Despite a soft market and plenty of incentive, people are paying more for new cars than ever.
New vehicle sales in the U.S. have softened this year forcing automaker and analyst alike to reconfigure their once-lofty sales expectations for 2017.
Most expected this year to approach last year’s record of 17.55 million units, but after a fourth straight month of down or flat sales — June sales are expected to slide 4% — most are forecasting sales to come in closer to 17 million units.
General Motors revised its forecasts earlier today down to the “low 17-million” unit range while the analysts at LMC Automotive rounded down 100,000 units to 17.1 million.
“It will be challenging in the second half of the year to keep pace with 2016, so some additional weakness and further risk are expected in both fleet and retail volume, but the year is still expected to reach 17 million units, which is certainly not a poor performance,” said Jeff Schuster, senior vice president of forecasting, LMC.
(New car sales hitting the skids in June. Click Here for the story.)
The question isn’t so much how to handle this squishiness, but why in an economy that is strengthening and a Dow at record highs are new vehicle sales stagnating? Pricing. It’s not the entire reason for sure, but after the last downturn, automakers essentially made a promise to themselves to be able to better retain a profit during lean times.
So even as automakers cut production rates to offset bloated inventory levels, prices remain high, according to Kelley Blue Book, which operates a car-sales website. Even though automakers are offering discounts on some models, most slow-selling sedans, prices have been on the rise.
The average transaction price — what people actually pay at dealerships — is still above last year’s level. It was $33,261 in May. New car prices were up $847, or 2.6%, in May compared to the same month last year. But they are starting to show weakness. They were down $266, or 0.8% compared to last month, KBB noted.
(Click Here for more about GM cutting its 2017 industry sales forecast.)
The first six months of 2017 may the worst in three years, according to Deirdre Borrego, senior vice president of automotive data and analytics at J.D. Power. She noted that incentive spending per new vehicle through June is up $470 from a year ago and averaged $3,770 — exceeding 10% of the average MSRP.
Trucks continue to dominate the market and account for 63.7% of the retail new-vehicle sales mix. In June, the average retail new-vehicle sales price set another record of $31,720, up from the June 2016 high of $31,073.
These higher transaction prices are coming, in some instances, on longer-term and subprime loans. Buyers are pushing out the end of the term to beyond six years at record-setting rates. The problem is that means that the vehicles that those longer-term 72- and 84-month loans are tied to are unde water.
(Fuel economy ratings still drive new car purchases. For more, Click Here.)
There is no quick way out to buy or lease another new vehicle. The average loan amount for a new vehicle reached a record $30,621 in the fourth quarter of 2016, a 3.6% hike year over year, according to Experian. And that loan is being taken out for those aforementioned longer terms. The 73-to-84-month group made up 32.1% of new-vehicle loan share in the fourth quarter of last year, compared with just 29% a year earlier.