A New Car Sales Boom May Be On The Horizon
Like any market, the car market has its cyclical ups and downs. COVID-19, however, was a curveball nobody saw coming. While nearly 3 years have passed since the pandemic began, the industry has had to adapt to a new digital environment, coping with the after effects of inventory shortages, production constraints, and the looming threat of an economic recession. Sales in the next year do not look promising, and while financial experts remain concerned, the current environment may pave the way towards a new car boom in a few years. In order to fully understand this forecast, it is important to flesh out what we have just dealt with, where we are presently, and how the market is likely to change in the coming years.
COVID-19 shook the auto industry hard, and potentially harder, than some other global industries. When the pandemic first began, dealers had to adapt to a new digital environment, finding ways to ease car buying as quarantines and medical protocols kept consumers from leaving their homes. While many people began to work remotely and decrease their driving, stimulus checks and low interest rates provided great incentive for consumers to purchase or lease new vehicles.
Apart from the initial 3-month production stop at the start of the pandemic, sales picked up later in 2020 into 2021 and new vehicle inventories remained strong. However, around this time, the after effects of the pandemic’s true force on global supply chains hit. All major automakers began facing production problems as they could not obtain certain parts for production, particularly the microchips that enable safety and comfort features consumers expect in their new vehicles. Production slowed to a crawl and dealers quickly found they had barely any new cars on their lots within a few months.
Once inventories ran dry, the infamous “market adjustment” term became a widespread talking point, as dealers hiked prices on new models, some by a few thousand, others by tens of thousands, over MSRP. Many consumers became perturbed from the new pricing, as they viewed the concept of paying over MSRP on a new vehicle as price gouging. Most consumers are use to paying thousands of dollars below MSRP, not thousands over.
The low inventories soon caused a spike in the value of used cars. While most Americans understood this (it’s a simple concept of supply and demand), dealers used high trade in values to help justify the even higher purchase prices of new vehicles. Customers trading in their used vehicles, now with more equity than ever before, could take advantage by rolling this into their new vehicle purchase. While paying over MSRP was not ideal, at least they could obtain financing rates between 0-2% and a lot for their trade. Many consumers remained unconvinced however, and instead opted to hold onto their current vehicles. Many of these customers bought out their leases, as they could not justify a new lease with monthly payments nearly twice as much as they were currently paying.
In early Winter 2022, the used car market leveled off. Used car values were at an all time high, and dealers found they were becoming buried in their inventory. In other words, dealers had overpaid for used cars and now had to sell them at a loss as the used car market fell. Any consumers that had decided to take advantage of the market did, and the used car market became saturated with many offerings.
Any true hopes of the market’s return to normalcy, however, were daunted by the effects of inflation throughout 2022. As gas prices and interest rates rose, consumers became more and more weary to finance or lease new vehicles. While market adjustments became less obscene as new inventories rose, manufacturers had to hike base MSRPs to keep up with inflation and supply chain effects on parts costs. Any benefits of increased inventories did little to help the price of cars as MSRPs continued to rise. Total new car sales did rise in 2022, however the looming threat of an economic recession has come to have a heavy impact on the present situation.
While the car market has rebounded slightly in regard to inventory levels, financial analysts and auto manufacturers remain wary of the current economic climate. Lease payments, which were high a year ago, are now higher due to the heightened interest rates and high capitalized cost of new vehicles. Auto financing, which was appealing a year ago with low interest rates, is now unappealing with standard rates sitting between 6-8% APR for clients with Tier 1 credit ratings.
The industry is in a tough spot, as lease AND finance deals have become increasingly unappealing to consumers. Similar to the housing market, Cash purchases are now at an all time high, as people with liquid assets would rather buy a car outright than make monthly payments with high interest. This causes concern to some lenders that rely on consumers to lease or finance new or used vehicles to make profits. As with the past few years, consumers are again opting to hold onto their vehicles longer, increasing the average age of vehicles on America’s roads to approximately 13 years. The main question is where the market can go from here, as many remain concerned about the current economic climate.
While the looming threat of an economic recession has dampened the appeal of many to finance or lease a new vehicle, it may set America up for a car boom in 2-3 years time. Production is expected to continue rising over the next year, with estimates that dealer inventories will return to pre-pandemic levels sometime in 2024. This will help normalize pricing, likely seeing the return of some incentives and a heavy decrease in vehicles selling over MSRP.
By this time, many of the consumers that held onto their vehicles from the past few years will find they either need a newer vehicle, due to theirs growing rather old, or that new market offerings provide enough appeal that they are ready to upgrade.
The auto industry is currently at a crossroads, with many brands racing towards an all-electric future. Most brands will be launching fresh portfolios of all electric vehicles, as well as traditional gas models, in the next few years. In general, the upgrades in new safety features and technology brings mass appeal, and while there is still skepticism on how the shift to an electric future will play out, it will likely cause a boost in sales on both sides of the aisle. Once manufacturers announce their exact plans for the future, there will likely be a race for stubborn consumers to buy their final gas vehicles, as EV adopters rush to purchase or lease a new generation of electric vehicles.
In another 2-3 years time, the economy should begin to normalize as well. Interest rates are expected to begin falling as early as Winter 2024. It will likely be a few years before rates return to the 0-2% range, however a fall into the 3-4% range will make leasing and financing more appealing, as that is roughly half the interest consumers are paying today.
It’s tough to be fully sure of these changes as they are just forecasts, however seeing how the car market has played out the past few years and what is on the horizon for the economy, interest rates, vehicle inventories, and the age of vehicles on America’s roadways, there are many factors that signal the possibility of a new car sales boom within a few short years.