Auto market update: what's brewing in new, used, and auto lending?
Plus, how to deal with no-haggle dealerships
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Today’s topics:
Auto market update: what's brewing in new, used, and auto lending?
Shoppers Corner: how to deal with no-haggle dealerships?
Reading time: about 3:21
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New cars
First the good news. New car inventory levels in February were at the highest level since April 2021, at 1.75 million vehicles. The Days Supply (DS) was at 56 across all brands. For reference, the DS of 60 is considered to be “normal”, so we are pretty close to the sweet spot overall, but the distribution is skewed: some brands have a lot of supply, while others don’t have much.
I like this chart from Cox that clearly shows where to look for availability and good deals:
Source: Cox Automotive
New car sales in March increased by 18.4% from February 2023.
GM and Ford vehicles were on top, increasing sales 12.6% and 7.5% respectively.
I wrote about Toyota’s inventory availability issues, and here’s the result: its sales were down 10% from February.
Nissan sales were up 29.5% from February, and I attribute it to the fact that Nissan had affordable cars in stock. The new Pathfinder is also a great SUV for the money.
The best-selling models in March 2023 were (compared to March 2022):
Ford F-Series ⏶ 34.5
Chevrolet Silverado ⏶ 8.8%
Ram pickups ⏷ 9.0%
Tesla Model Y ⏶ 31.7%
Nissan Rogue ⏶ 68.6%
Honda CR-V ⏶ 3.8%
Toyota RAV4 ⏷ 18.9%
Toyota Camry ⏷ 2.6%
Ford Explorer ⏶ 37.6%
GMC Sierra ⏶ 8.4%
As total inventory increased, so did the availability of more affordable vehicles. However, manufacturers are still focusing on high-margin segments: large vehicles and trucks, which bring more profits. Budget-friendly vehicles have the lowest supply.
Cox Automotive reports that from December 2017 to December 2022, sales of new cars under $25,000 dropped 78% from approximately 13% of total new-vehicle sales to just under 4%. On the contrary, sales of new cars over $60,000 went from 8% to 25% of sales.
As inventories in some categories are approaching pre-pandemic levels, some manufacturers are even cutting production as well as ramping up incentives spending – refreshing news for consumers. Incentives in February reached 3% of the average transaction price, the highest level since March of the last year.
Electric vehicles’ market share reached 8%, but the transition to EVs will not be smooth for manufacturers and their suppliers. One of the biggest issues is reliable and cost-efficient sourcing of key raw materials like lithium, nickel, manganese and cobalt. China is responsible for about 70% of the world’s lithium and cobalt and 99% of the world’s manganese, so the geopolitical situation may affect the supply of batteries.
Another issue is the lingering shortage of chips. AutoForecast Solutions estimates that chip shortages will cause 2.8 million vehicles to be cut from production this year. On top of that, traditional vehicles require about 600 chips where EVs require more than 1,300.
Ever changing legislation related to tax credits and mineral sourcing requirements for electric vehicles does not help either.
Used Cars
Does the improved new car availability bring good news to used car shoppers? It would make sense - dealers selling new cars are taking more trade-ins. However, Manheim’s latest data suggests that retail and wholesale days’ supply were below normal in mid-March. The nationwide inventory of used cars for sale is shrinking. Wholesale prices are going up and retail prices will surely follow, unless the demand cools down significantly.
The traditional tax season bump in sales started early this year. The IRS processed a significantly higher number of refunds this year than during the corresponding period last year (even though the average refund amount is smaller this year) Consumers typically use tax refunds to fund car purchases. In response, used car values went up 2.5% since the beginning of the year.
Playing in the industry for a while, I’m well aware that the strong used car sales will not last forever. I expect the market to start cooling off in May. Here’s why: interest rates may climb even higher, making car purchases less affordable. Tax refunds will dry out. Rebates for new cars are increasing, which in turn puts the downward pressure on 1-3 year old vehicles.
Two pieces of economic news caught my eye, confirming my thinking that car prices will inevitably cool down.
First, we've been hearing about layoffs across many industries, but healthcare announced the third-most job cuts out of 30 industries in Q1 of 2023, according to a report from Challenger, Gray & Christmas, an executive coaching firm.
Second, Costco reported a major slowdown in sales from previous months and which was the company’s lowest since April 2020. Home furnishings, toys and jewelry — discretionary categories — are among the worst performers indicating that consumers are shifting towards essentials.
Source: Costco
I’m focusing on right-sizing my inventory and staying within my core segment by acquiring reliable, affordable, and practical units.
Auto Lending
There’s a new study from California Policy Lab that emphasizes trends that I’ve been covering in my previous newsletters. While the report focuses on California consumers, it can be easily extrapolated to the rest of the country.
The highlights are familiar:
First: there has been a dramatic rise in the size and length of new auto loans in the last 10 years that greatly accelerated since the start of the pandemic. The number of Californians with auto loans increased by 36% and the average amount owed by Californians on their auto loans went up by 51%.
Second: The average new auto loan (for a new or used car) in California is now over $34,000, which is $7,300 more than it was just 3 years ago. The loan balance carried by consumers is also at the all-times-high:
To lower monthly payments consumers are opting for longer loan terms. But despite longer terms, monthly payments have been going up:
Lastly, The share of loans that are over 30 days late jumped to 2.7% in 2022 from 1.5% in 2021. More repossessions are on the way.
Episode 3 of the CarDealershipGuy Podcast is now live!
Why car leasing sucks right now (and how it will impact used car prices).
Click below to listen now:
EP3 of the CarDealershipGuy pod is live! 🔥
Why car leasing SUCKS right now
(and how it will impact used car prices)Episode length: 8 min
Listen now:
🔊: https://t.co/H2NteumxAj
📺: https://t.co/K5uSYjHePX https://t.co/jHNFP5P1ab— CarDealershipGuy (@GuyDealership)
Apr 7, 2023
Shoppers Corner
Many dealers have adopted the no-haggle pricing and flat out refuse to negotiate any discounts from the advertised price. What can you do as a shopper to get a better deal?
First, you should know that dealerships don’t price cars randomly. Their inventory management software analyzes the marketplace and recommends how to price each vehicle based on its popularity and its projected time to sell. These pricing algorithms are getting sophisticated as they monitor market trends and suggest price adjustments to maximize the dealership’s profitability and increase the inventory turnover rate.
Here’s an example dashboard from CarGurus that helps dealerships with pricing their inventory:
Source: CarGurus
Do your research, and in many cases you will find out that dealerships that have no-haggle pricing are usually pricing their inventory very competitively.
If you see an outlier – a unit that is priced too high or too low – you should look deeper into it and try to understand why. Is this a clean, one-owner, low-mileage lease return unit that deserves a price premium? Is it certified by the manufacturer?
On the opposite end, if the price is lower than comparable units, take a closer look at CarFax: are there any accidents? Does the title say that the car is salvage, rebuilt, or had flood damage? Is the vehicle heavily modified and some original equipment is missing? Is the mileage too high for the year? And so on.
Even though a no-haggle policy can be the first response you hear, when it comes the time to put together a deal, the dealership may still work with you to make the deal happen and offer a special discount, more money on the trade-in, or maybe throw in a warranty or maintenance contract, etc.
Focus on finding the right car that fits your requirements and lifestyle first, and discuss the pricing after test driving and inspecting the car in person.
Thank you for joining me again here on the CarDealershipGuy newsletter. See you soon!
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