Just before the Titanic went under, the rear end went up higher – possibly giving those in that end of the ship a false sense of buoyancy. Those who leased a car just before “COVID” hysteria spread across the globe are enjoying something similar.
When the supply of new cars began to dry up in the wake of new car factories and dealerships being closed up – an artificial shortage magnified by the also-artificially-induced shortage of the microprocessors or “chips” needed to finish making new cars – the market value of the cars already in people’s hands went up rather than down.
Desperate-for-inventory dealers were offering to buy people’s used cars for more than what they would have sold for in the used car market just before “COVID”- and then offered them for sale for as much as what they sold for when new.
This, of course, further drove up the asking prices of used cars, resulting in the heretofore-never-happened-before phenomenon of used vehicles appreciating in value.
This was bad news for anyone who wanted to buy a car, new or used. But it was very good news for people who were looking to sell a vehicle they’d bought before “COVID.”
And if you’d leased a car just before “COVID” – in air quotes for the same reason that, per the rules of grammar and style, one puts the title of a play inside quotation marks – you were in luck, too.
Instead of being under water to the tune of several thousand dollars by the time the lease expired – which was a common thing before “COVID” because of the increasingly unfavorable ratio between record-high new car prices at the beginning of a lease and the expected depreciated value at the end of the lease – many lucky leasers discovered they had thousands of dollars in equity in their leased car. They could purchase the car for a price negotiated before the market value of used cars went up like the stern of Titanic. That price – based on expected depreciation, pre-“COVID” – was often thousands less than what the vehicle could be re-sold for during “COVID.”
Many saw an opportunity to make some money, for once – and bought their leased vehicle at the pre-“COVID” agreed-upon depreciated price in their lease contract and them promptly sold it themselves at a “COVID”-inflated price.
According to industry analyst Jeremy Robb of Cox Automotive, “Lessees of 2018 models hit the jackpot, with a positive equity that reached as high as $9,705 in late 2021 and averaged $5,516 for the year.”
He adds that “Leased vehicles from the 2019 model year have averaged $7,970 in positive equity in 2022 through the week ending Nov. 12″ and that “Three-year leases of 2020 models maturing in 2022 have averaged $8,536 in that time.”
But those times are coming to an end – because they were artificial and for that reason, temporary.
The supply of new vehicles is improving. This makes it harder to sell someone a 2-3-year-old vehicle for about the same price as a new one. There is also the cost of money – interest – to consider. It costs more to finance a vehicle now than it did, pre-“COVID” – and the cost of money on used car loans has always been higher, because (historically) there is less equity in the thing to start with and for that reason the unhappy nexus of owing more on the loan than the car is worth – being under water – arrives sooner. Loan-issuers are well aware of this fact and so charge more for money (interest) to make sure they make money, rather than lose it – when the person making payments realizes he’s under water and stops making those payments.
Robb says equity in used/leased vehicles is on the downward slide now, as is natural. Very much as happened to the back-end of Titanic once a sufficiency of sea water had displaced the buoyancy-providing air remaining in the still-afloat portion of the ship’s hull.
This is very bad news for people who bought into a lease – or bought a new vehicle – over the past year or so. It is probable they will shortly find themselves very much under the water.
But this is potentially very good news for those who didn’t buy – or lease – a vehicle during the past year or so. They may soon find unprecedented deals on both used and new cars, the prices of which may soon collapse as depreciation replaces appreciation and a possible glut of dumped leased vehicles and repo’d vehicles (whose former owners stopped making payments on them) floods the market, increasing supply at just the moment when demand has slackened . . . because so many people can no longer afford to buy/lease car anymore, on account of the increased cost of everything else – in tandem with the decreased purchasing power of whatever money they have left.
This will put those who do have money – and don’t need to borrow it – in the catbird seat.
. . .
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