Leases, used car sales could be hurt by tax refunds: What to know
Used car prices holding up well as job market remains strong

TNS

Jan. 15, 2019

In this Nov. 28 photograph, long lines of unsold 2019 Pilot sports-utility vehicles sit at a Honda dealership in Highlands Ranch, Colo.
Associated Press

DETROIT — The warnings flashed a few years back: 2019 was to be a year of the “lease tsunami.”

A glut of cars, trucks and SUVs leased a few years ago are set to come off three-year leases and return to dealer lots, driving down used car prices. In 2019, we’re expected to hit a peak of 4.1 million returns of leased vehicles.

The threat of a tsunami remains, but so far experts say the impact might not be dire as experts and Wall Street analysts initially forecast.

Used car prices look like they might be able to hold up fairly well, as the job market remains strong and the U.S. economy continues to grow.

“What we’re seeing is we’ve got a hot economy and all these off lease vehicles are being absorbed,” said Charlie Chesbrough, senior economist for Cox Automotive. Cox owns carshopping websites including Kelley Blue Book and AutoTrader.

Sure, risks remain. Wild swings in the stock market, a federal government shutdown and news about layoffs at big companies, including General Motors, all can erode confidence. In Michigan, who doesn’t know somebody who is worried about losing a job?

Another lurking unknown: How exactly will your tax refund compare to last year’s payout?

Tax refund checks play a big role in selling used cars. A $2,500 or $3,000 income tax refund can be a sizable down payment, particularly on a used car.

The peak period for used vehicle sales typically follows when tax refunds have been received by most households, said Jonathan Smoke, chief economist for Cox Automotive.

Now, there’s a growing concern that some households could receive a far smaller refund — or might even owe a bigger tax bill than they’d normally expect — because they received more money each week in 2018 in their paychecks, thanks to changes in the tax withholding tables under the new federal tax law.

A Cox Automotive analysis of employee withholdings indicated that the amount being withheld from each paycheck for taxes is even less than the tax rate reduction should have produced.

Many people may not have been withholding enough in taxes out of their paychecks in 2018 to even cover the new, lower tax rate, Smoke warns.

As a result, there’s a sizable risk for a surprise in the spring when it comes to seeing smaller tax refunds.

While workers were encouraged to review how much money was being withheld and perhaps adjust their W-4 forms to have more money withheld, most people didn’t do that, according to H& R Block and others.

If the refund is far smaller, experts are concerned that some consumers may be far less motivated to go out and buy a used car.

And, of course, we don’t really know if the federal government shutdown will lead to delays of some sort when it comes to issuing federal tax refunds.

The government shutdown is making the “situation even more murky,” Smoke said.

Right now, the strength of the used car market could be used to benefit some consumers who are seeing their cars and trucks come off lease.

Consumers who are at the end of a lease might want to review the residual values — or the expected value at the end of the lease.

Brad Korner, general manager of Cox Automotive Rates & Incentives in Ann Arbor, said consumers can use information that’s available online to their advantage to understand what that leased vehicle is now worth. Online sites, such as Kelley Blue Book, can help.

You’d also want to review your lease contract, Korner said, to see the estimated residual value for your vehicle.

If the market value now is higher than that residual value, it may be possible to negotiate a better deal if you’re going to lease or buy another car.

Used-car prices saw some drops during parts of last year, but overall prices increased, according to data from Manheim, a Cox company specializing in auto auctions.