Oct. car market balances higher sales with shrinking margins

The U.S. car market is settling into a new phase as inventory builds and incentives grow, giving consumers more options — but not without some trade-offs.

Driving the news: New car sales are expected to hit 1.33 million units this Oct., a 2.1% increase year-over-year (YoY)., according to a J.D. Power forecast. The seasonally adjusted annualized rate (SAAR) is poised to reach 16.1 million units, up from 15.4 million last Oct., showing that demand is still there despite economic pressures tempering some car buying intent.

After years of supply constraints, inventory levels have surged to 1.9 million units, up 25% from last year. Consumers now have better access to lower-priced and discounted models. But this creates new challenges for automakers and dealers, who must now manage growing inventories and shrinking margins.

• Vehicles now sit on lots for an average of 50 days — more than double the 20-day average from Oct. 2023.

• With fewer cars selling above MSRP—only 12.7% compared to 27.1% last year — pricing power has weakened.

The build up in inventory has also led to bigger discounts. Automakers are offering $3,149 per vehicle on average in incentives, up 70% YoY, bringing down retail prices slightly to an average of $44,904. Yet, these discounts alone aren’t enough to offset higher financing costs.

Interest rates remain a major obstacle, with the average monthly loan payment climbing to $738, up $14 from last Oct. Compounding the issue, trade-in equity has fallen to $7,909, down nearly $1,000 YoY as used-car values decline.

Why it matters: The duo of incentives and higher interest rates is reshaping consumer behavior. Shoppers who might have purchased a new car are now looking at leases, which offer a more affordable monthly payment. Leasing now accounts for 23.2% of retail sales, up from 20.8% last year, as automakers try to clear inventory.

Looking ahead: Automakers and dealers are caught between the need to move more inventory and the challenge of maintaining profitability, which is expected to drop 27.3% YoY to $2,245. The rise in incentives is driving volume, but it comes at a cost — shrinking margins that will require dealers to sell more vehicles to remain solvent.

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