November 20, 2019

Your Money: Auto Leases Entice, but They’re Still Costly

After all, if your family is already paying for cable television and a couple of cellphones, many of the current leases being offered may seem like a relative steal. And with leases fueling surprisingly strong car sales, it seems that more drivers are thinking in those terms.

Indeed, the pay-as-you-go smartphone mentality seems to have seeped into the car market, especially with younger buyers, many of whom don’t seem to mind that they don’t own anything at the end of the lease’s term. But that hasn’t changed the long-term economics of leasing: it still costs several thousand dollars more than buying a new car, not to mention a newish used car.

“People’s attitudes are shifting,” said Philip Reed, senior consumer advice editor at Edmunds.com. “The car is being seen more as a commodity to be used and then returned. Ownership was a big part of the World War II generation — people wanted to own their house and own their car. They were taught that was financially responsible.”

There are reasons certain people might want to lease (the first one being you have extra money to burn). But for the rest of us, the financial consequences are worth re-examining, especially when you have a slew of competing financial priorities like college tuition, retirement or even a nice vacation.

So let’s start with the hard numbers. Mr. Reed looked at three ways you could acquire a four-door Honda Accord EX: buying a new 2014 model, leasing the same 2014 car, or buying a used 2011 Accord with 36,000 miles. (Many people in the New York area are paying about $28,211 for the new car, including tax, title and registration.)

The analysis looked at the cost over six years, since the average person owns a car for that long, and it incorporated typical buying patterns: the new Accord is purchased with a five-year loan, the used car is financed with a four-year loan, and the person who is leasing must take out two consecutive 36-month leases. (The rest of the assumptions are detailed on the accompanying chart.)

Leasing initially seems to be the cheapest route when you look at total out-of-pocket expenses: It costs $5,244 less than buying new. (Buying a used car is still the most economical. You save $5,277 compared with leasing, and it’s about a whopping $10,500 less than buying new.)

But when you account for the teensy fact that you don’t own anything at the end of those six years, the calculus changes. If you had bought the car new, it would still be worth about $11,000, according to Edmunds.com’s calculators. The used Accord would be worth around $5,000.

So after you factor in that equity, leasing costs $5,756 more than buying a new car and $10,277 more than buying used. (Buying new costs $4,521 more than buying used.) Leasing is the loser across the board.

“If you asked me what is the most expensive way to get a car, the answer would be: You only want to own it during its period of greatest depreciation and then move to another new vehicle,” said Jeff Bartlett, deputy automotive editor at Consumer Reports. “Well, that’s what leasing is.”

With that analysis in mind, here are some other factors that need to be considered when deciding the best way to acquire a car:

NEEDS VERSUS WANTS Is there anything you absolutely need now that you can’t get in a lightly used car that’s only a few years old? Some experts say you can make a decent argument for new cars based on some recent safety improvements. The Insurance Institute for Highway Safety, which some experts say tends to have more rigorous guidelines than the government, added new recommendations after its latest small frontal crash tests last summer. And some manufacturers have been updating their existing models, Mr. Bartlett said, to meet those standards.

Though it’s hard to argue that anyone “needs” to have the latest technology, that has come a long way in the last couple of years, too. “That two- to three-year time difference means the world in terms of connectivity,” Mr. Bartlett added. “Now, there are stereos in mainstream cars that offer Pandora, Aha, and Stitcher for streaming Internet radio via a smartphone and allow you to control an iPod. Plus, USB connections are fast replacing traditional microplugs, and Bluetooth is near ubiquitous. The expectation of mobile connectivity and what you can do on the run has changed dramatically.”

LEASING It becomes a difficult cycle to escape. Unless you saved extra money while leasing, you may not have accumulated enough for a down payment on your next car, and you won’t have a car to trade in. And now that you’re accustomed to the low monthly payment, it will be hard to stomach the much higher monthly cost of buying new (or even a not-too-old used car, in some cases).

You will avoid repair or maintenance costs (except for oil changes and tire rotation) that used and even new car buyers would eventually have to pay. But you will probably pay more for insurance with a leased vehicle, which Mr. Reed says is almost as much as the extra maintenance. It ends up being close to a wash.

Leasing also allows you to get into a car right away, with little financial disruption: it requires little or no money down and minimal outlay each month. There’s also the fact that you’re driving a brand-new car, with all of the latest technological and safety features.

TIME HORIZON Beyond the numbers, your time horizon should also help determine what you ultimately decide. “If you are someone who knows they are going to own a car for 10 years and you are driving all over the country, you are not the type of person who should be leasing,” said Alec Gutierrez, a senior market analyst of automotive insights at Kelley Blue Book, referring to the mileage limits of about 12,000 a year on leased vehicles. “If you go beyond that, you are likely to be hit with significant penalties.”

Besides, buying a new car and holding onto it is more economical now. “You are making pretty high payments for about four or five years, but the dependability of cars is really great these days,” said Mr. Reed. “It can probably go another five years with minimal costs.”

LEASE MECHANICS You’re essentially paying for the amount of value the car loses over the course of your lease; in other words, the price you pay is based on the vehicle’s residual value at the end of the term. Consider a $30,000 car that is worth $15,000 after three years. “You will divide that into monthly payments, and that is your lease payment, plus interest and some fees,” Mr. Reed explained. (You also only pay sales tax on the amount of the vehicle that you use, in this case, $15,000).

That’s why cars that retain their value tend to translate into better deals for leasing: the higher the residual value, the lower the monthly payment. “Things like Mercedes, BMW and Honda hold their value very well, and make very good lease cars,” Mr. Reed said.

(If you do lease, figure out the number of miles you want to drive each year; how long a lease you want; and how much you want to put down. Then call a few different dealers and ask them to quote you a monthly payment. This is the simplest way to shop around, Mr. Reed said, though leasing aficionados may choose to get more technical.)

BUYING USED If you buy used, you may need to come up with a larger down payment than if you bought new since more people tend to default on used cars (you might have to put 10 to 20 percent down on a used car, compared with 0 to 10 percent for a new one). “But because of the easily repossessed nature of the collateral, if there is one loan that is easier to qualify for, it tends to be a car loan,” said Greg McBride, senior financial analyst at Bankrate.com.

PAYING CASH Of course, there’s always the option of paying for a car the old-fashioned way: saving up and paying cash.

That’s what Mr. Bartlett of Consumer Reports does, whether he is buying new or used.

“Obviously, nobody does this,” he said. But when you pay cash, “you don’t have to worry about them sneaking in all of these fees. You just negotiate a price, and then write a check for that number. If I can put some of it on my credit card and then get the points and pay it off at the end of the month, I come out ahead.”

Article source: http://www.nytimes.com/2013/09/21/your-money/car-leases-grow-more-enticing-but-no-less-expensive.html?partner=rss&emc=rss

Sirius XM Reports Record Revenue, Aided by Auto Recovery

The satellite-radio provider had $283 million in adjusted earnings before interest, taxes, depreciation and amortization, up 19 percent from the same period a year ago.

But while the pace of Netflix’s subscriber growth worried investors, Sirius has continued to grow quickly, sped along by the recovery in car sales. Sirius reported 25.1 million subscribers, up 716,000 from the same period last year, and the company increased its guidance for the full year, saying that it expected to add 1.5 million subscribers and have more than $3.7 billion in revenue. Shares of Sirius were up a little more than 1 percent in the early afternoon on Thursday.

“The wind has certainly been at our backs with increasing auto sales, and we expect that to continue for the rest of the year,” James E. Meyer, the chief executive, said in an conference call with investors and analysts. Mr. Meyer replaced Mel Karmazin, Sirius’s longtime chief executive, in December.

Mr. Meyer said that there are 54.5 million automobiles in operation with Sirius installed, and that he expected the number to rise to 100 million by the end of 2017.

Sirius also fared well with two particular measurements that investors have paid close attention to. Its “churn” rate, a measurement of customer turnover, has lately hovered around 2 percent, but for the second quarter it dropped to 1.7 percent, meaning that fewer customers were canceling subscriptions.

The number of “self-pay” subscriptions — as opposed to those with trial subscriptions subsidized by automakers — also grew in the second quarter to a high of 20.3 million, up 9 percent from last year. Subscriptions to the satellite radio service start at about $15 a month.

Sirius’s stock has jumped more than 75 percent in the last year, driven by the company’s improved performance as well as the company’s takeover last year by Liberty Media, which has suggested that it may sell the company or combine it with another of its holdings. This year, Sirius has also completed $1.3 billion of a planned $2 billion stock repurchase plan.

Article source: http://www.nytimes.com/2013/07/26/business/media/sirius-xm-reports-record-revenue-aided-by-auto-recovery.html?partner=rss&emc=rss

European Troubles Lower Results for VW and Fiat

Until now, Volkswagen, the German auto company, had been buffered a bit more than other auto companies doing business in Europe because of its size and strong sales in North America and China.

But its shrinking profit margins reflect both the industry’s steep sales decline in Europe as well as intense price competition in the biggest vehicle segments.

Volkswagen joins a growing roster of foreign and United States automakers that are struggling in Europe, where car sales dropped 10 percent during the first quarter, including double-digit decreases in France, Germany and Spain.

Most automakers are banking on surging sales in the United States to offset some of these losses.

And VW’s chairman, Martin Winterkorn, cautioned that the company expected little improvement any time soon in Europe.

“The coming months will be anything but easy,” Mr. Winterkorn said in a statement. “The current environment is definitely a tough challenge for the entire industry.”

VW reported on Monday that its after-tax profit fell 38 percent, to 1.95 billion euros ($2.5 billion) in the first quarter, even though revenue slipped just 1 percent, to 46.6 billion euros.

The Italian automaker Fiat also reported a drop, reporting that its net profits plunged 88 percent during the three-month period, to 31 million euros ($40 million), and that revenue fell 2 percent, to 19.76 billion euros.

Fiat’s chief executive, Sergio Marchionne, said that the combination of pricing pressure and weak demand was likely to depress profits in Europe for some time. “It is unfortunate the European market is in this state,” Mr. Marchionne said Monday in a conference call with reporters and analysts.

He added that some automakers had considered themselves immune to the downturn, but no longer. “Those who have claimed a Teflon approach are getting that coat taken off,” he said.

Last week, the American automaker Ford reported a pretax loss of $462 million in Europe, and projected a full-year loss of $2 billion in the region. And the French carmaker PSA Peugeot Citroën said it expected losses to force new labor talks to cut costs and increase competitiveness.

With the European market in such a dismal state, most auto companies are counting on surging sales in the United States to generate the bulk of their future profits.

At Volkswagen, the company’s Audi luxury brand is the bright spot in its lineup. Audi, which has posted a 16 percent sales increase in the United States this year, contributed more than two-thirds of overall profits that VW earned in the first quarter.

Fiat has been getting virtually all of its profits from its Chrysler subsidiary in the United States.

Fiat took control of Chrysler after the American company’s government bailout and bankruptcy in 2009. Since then, the Italian automaker has accumulated a 58.5 percent stake in Chrysler, and they have begun developing vehicles together.

In the first quarter, however, Chrysler’s comeback stalled somewhat, as it spent heavily on new versions of two core products, the Jeep Grand Cherokee sport utility vehicle and a heavy-duty Ram pickup truck.

Chrysler said Monday that its net income fell 65 percent during the quarter, to $166 million, and revenue dropped 6 percent, to $15.4 billion.

Yet Chrysler still managed to help Fiat post a profit. Without Chrysler’s contribution to the bottom line, Fiat said it would have lost money during the period.

Mr. Marchionne, who is also chief executive of Chrysler, said he expected the American company to reach its full-year target of $2.2 billion in net income and revenue of $72 billion or more.

He said that the coming introduction of the new Jeep Cherokee S.U.V. this summer was “crucial” to hitting those goals.

“We need to do everything we can between now and then to make it happen,” Mr. Marchionne said.

He added that given the strength of the United States market, Chrysler should regain momentum with its new models. “The onus is on us,” he said.

Analysts said that Chrysler’s performance remained Fiat’s best hedge against the turmoil in Europe.

“Who would’ve guessed five years ago when Fiat rode to the rescue of a then-bankrupt Chrysler, that Chrysler would be viewed as the savior of Fiat?” asked Jack R. Nerad, an analyst with the auto research service Kelley Blue Book.

Mr. Marchionne also updated analysts Monday on the potential for Fiat to take full ownership of Chrysler.

“I have always seen Fiat and Chrysler being one entity at some point in time,” he said. “How we get there is a story that’s going to be written.”

Fiat hopes to buy the 41.5 percent stake in Chrysler owned by a health care trust for United Automobile Workers union retirees in the United States. But Fiat and the U.A.W. trust remain far apart on a price for the shares.

A federal judge in Delaware is considering different valuations proposed for the stock, and is expected to make a ruling on a fair price this summer.

Until the court case is resolved, Mr. Marchionne said a potential Fiat-Chrysler merger was temporarily delayed.

“I remain hopeful that we can find a solution that meets their objectives and ours,” he said.

If Fiat is successful in acquiring the shares owned by the U.A.W. trust, it could consolidate its balance sheet with Chrysler. Fiat could then gain access to Chrysler’s cash reserves to bolster its product lineup in Europe and elsewhere.

Once a Fiat-Chrysler merger is completed, Mr. Marchionne said the combined company would restructure itself and issue new shares to raise capital.

Fiat shares, like most Italian companies, are currently traded on the stock exchange in Milan. But Mr. Marchionne said new shares in Fiat-Chrysler would most likely be listed on the New York Stock Exchange.

“It’s the most efficient capital market I can get my hands on,” he said.

Article source: http://www.nytimes.com/2013/04/30/business/global/european-troubles-lower-results-for-vw-and-fiat.html?partner=rss&emc=rss

Manufacturing and Construction Lift Outlook on U.S. Economy

The Institute for Supply Management, a trade group of purchasing managers, said on Tuesday that its manufacturing index rose to 53.9 in December from 52.7 in November. Readings above 50 indicate expansion.

Also on Tuesday, the Commerce Department reported that spending on construction projects rose 1.2 percent in November, following a revised 0.2 percent drop in October. The increase was the third in four months and the largest since a 2.2 percent rise in August.

The November increase pushed spending to a seasonally adjusted annual rate of $807.1 billion, still barely half the $1.5 trillion that economists consider healthy. Analysts say it could be four years before construction returns to healthy levels.

United States manufacturing has expanded for more than two years. Factories were one of the first areas of the economy to start growing after the recession officially ended in June 2009.

The latest survey from the Institute for Supply Management showed that domestic factories should start the year strongly. Factories hired last month at the fastest pace since June, the survey found. A measure of new orders rose, a good sign for future output. And exports also increased last month, though it was not clear how long that would last. The economy in Europe is faltering as the Continent continues to address its debt crisis.

Consumers are gaining confidence and are spending more. Some economists were forecasting that car sales increased in December after a strong month of sales in November. That should improve output among automakers and also steel companies, tire makers and others that supply the industry.

Orders for long-lasting manufacturing goods jumped in November, the Commerce Department said last month. Most of that increase reflected a huge rise in commercial aircraft orders, a volatile category.

Still, demand for core capital goods, which are often a proxy for business investment plans, fell for the second straight month. Business spending was a crucial driver of economic growth in 2011. If businesses trim spending, economic growth is likely to slow.

Businesses are less likely to retreat, however, if the economy continues to improve.

For construction in November, strength was seen in housing and government spending. Nonresidential construction fell, reflecting declines in construction of office buildings and shopping centers.

The industry was hit hard by the housing bust and has had trouble recovering. But home construction has begun a gradual rebound and should add to the nation’s economic growth. The chief reason is that apartments are being built almost twice as fast as two years ago. Renting is often the only option for many people who have lost their jobs, their homes or both.

Builders in November broke ground on homes at a seasonally adjusted annual rate of 685,000. That was a 9.3 percent jump from October and the fastest pace since April 2010.

Builders should start at least 600,000 homes this year. That is up from 587,000 last year and 554,000 in 2009 — the worst year on record — but it is half the number that economists expect in a healthy market.

Even so, the recovery appears to be strengthening, if fitfully. Last week, the Conference Board said its consumer confidence index rose in December to the highest level since April. That is important because consumer spending accounts for about 70 percent of the economy.

Article source: http://feeds.nytimes.com/click.phdo?i=5be676a11ab1b46dec75fe3e003bb3a0

Economix Blog: When Confidence Is Lower Than the Economy Itself

Distrust in government is at its highest level in recorded history. Americans are worried that the economy is cratering. Protesters in the Occupy movement are voicing the frustrations of an increasing number of people.

There is no question that these sentiments reflect a grim reality: the poverty level is up. Inequality has grown exponentially since the 1970s. The European debt crisis remains unresolved. Unemployment is stuck at 9 percent, and if you count the people who have either given up looking or those who have taken part-time jobs because they can’t find full-time work, close to one in six people is underemployed.

Yet by at least one measure, how people feel seems disconnected from how things are. Consumer confidence is back down to lows last seen during the depths of the Great Recession, despite the fact that the economy is still, believe it or not, growing.

On Thursday, the Commerce Department will announce its estimate for economic growth in the three months from July through September. The consensus is now for an annual rate of 2.5 percent. Although that’s certainly not enough to bring down the unemployment rate significantly or increase middle-class incomes, it does suggest that the economy is not currently on the cusp of a double-dip recession.

Yet consumer confidence, as measured by both the Conference Board and the University of Michigan/Reuters index, is down to lows last seen in the fourth quarter of 2008, when the economy actually contracted at an annual rate of 9 percent.

It’s possible that the dip in confidence is a precursor of an actual pullback in spending that would, in turn, push economic growth down. But for now, actual spending does not seem to reflect the gloom that people feel. Chain store sales are up, as are auto sales. Part of the reason car sales have risen is that the supply chain disruptions caused by the Japanese earthquake and tsunami have receded. But people still have to buy the cars that are being produced.

Cars are usually bought on credit, which means buyers are committing to a stream of payments into the future. The fact that consumers are purchasing autos, said Ben Herzon, senior economist at Macroeconomic Advisers, “suggests they are not feeling as glum as they are reporting.”

It is not unprecedented that consumers would feel much worse than they actually behave.

According to the Conference Board, people do take longer to recover from a recession than the official economic metrics, in part because companies do not tend to create a lot of jobs until they are sure that growth is going to last. “The labor market has a significant impact on confidence readings,” said Lynn Franco, director of the consumer research center at the Conference Board.

So between 1991 and 1994, confidence zigzagged up and down. Twice during 1992, a year after the recovery had begun, confidence dipped as low as it had been during the recession. And in early 2003, a year after growth had resumed following the 2001 recession, consumer confidence fell to a far lower level than it ever reached during the recession.

The gap between perception and economic growth this time around also has to do with jobs. Employers are simply not creating them fast enough to instill optimism. On top of that, political brinkmanship over the debt ceiling in Washington, the Standard Poor’s downgrading of the United States credit rating in August, and vast swings in the stock market have rocked confidence.

In fact, stock market volatility may be playing a larger role in the consumer mind-set than it has in the past. After Black Monday in 1987, when the Dow fell more than 22 percent in one day, the University of Michigan/Reuters index of consumer expectations, which records how consumers feel about their economic futures, fell just 7.7 points, said Ian Shepherdson, chief United States economist at High Frequency Economics. Since May of this year, that index has fallen more than 20 points.

And let’s face it, even at 2.5 percent growth in gross domestic product, no one would call that firing on all cylinders. The amount of time it is taking to recover from the financial crisis is throwing everyone.

“This recession, followed by sluggish recovery, is not the experience of pretty much anyone today,” Mr. Shepherdson said. “So for all intents and purposes nobody in America has any experience for an economy behaving like this. Economists don’t even understand it.”

He added: “So if people don’t really understand what’s going on in the economy, how can they frame reasonable expectations of where it’s going?”

Article source: http://feeds.nytimes.com/click.phdo?i=15d0d320ad025901650e4e0ef2d6ec75