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HomeNewsCaribbean NewsAverage new-vehicle price sets another record: Interest rates push monthly loan payments...

Average new-vehicle price sets another record: Interest rates push monthly loan payments to all-time high: Part1

By J.D.Power

The retail sales forecast

New-vehicle retail sales for May 2022 are expected to decline when compared with May 2021, according to a joint forecast from J.D. Power and LMC Automotive. Retail sales of new vehicles this month are expected to reach 1,013,700 units, a 20.9 percent decrease compared with May 2021 when adjusted for selling days. May 2022 has two fewer selling days compared to May 2021. Comparing the same sales volume without adjusting for the number of selling days translates to a decrease of 27.0 percent from 2021.

The total sales forecast

Total new-vehicle sales for May 2022, including retail and non-retail transactions, are projected to reach 1,188,100 units, a 18.0 percent decrease from May 2021. Comparing the same sales volume without adjusting for the number of selling days translates to a decrease of 24.3 percent from 2021. The seasonally adjusted annualized rate (SAAR) for total new-vehicle sales is expected to be 13.6 million units, down 3.3 million units from 2021.

The takeaways

Thomas King, president of the data and analytics division at J.D. Power said:

“May results reflect a continuation of what has become the norm for the US new-vehicle sales environment. For the 12th consecutive month, month-ending retail inventory will be below one million vehicles. The industry sales pace is being dictated by how many units are delivered to retailers during the month, and demand far exceeds supply. Record transaction prices are the result.

“For retailers and manufacturers, the increase in transaction prices, coupled with the near elimination of discounts on new vehicles, has more than offset lower sales volume to deliver enhanced profitability. However, the sales environment is poised to evolve as the year progresses. Production volumes are likely to improve in the second half of the year, which will lead to increased sales rates. Record levels of pent-up demand from new-vehicle shoppers will mean any extra production should be sold quickly, but the increased production will challenge the industry’s ability to consistently increase transaction prices. During the past 12 months, new-vehicle prices have increased 15-20 percent year over year compared with just 2-3 percent between 2012 and 2018.

“For the balance of 2022, increased vehicle availability, higher interest rates and some cooling of used-vehicle values likely will lead to slower transaction price growth – but are unlikely to lead to declines.”

New-vehicle prices continue to set records, with the average transaction price expected to reach a May record of $44,832 – a 15.7 percent increase from a year ago and the third-highest level on record despite rising interest rates. Average interest rates for new vehicle loans have risen.

The average interest rate for loans in May is expected to increase 62 basis points from a year ago to 4.92 percent. However, elevated used-vehicle values continue to help affordability for new-vehicle buyers who have a vehicle to trade in. The average trade-in equity for May is trending towards a record of $9,922, a 59.4 percent increase from a year ago.

“Even with elevated trade-in values, the average monthly finance payment is on pace to hit a record high of $687, up $90 from May 2021. That translates to a 15.1 percent increase in monthly payments from a year ago, which is just below the 15.7 percent increase in transaction prices. The growth in transaction prices means that, even though the sales pace is down 20.9 percent year over year, consumers will spend $45.4 billion on new vehicles this month, the second-highest level ever for the month of May but down 15.5 percent from May 2021.

“Due to the lack of inventory, discounts from manufacturers continue to be sparse. For May, the average incentive spend per vehicle is $965, a decrease of 64.6 percent from a year ago. Incentive spending per vehicle expressed as a percentage of the average vehicle MSRP is trending toward a record low of 2.1 percent, down 4.4 percentage points from May 2021 and the fourth consecutive month below 3.0 percent. One of the factors contributing to the reduction in incentive sending is the absence of discounting on vehicles that are leased. This month, leasing will account for just 18 percent of retail sales. In May of 2019, leases accounted for 30 percent of all new-vehicle retail sales.

“As demand continues to outstrip supply and pricing remains elevated, dealer profit per unit continues to be at record highs. Total retailer profit per unit – inclusive of grosses and finance and insurance income is on pace to reach a May record $5,066, an increase of $1,679 from a year ago. Seven of the past eight months have seen retailer profit per unit at or above $5,000. This elevated per-unit profit level is more than offsetting the drop in sales volume as total aggregate retailer profits from new-vehicle sales is projected to be up 9.2 percent from May 2021, reaching $5.1 billion, the best May ever and the fourth-highest amount of any month on record.

“Even at these record pricing levels, vehicles continue to sell quickly and a significant number of vehicles are being ordered – or purchased – by buyers before they arrive at the dealership. This month, 56 percent of vehicles will be sold within ten days of arriving at a dealership, while the average number of days a new vehicle is in a dealer’s possession before being sold is on pace to be 19 days – down from 45 days a year ago.

“Three metrics in June that will demand focus are pricing, interest rates and trade-in values. The combination of future interest rate increases, along with elevated new-vehicle pricing levels, will present a challenge to sustaining the current ‘Goldilocks’ economic environment. If used prices soften, so will trade-in values, which will reduce consumer purchasing power.”

In part 2: The details, observations and global sales outlook

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