. At the same time, the trend-setting environment suggests a greater desire of residents to maximize the quality of the cars they drive.
Leasing: Not Just For Luxury Vehicles
Mention leasing and luxury cars typically come to mind. Certainly, leasing is the most popular for luxury vehicles nationwide — nearly half of all new luxury vehicles are leased. In contrast, the segments in which leasing is the least popular nationally include large trucks, compact trucks, and subcompact cars. New York mirrors these trends, but the popularity of leasing in New York means that even the least popular leasing segments there have more than 20 percent of new vehicles leased.
Even so, New York is also experiencing the same expansion of leasing beyond luxury segments that is taking place around the country. The share of new car sales accounted for by leasing has grown in 80 percent of segments in New York since 2008. In particular, the leased share of sales in five segments — compact cars, compact trucks, large cars, large crossovers, and large trucks — has more than doubled and the leased share of subcompact cars has more than tripled. As a result of leasing growth in non-luxury segments, the share of new car leases attributed to luxury vehicles in New York fell from 28 percent in 2008 to 23 percent in 2014.
Leasing: Not Just For Wealthy And Aspirational Buyers
Another commonly held view of leasing is that it appeals more to wealthy buyers who can afford a new car every few years and to aspirational buyers who want more car for their dollar. Not surprisingly, lessees nationwide, including in New York, tend to be younger (under 45 years old) and have higher annual household income (over $75,000 and especially over $150,000) compared to the typical buyer. Recently, though, these patterns have shown signs of change. Leasing has become more common among older buyers (over 55 years old) and buyers with household income under $100,000 per year.
Forecast: More Leasing In 2014
Expected market conditions in 2014 should support continued leasing popularity. Car shoppers coming off lease will account for some additional 300,000 in new car sales nationwide over 2013, or about 40 percent of the expected 2014 auto sales growth. Continued economic improvement will mean more car shoppers feel confident enough to lease. And, the recent shifts in the leasing landscape reveal a larger and more diverse group of car shoppers now interested in leasing. The increased consumer interest in leasing will be further encouraged by monthly lease payments which are currently quite competitive, thanks to strong residuals and low lease interest rates.
Looking Further Ahead: Headwinds To Come
While current leasing popularity is expected to continue in the coming months, both in New York and around the country, its very success could later prove to be its undoing. Growing lease returns are combining with more trade-ins from higher new car sales to rebuild used car inventories. This inventory growth will put downward pressure on used car prices, which in turn will lower residuals and raise monthly lease payments. Monthly lease payments could also increase due to rising interest rates from changes in Federal Reserve programs that have kept rates low. While it is likely that New Yorkers will continue to find leasing fits well with their lifestyle, the increase in monthly payments could dampen its appeal for the more cost-conscious car buyers in the area.
Lacey Plache is the Chief Economist for Edmunds.com. Follow @AutoEconomist on Twitter.