A flood of leases set to hit car market

Stocks began their holiday-shortened week in the red, with weakness in the financials and energy sectors. The S&P 500 Index and the Nasdaq broke a seven-session winning streak.

The Dow fell 50 points, with 16 of its 30 components retreating; the S&P 500 Index lost 2; and the Nasdaq dropped 7. Decliners led advancers by eight to five on the NYSE and nearly two to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $5.70 to close at $1,265.70 an ounce, and the price of oil slipped 14 cents to settle at $49.66 a barrel.

In other business news:

• Consumer spending rose 0.4% in April, according to the Commerce Department’s Personal Income and Outlays report. It was the strongest gain since December 2016, and reflected tax refunds hitting household bank accounts and rising incomes, also up 0.4%. Consumer prices rose 0.2% for the month and 1.7% for the year, according to the Personal Consumption Expenditures (PCE) Index. The core index, which excludes the more volatile food and energy components, rose 0.2% for the month and 1.5% for the year. The PCE Index is the Federal Reserve’s preferred inflation measure, so a reading below its 2% target could influence its decision over when or how often to raise interest rates this year.
• The Conference Board’s Consumer Confidence Index softened slightly in April, falling to 117.9 from 119.4 the prior month. Consumer confidence about current conditions held steady, with the decline coming from expectations about economic conditions six months from now.
• Dwindling housing supply continued to send home prices higher in March, according to the Case-Shiller 20-City Home Price Index. The index rose 5.9% from a year ago, led by a 12.3% jump in Seattle. All 20 cities measured by the index recorded gains above 4%.
• Shares of Amazon.com briefly traded above $1,000 a share for the first time today, a far cry from its 1997 initial public offering price of $18 a share. The company is nearing a market capitalization of $500 billion, making it the fourth-largest company in the U.S., all of which are in the tech industry, and well ahead of its retail competitors, such as Wal-Mart. The online retailer’s shares ended just shy of the mark, up 0.09% to close at $996.70.

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Since the 2008 financial crisis, used car buyers could be forgiven for thinking that a four-year old Honda Civic had suddenly slipped into some sort of in-demand antique car category. When the new car market essentially froze up, buyers flooded the used car market, which sent used car prices soaring. Buyers needed affordable cars, which elevated demand to the point that used cars became unaffordable. It’s like going to a nice secluded lakeside cabin for peace and quiet and discovering that everyone else had the same idea, so everyone can be not secluded and not peaceful and quiet together.

Relief might be around the corner (for used cars, not formerly secluded cabins). Used car prices have been falling this year, and due to a quirk of timing, they have the potential to fall even more. Three years ago, car leases started spiking, according to a new analysis from the Associated Press. That means those three-year leases are ending this year. About 3.5 million leased cars are estimated to hit the used car market in 2017, up from 3 million in 2016. The number of formerly leased vehicles is expected to increase in the next three years as well. Leases rose from 23% of all sales in 2014 to 30% at the start of 2017. It’s now dipped below 30% as of April, as manufacturers actively tried to turn off the leased-car spigot, but there’s now a three-year-long, slow-cresting wave of leases crashing into the market.

There’s another wrench in the works too. Most of the leases were for cars, not SUVs. The era of low gas prices, however, helped prod consumer preferences toward gas-heavy SUVs. The percentage of car sales sank from about half of all sales in 2014 to 38% this year, per AP. Automakers will thus have a glut of cars to sell at the exact moment that the majority of car buyers wants trucks and SUVs. In that sense, perhaps the buyers best suited to take advantage of the current market are those who are trading in an SUV to buy a used car. Buyers trading in a used car might not be as lucky, as car dealerships might already have a pile of three-year-old used cars out back.

In any case, my used car negotiation strategy for the next few years will be to take the sticker price and subtract the sticker price. “Hmm, I like that it has low miles, but I’m not wild about the price, in the sense that I’m looking for a vehicle without a price. Can you take that to your manager?”

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