Car Buying Frenzy Eases, But Auto Dealer Sales Remain Brisk

Less than 10 years ago, the average vehicle transaction price was $30,000 in the U.S. Today, it’s $41,000. That may trigger sticker shock among some consumers, but a lot of them continue flocking to dealerships to buy in a market that’s heavy on demand, lean on supply.

“Demand remains high, despite the prices,” says Charlie Chesbrough, Cox Automotive’s senior economist, noting that prices rose 5.5% in the first five months of the year.

But the situation could change if the U.S. economy slows down. Worst case scenario: Lots of high-priced vehicles that a lot of people aren’t buying because of financial circumstances, he says in Cox Automotive’s annual midyear automotive report.

For now, though, the industry is “enjoying a perfect storm of sales,” Chesbrough (pictured below, left) says.

Inventory is constrained because of manufacturing issues, particularly a microchip shortage that has bit into production.

National day’s supply is 33, with 1.5 million units of available supply, down 2 million from 2019, and 1.3 million from 2020, according to Cox data.

“How low can it go before it affects sales is important,” Chesbrough says.

But so far, sales have been brisk (and dealer profitability high), especially earlier in the year. Deliveries since then have tapered off a bit.

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The constrained inventory pressure will let up as the year progresses and the chip shortage abates, “but it is going to be a tight summer,” Chesbrough says. “All over the country, people are looking at tight inventory.”

The upside of that is that dealer discounting and automaker incentives are down, and profits are up, Smoke says.

Cox forecasts U.S. new-vehicle sales of 16.5 million this year, up 13% from 2019, which had some rough spring sales months because of COVID.

Dealers are managing this year’s supply constraints well, but there’s only so much they can do if inventories become chronically lean. “You can’t sell what isn’t there,” Chesbrough says.

Cox predicts new- and used-vehicle sales of 56 million this year, with pre-owned vehicles representing 42.2% of franchised dealers’ deliveries. “That’s down from last year, but used vehicles still represent a significant part of dealership business,” Chesbrough says.

Used-vehicle supply is tight, “but not nearly as much as new-car inventory,” says Cox’s industry intelligence analyst Kayla Reynolds.

Used-vehicle sales helped steer dealers out of the dark spring of last year. “Dealers report record-high used-car profits,” she says. “The record sales pace for used vehicles will continue through 2021 and into 2022 and 2023. The biggest issue is finding inventory.”

The supply-demand imbalance isn’t the only big issue dealers face, Smoke says. Another one is finding and hiring enough staff, particularly auto technicians but also salespeople.

“A majority of dealers want to grow their staff, but 72% say hiring is a challenge,” he says.

Steve Finlay is a retired WardsAuto senior editor. He can be reached at [email protected].