Bolstered inventories, OEM incentives spark May vehicle sales jump admidst consumer interest rate and negative equity challenges
Adapted from GCADA Newsletter
Despite the persistent challenges of high interest rates and negative equity, the automotive industry has demonstrated its resilience. In May, vehicle sales reached their highest seasonally adjusted rate in nearly a year at 16.08 million, a testament to the industry's ability to adapt and overcome. This was largely due to the significant improvements in inventory levels and the introduction of consumer incentives.
The good news comes as the nation’s fleet of 286 million vehicles hits a record age of 12.6 years, marking a two-month increase in the past year alone. Motor Intelligence reports incentives reached an average of $3,274 per vehicle in May, a 69 percent increase from a year ago.
May retail inventory, which includes vehicles actually on the ground and ready to sell rather than those in transit, is expected to reach 1.8 million vehicles, which equates to a 0.6 percent increase from April and a 53 percent increase from May 2023.
J.D. Power reported that the average days of inventory increased to 40 in May, up from 29 days last year at this time. About a third of all vehicles are sold within 10 days of delivery to the dealership. Jeff Schuster, global vice president of automotive research at GlobalData, said, “Inventory is in a good place at an industry level,” yet noted each manufacturer’s situation is different. “It varies a bit by manufacturer, but we’re seeing some negotiating power coming back into deals.”
Leasing, seemingly “the lost transaction” during the past several years, has seen a resurgence. Lease penetration increased 3 percent year-over-year to 24 percent last month, but still lags 7 percent below pre-pandemic levels. Maintaining the momentum may be more difficult as we approach the third anniversary of the supply chain crisis which effectively killed the natural lease/lease return cycle.
Better incentives, vehicle pricing, and the reality of vehicle maintenance costs will likely help rekindle customers' interest in leasing. As Tyson Jominy, vice president of data and analytics at J.D. Power, told Automotive News, “Experienced lessees, especially from luxury brands, are likely facing the first realities of maintenance costs and may be primed for a return to a more turnkey ownership experience.”
That brings us back to the topic of compounding higher interest rates and the re-emergence of negative equity, which are perhaps predictable results of supply chain shortages.
Edmunds recently reported the first-quarter annual percentage rate for new vehicles stood at 7.1 percent while the used vehicle rate was 11.7 percent. The share of traded vehicles with negative equity rose to 23.1 percent in the first quarter, an increase from 18.3 percent a year ago and 14.7 percent in the first quarter of 2022. The average negative equity number hit an all-time high of $6,167 in May, which resulted in an average new vehicle payment of $887 for those buyers who were upside down in their trades. Edmunds reports those buyers' average interest rate was 8.1 percent and their average term was 75.8 months.
