The car industry is dealing with a sticky issue

Hey, everyone. Exciting day — My interview with the CEO of Hyundai Motor America is now live! We discuss EVs, vehicle design, full self-driving, the future of Auto and much more. Click here to stream it now (or save it for later!)

—CDG

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The car industry is dealing with a sticky issue…

And it can be summed up in 13 letters: affordability (or lack thereof).

The car market is a lot more complex than “cheaper price = more sales.” And while some things are getting more affordable, others are more expensive than ever.

If we want to really understand the impact of affordability, we need to take a close look at the total cost of car ownership, how the variables have actually changed over the last year and the broader context in which these elements exist.

The good news…

…is that affordability is returning to the market in two key ways.

Car prices: Whatever segment you look at today, new, used, SUVs, pickups, etc., values are down across the board. In Q1, the average transaction price (ATP) for new vehicles hit a two-year low, dropping to $47,218 by the end of March.

Incentives: Whereas new vehicle prices are moving slowly, incentives are coming back far more aggressively. Manufacturers spent 69% more on incentives in May 2024 than they did last year, averaging about $3,274 or 6.9% of the current ATP.

The bad news…

…is that while some ownership costs are getting cheaper, others are getting more expensive.

Auto loan rates: Consumers are paying a lot more in monthly interest payments than they’re used to. Compared to 2021, buyers today will spend around $4,250 more in interest rate payments over the term of their loan, according to Edmunds.

Negative equity is up: Many consumers who purchased their vehicle during the peak in new car prices are now struggling to afford down payments on their new purchases due to rapid depreciation. Around 23.1% of car buyers were upside down on their loans in Q1, lowering the value of their trade-ins. This is also leading to higher loan amounts and longer terms.

Insurance premiums: Car insurance costs a lot more today than it did just a year ago. By March, the average premium was up 22% from last year, according to the Associated Press, after jumping 2.6% from February.

Service costs: Car owners are also spending way more on repair and maintenance than they’re used to. In just three years, the average cost per service transaction has gone up 45% (including warranty costs).

What effect are these trends having on the car market?

It’s clear that the return of affordability to the market has been uneven. As a result, the landscape itself has become more volatile, with trends both positive and negative appearing in different areas.

Sales are up, but not evenly:

• Combining numbers from the seven automakers who reported U.S. sales in May, we can see that the total number of new vehicles sold rose 10.3% year-over-year to 796,307 units.

• But if new car sales are rising, then used car sales are skyrocketing. As new vehicle sales shrank slightly in Q1 (down 2%) compared to Q4 2023, used volumes surged 11%. And while new vehicle days’ supply rose 10 days during the same timeframe, it shrank 9 days for used vehicles. This shows a clear shift in preference favoring preowned vehicles.

• At the same time, buying a cheaper used car comes with the inherent risk of higher maintenance and repair costs, making it crucial for drivers to consider the full cost of ownership, rather than focusing on the price tag.

We asked our readers to tell us how business was doing in their area. Just like the data suggests, results are all over the place depending on where you look.

The financing landscape is changing:

• Leasing is making a comeback: Drivers are taking different routes to car ownership in an effort to lower their monthly costs. Lease share rose around 5% year-over-year in Q1, going from 19.3% to 24.1%, according to Experian’s State of the Automotive Finance Market report.

• Subprime share is declining: Lenders are still being extremely selective about who gets approved for a car loan. The share of subprime buyers in today’s market is now just 17.5%, while the number of buyers in prime categories is 70%.

• Delinquencies are up: Delinquencies on auto loans are up about 48 basis points from last year in the 30-day category and 14 points in the 60-day category.

The bottom line: So is affordability back in style? Are we going to see consumers flood back to the dealership now that cars are cheaper? Unlikely. The car market isn’t going back to the way things were before the pandemic, at least not anytime soon. The costs of owning a vehicle are still much too high in certain areas for our market to function like it used to. But over time, we’ll figure out what the new normal is: until then, we need patience…

Withum partners with dealers to help maximize revenue and cut costs, adding profit straight to the bottom line.

And dealers, one of the easiest ways to add thousands to your bottom line is by working with Withum to submit for a Warranty Reimbursement Rate Adjustment.

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Contact Withum today to get a free estimate on the potential profit you may be missing out on by visiting withum.com/warranty.

The auto lending expert: consumer financing is broken in the U.S. - Auto lending doesn’t work like it used to, which is why I sat down with Amitay Kalmar, the co-founder and CEO of Lendbuzz, to figure out where the lending market is headed. We also talk about the role of AI in finance. Give it a listen.

Why the Canadian gov’t is the best car salesman - In this episode, Jimmy Houle, CEO of Groupe Lallier Automobile in Quebec, sheds light on his journey from a car salesman to leading a successful dealership group, his views on the Canadian car market, and the unique challenges it faces. Get an insider's perspective on inventory struggles, the absence of Carvana, and what sets Canadian car buyers apart from their American counterparts. Catch it here.

Listen to the episodes here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to Uber for Business, Cars Commerce, Auto Hauler Exchange, Private Auto, and CDK Global for making these episodes possible.

We’ve got tons of great jobs hitting the CDG Job Board right now. Here are some standouts for anyone looking for their next move.

• Are you a creative professional? Foureyes is looking for a content manager.

• Have a deep understanding of how dealerships work? Uber is looking for a senior SMB account executive for its new automotive business.

• Have a passion for connecting clients to solutions that fit their needs? Transport ATX is looking for a business development representative.

Looking to hire? Add your roles today—it’s 100% free.

• New study says 40% of EV buyers want to go back to ICE cars.

• Findlay Automotive has been the victim of a cyber crime.

• General Motors adjusts EV timeline and approves stock buyback.

• EU approves 38% tariffs on Chinese EVs.

• Ford CFO is worried about high inventory levels across the industry.

Thanks for reading. One last thing…

Don’t forget to cast your vote at the poll below so we can keep improving this newsletter for you. See you at the next edition…

—Car Dealership Guy

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