A Numbers Game

Mar 1, 2023 | Industry

By Jim Henry

“We pride ourselves on the fact that about one-quarter of our used-car volume is nine years old or older.”

Bryan DeBoer, president and CEO, Lithia & Driveway Motors

Unless there’s an unexpectedly severe recession, analysts predict 2023 should be a less extreme version of 2022 for auto sales.

Continued supply problems were the timeliest topic at the NADA Show, the annual convention and trade show for National Automobile Dealers Association, in January.

The near-term consequence is, experts at the convention and related events here don’t expect a big increase in new-vehicle production and therefore sales, in 2023, or even into 2024 or possibly longer.

Affordability is a closely related problem. However, it’s been on the back burner until recently.

Low supply and high demand have driven high retail prices, but also record dealer profits the last couple of years. Why should dealers worry about affordability, when customers are lined up on a waiting list?

What’s new is rising inflation, and worries about the U.S. economy in general. Those threats have new-car dealers more concerned about consumer demand than they have been in the recent past.

According to J.D. Power, the new-vehicle average transaction price was a January-record $46,437, up 4.2% vs. January 2022. The average new-vehicle monthly payment in January was an estimated $723, up 8.8% vs. a year ago. The average interest rate for a new-vehicle loan was an estimated 6.8%, vs. about 4.2% a year ago.

Meanwhile, U.S. domestic brands have effectively quit offering small sedans, which used to be their entry-level models, in favor of bigger, pricier, and more profitable trucks and crossovers.

To keep a lower price point on the menu, new-car dealers increasingly offer older used vehicles, including trade-ins which in the past they probably would have sent to wholesale auctions, instead of reconditioning and retailing them themselves.

Bryan DeBoer

“We pride ourselves on the fact that about one-quarter of our used-car volume is nine years old or older,” said Bryan DeBoer, president and CEO of megadealer group Lithia & Driveway Motors, Medford, Ore.

“These are your future used-car, new-car buyers,” DeBoer said about the market for older used cars, at the Auto Team America Dealer/CEO/CFO Forum here on Jan. 26. Lithia & Driveway says its “value autos” segment, defined as vehicles with over 80,000 miles, and up to 20 years old,is a strategic focus.

Across the industry, high prices for new vehicles are driving some new-vehicle intenders into nearly-new, certified pre-owned vehicles. That’s crowding subprime customers almost entirely out of the new-vehicle market, and driving up the price of newer used cars, relative to before the pandemic.

By default, dealers say customers with subprime credit are turning to older vehicles, to find an affordable monthly payment.

Analysts at the NADA convention say it could be years before the industry can produce and import enough new vehicles for U.S. light-vehicle sales to get back to 17 million units annually, a level that had come to seem routine, before 2020 and the pandemic.

Sales in 2022 were 13.9 million, down 7.9% from about 15.1 million in 2021, according to the Automotive News Data Center. NADA expects U.S. new, light-vehicle sales of just 14.6 million in 2023.

Tight supplies of new vehicles today mean tight supplies of used vehicles from the current model years, for as long as those model years are on the road.

There’s going to be a permanent “trough” in units in operation representing new cars and trucks that didn’t get built from 2020 to 2023 – and counting.

There’s a similar divot in units in operation for model years 2008 through 2011. That’s how long sale were down, from the beginning of the credit crisis that led to the Great Recession, through the recession, and the recovery afterwards. It took until the 2012 model year for new-vehicle sales to meet or exceed the level of sales for the 2007 model year, according to Experian Automotive.

Jonathan Smoke, Cox Automotive chief economist, said at the Auto Team America conference it isn’t safe to assume that 17 million units is “normal” or easy to achieve, even if production were high enough. That’s comparing apples and oranges, he says, because prices and interest rates are much higher than they were in 2019.

“It’s much harder to achieve at today’s prices, and today’s interest rates,” he said, at the Auto Team America Forum. “Using 2019 as a base is basically creating demand that the consumer can’t step up and deliver.”

It’s also debatable how soon new-vehicle supply would grow to the point where OEMs would be forced to offer higher incentives.

There’s a widespread expectation that record or near-record new-car prices are bound to come down – in the same way. South is the only direction to go, when you’re at the North Pole. But how much prices come down depends on how much inventory increases, and how much inflation and economic worries reduce demand.

Absent high supply and low demand, there’s not much motivation for automakers to raise incentives substantially.

“I imagine a 5% increase in production, in 2023”, said John Murphy, managing director and lead U.S. automotive analyst, Bank of America, at the Auto Team America Forum. “It could easily be 15% or 20% more, if the supply based wasn’t challenged in so many ways,” he said.

Average transaction prices have already fallen some, to below manufacturer’s suggested retail price. But to put that in context, paying over sticker was almost unheard-of before the pandemic, the computer chip shortage, and other supply-chain issues.

Smoke said that until recently, the average new-vehicle transaction price was above MSRP for 18 straight months. “There’s a big gap, to get back to where prices were in 2019,” he said.

Jim Henry is a New Jersey-based, veteran freelance reporter covering the U.S. auto industry, writing for trade magazines Automotive News and WardsAuto, plus Forbes and others. Concentrations include U.S. light-vehicle sales, dealership Fixed Operations and Finance & Insurance, mergers and acquisitions, publicly traded dealer groups, OEM financial results, and Connected, Autonomous, Shared, Electric Vehicles. He is also the former department manager, corporate strategy and market research for Mercedes-Benz USA, and a former president of the International Motor Press Association.

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