What was initially expected to be an uncharacteristically slow December has been turbocharged with discounts by automakers. Find out what kind of impact they’re having below.
The industry used discounts to help drive up sales in December.
With prices heading down and incentives rising, new-vehicle sales during December are increasing by 13.2%, according to a joint forecast from J.D. Power and GlobalData, capping off a strong year for an industry, which weathered shortages, rising interest and strikes.
The seasonally adjusted annualized rate, or SAAR, for total new-vehicle sales is expected to be 15.4 million units, up 1.7 million units from December 2022. New-vehicle total sales for 2023 are projected to reach 15,466,000 units, a 13.2% increase from 2022 when adjusted for selling days, the LMC-J.D. Power forecast predicted.
“We continue to see strength,” said Jonathan Smoke, Cox Automotive chief economist, The level of stress remains relatively high, Smoke added, but consumer sentiment has improved as gas prices have declined, and sales of new vehicles have been trending slightly higher over the last four weeks.
No more rate hikes
Additionally, interest rates on vehicle loans appear to have peaked, Smoke noted, while inventories are closer to pre-pandemic highs than they have in the last several years as the “seller’s market” has vanished.
It appears that new and used vehicles are becoming more affordable as new vehicle incentives rose in December.
Thomas King, president of the data and analytics division at J.D. Power, said the December results are capping off the year with a robust performance, illustrated by double-digit year-over-year sales growth and the second-highest consumer expenditure on new vehicles ever recorded for the month.”
Total sales of just under 15.5 million for 2023, will represent a significant increase of 12.8% from 2022, when just 13.7 million vehicles were sold, King said.
At the same time, as inventory improves, the average new-vehicle retail transaction price is declining.
Transaction prices in December are dropping to an average of $46,055, down $1,274 — or 2.7% — from December 2022. However, even with the decline in average transaction prices, consumers are on track to spend $50.4 billion on new vehicles this month — the second highest on record for the month of December and 5.1% higher than December 2022.
Makers makin’ deals
Manufacturer discounts in December are expected to be up $145 from November and have materially increased from a year ago when incentives were at record lows. The average incentive spend per vehicle has grown 90.7% from December 2022 and is currently on track to reach $2,458. Expressed as a percentage of MSRP, incentive spending is currently at 4.9%, an increase of 2.3 percentage points from December 2022.
Despite taking out smaller loans, monthly payments rose $25 a month during the third quarter.
King added leasing is expected to account for 21.2% of retail sales, up significantly from 17% in December 2022, but still well below December 2019 when leased vehicles made up 30% of all new-vehicle retail sales.
“Despite falling transaction prices, higher interest rates and reduced trade equity are contributing to the escalation of monthly loan installments. The average monthly finance payment in December is on pace to be $739, up $9 from December 2022,” he said.
That translates to a 1.1% increase in monthly payments from a year ago. The average interest rate for new-vehicle loans is expected to be 6.9%, an increase of 46 basis points from a year ago.
Used vehicles
Average used-vehicle prices are forecasted to be $29,413 in December, reflecting a 2.6% or $786 decrease to December 2022. However, they remain 28.7% higher than the pre-pandemic level. The decline in used-vehicle values is translating to lower trade-in equity for consumers, according to the data collected by J.D. Power.
“What’s even more noteworthy is that consumer expenditure on new vehicles in 2023 set a record of $578 billion. This is the third consecutive year in which U.S. consumers spent more than half a trillion dollars buying new vehicles,” King said.
Sales to fleet customers are also rising as vehicle availability improves. Fleet sales are projected to increase 13.6% from December 2022, or 9.4% on a non-selling day adjusted basis.
King said, as inventories increase, dealers are seeing their margin erode. However, profits continue to exceed pre-pandemic levels. The total retailer profit per unit — which includes vehicles gross plus finance and insurance income — is expected to be $2,729 in December. While this is 32.5% lower than a year ago, it is still more than double the amount in December 2019.
The primary factor behind the profit decline is the reduced number of vehicles selling above the manufacturer’s suggested retail price or MSRP. This month, only 18.9% of new vehicles are projected to be sold above MSRP, which is down from 32.5% in December 2022.
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