The Automotive Advisor Team

Economy  SOURCE

Squeezed by painfully high prices for two years, Americans have gained some much-needed relief with inflation reaching its lowest point since early 2021 — 3% in June compared with a year earlier — thanks partly to easing gasoline prices, airfares, used cars, and groceries.

The inflation figure the government reported Wednesday was down from 4% in May, though still above the Federal Reserve’s 2% target. From May to June, overall prices rose 0.2%, up from just 0.1% in the previous month but still comparatively mild.

Wednesday’s inflation data showed price increases fell back to 2% without causing a spike in unemployment or a deep recession. Last week, the government reported solid hiring in June compared with earlier this year. The unemployment moved ticked lower, from 3.7% to 3.6%, near a half-century low. All of which is good news for our economy and our retail outlook.

 

New Car Outlook

Since the pandemic struck three years ago, the average new vehicle has rocketed 24% to nearly $48,000 as of April, according to Edmunds.com. Typical loan rates on new-car purchases have ballooned to 7%, a consequence of the Federal Reserve’s aggressive streak of interest rate hikes to fight inflation. It’s all pushed the national average monthly auto loan payment to $729. Affordability will continue to be an issue for some time and deal-making with OEMs getting involved is on the rise.

Used Car Outlook:

NextGear Capital data shows the average used vehicle is 23% older (7.5 years in H1/23 vs 6.1 years in H1/19 and carrying 13% more miles (68,671 vs 60,848). Manheim’s data paints a comparable picture.

According to Manheim’s data, the average wholesale sold price of a used vehicle was 33% higher than in H1/19, and 3% closer to Cap clean (96.4% vs 93.8%).

The average retail margin, as captured by Dealer Auction, has risen by 4% vs H1/22 (note – retail margin data was not captured in 2019)

Used cars are selling marginally faster than they did pre-pandemic according to NextGear Capital, at 60.3 days per vehicle in H1/23 vs 61.5 in the first six months of 2019.

Wholesale Outlook:

  • The 3-year-old index continued to depreciate this week, dropping 0.9%. Lane efficiency bounced back after the holiday week and sale prices were 1.97% below MMR (MMR retention). 
  • Retail used sales and days’ supply trended close to 2019 and 2022 (days’ supply at 44 days). New car sales trended higher than most previous years and days’ supply moved down to 49.
  • The 3-year-old index depreciated from 0.9% to 96.9%. Both non-luxury and luxury decreased by 1.0% with all model years depreciated week over week. Sale prices continua to run below MMR (-1.97%) with the efficiency bounced back after the holiday week.

Retail Margin Outlook 

  • The wholesale values continued to decline for all model year vehicles with the older models declining less.
  • The average spread is consistent for most model years and both the $ value spread and % spread are getting bigger.
  • The 1-Year-Old (2022 MY) spread % is at 9.2% vs 9.0% last week.
  • The 3-Year-Old (2020 MY) spread % is at 9.8% vs 8.8% last week.
  • The 5-Year-Old (2018 MY) spread % is at 18.4% vs 17.6 last week

According to Experian’s State of the Automotive Finance Market Report: Q1 2023, the average interest rate for a new vehicle increased to 6.58%, from 4.10% the previous year, while the average interest rate for a used vehicle jumped from 8.67% in Q1 2022 to 11.17% in Q1 2023.

With interest rates rising, we’re witnessing consumers bring more cash and/or trade-in value to the transaction, resulting in the overall year-over-year (YOY) growth of loan amounts not being nearly as high as in previous years.

For instance, the average loan amount for a new vehicle grew $1,213 YOY, reaching $40,851 in Q1 2023—compared to the $1,558 YOY increase from Q1 2020 to Q1 2022 and $4,255 YOY hike from Q1 2021 to Q1 2022.

Meanwhile, the YOY loan amount decreased by $1,590 for a used vehicle, going from $28,010 in Q1 2022 to $26,420 in Q1 2023. This is a positive sign considering loan amounts have been increasing at a significant rate in recent years—growing $1,698 YOY from Q1 2020 to Q1 2021 and $5,619 YOY from Q1 2021 to Q1 2022.