Car Prices Rise, But Incentives Deflate Profits

A new report by Kelley Blue Book found that May’s average transaction price for new vehicles remained below the suggested retail price for the fifth consecutive month. Still, that was up from the previous month.

“The modest new-vehicle price increase in May was offset by increased incentives, so many buyers were able to find deals below sticker,” says Rebecca Rydzewski, research manager of Economic and Industry Insights for Cox Automotive, the parent company of Kelley Blue Book.

As Wards previously reported, the rollercoaster shifts in retail sales in recent years have prompted dealers to rethink everything from sales channels to marketing and training to move vehicles at a profit. That’s especially true as high interest rates and other economic factors pause consumers’ thirst for major purchases just as many dealers’ lots begin to populate with new inventory and the summer driving season arrives.

Doing the Math

The average transaction price (ATP) of a new vehicle in the U.S. increased in May 2023 to $48,528, a month-over-month increase of 0.5% ($251) from an upwardly revised April reading of $48,277.

New-vehicle transaction prices in May were up 3% ($1,393) compared to year-ago levels. The year-over-year increase in May of 3% was the smallest in 2023; in May 2022, new-vehicle prices were up 13.5% year over year. Meanwhile, in May, auto manufacturers’ incentive spending rose to the highest level in the past year at 3.9% of ATP, averaging $1,914. One year ago, average incentive spending was 2.5% of ATP.

In May 2023, consumers’ average price for a new vehicle fell to $410 below sticker price. A year ago, the average ATP was $637 above the sticker price for comparison. As lower prices and higher inventory levels likely drew in buyers, sales volumes in May were up 0.7% month over month and up 22.1% year over year, higher than most forecasts and fed in part by a healthy dose of fleet deliveries.

The average price paid for a new non-luxury vehicle in May was $44,960, an increase of $158 compared to April. Year over year, non-luxury prices increased 3.7%. The average non-luxury sticker price rose to $45,362 in May, so buyers paid below MSRP by $402.Several non-luxury brands – saw ATP increases ranging between 1% and 2.2% month over month in May. Ford and Kia showed the most price strength in the non-luxury market, transacting at more than 3% over sticker price in May.

Several non-luxury brands saw ATP increases ranging between 1% and 2.2% month over month in May. Ford and Kia showed the most price strength in the non-luxury market, transacting at more than 3% over sticker price in May.

The average luxury buyer paid $64,396 for a new vehicle in May, up $239 from April and the second month in a row that transaction prices for luxury were below $65,000. Across key segments, luxury-vehicle ATPs were a mixed bag in May, with high-end luxury cars and luxury fullsize SUVs showing price declines between 0.5% and 1.6%. Entry-level luxury cars’ ATP remained stable. Luxury cars and luxury fullsize SUVs saw price increases between 0.1% and 3.3

Strong luxury sales have been a primary reason for elevated new-vehicle prices. This trend continued in May, with the luxury-vehicle share at 18.4% of total sales. However, the luxury share is trending down after hitting a high of 19.5% in February 2023.

How Incentives Come Into Play

Incentives averaged $1,914 in May to reach the highest point in a year, increasing to 3.9% of ATP compared to 3.5% in April. While May incentives increased by $229 month over month, they remain historically low.

For comparison, Kelley Blue Book estimates incentives averaged 7.3% of ATP in May 2021 and 9.9% in May 2019. The luxury-car segment had the highest incentives in May 2023 at 7.7% of ATP. Meanwhile, vans had the lowest incentives at only 0.3% of ATP.

“Incentives are up to nearly 4% in May, a sign that automakers are trying to move vehicles,” says Rydzewski. “The majority of luxury brands have higher inventory levels than the current industry average. As supply continues to increase, industry average incentives will keep increasing.”