Auto leasing is at its most popular, accounting for a record 23 percent of new car sales in 2013. This reflects the improving economy, including expanding credit markets and more confident consumers. Leasing has recently grown in nearly every DMA, in a number of segments beyond luxury, and to older and less affluent consumers. But, headwinds to continued leasing strength lie ahead. In particular, currently competitive monthly lease payments could rise as interest rates increase and residuals fall.
Leasing: Not Just For Big Cities
Leasing is more geographically concentrated than overall sales, in part due to the high rate of leasing in areas where automakers are key employers and offer leasing programs to their employees. The top ten DMAs for new car leases account for over half of all leases, while the top ten DMAs for new car sales account for only about one-third of all sales. But, leasing is becoming less concentrated, and its growing popularity is a nationwide trend. The share of new car sales accounted for by leases grew in 92 percent of U.S. DMAs during the past five years. In half of these, the leased share of new vehicles increased by at least 50 percent.
Leasing: Not Just For Luxury Vehicles
Mention leasing and luxury cars typically come to mind. Certainly, leasing is the most popular for luxury vehicles — nearly half of all new luxury vehicles are leased. In contrast, the segments in which leasing is the least popular include large trucks, compact trucks, and subcompact cars. But, leasing is increasing in popularity in a wider variety of segments. The share of new car sales accounted for by leasing grew in two-thirds of segments from 2008 to 2013. In particular, the leased share of compact cars more than doubled — from 11 percent of compact car sales to 25 percent — and the leased share of subcompact cars nearly tripled — from 5 percent to 14 percent. As a result of leasing growth in non-luxury segments, the share of new car leases attributed to luxury vehicles fell from 30 percent in 2008 to 24 percent in 2013.
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 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 65 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 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, 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.
Lacey Plache is the Chief Economist for Edmunds.com. Follow @AutoEconomist on Twitter.