Car Dealers, Automakers Face Affordability Implications

Life has become more expensive for consumers looking to get into a new vehicle.

Even controlling for the overall consumer shift to pricier SUVs and trucks, the average transaction value per vehicle over the past year has risen by approximately $1,000, crossing the $33,000 mark for the first time this year. 

While this is undoubtedly music to the auto industry’s ears over the short term, it may be time to assess the implications of these pricing trends in the context of consumer affordability, the evolving vehicle supply picture in the used market and 

a long-term economic outlook that some consumers are beginning to question.

From an affordability perspective, rising prices have coincided with reductions in incentive spending, which has fallen as a percentage of the MSRP.

That is prompting a growing number of consumers to review their full range of options: from considering a less expensive trim level in a preferred model, to exploring the offerings of less expensive brands, to seeing what is available in the used-car market. 

Other consumers are responding to the challenging affordability picture by simply staying put. They are deferring new purchases by hanging on to their cars long after loans – and in some cases even lease terms – have been met.

Supply-Side Picture

The waiting game may turn out to be a strategy that pays off for cash-strapped consumers, because the supply side of the equation is evolving to eventually temper price growth of new vehicles while driving down costs of used vehicles. 

There are plenty of late model vehicles across the spectrum of mainstream and luxury brands that are working their way into the secondary market.

Compact SUV wholesale volumes, for instance, have surged 30% over the past 12 months and have been joined by mid- and large-SUV wholesale volumes that have also gone up an impressive 12% year-over-year.

If the market cannot find homes for this attractive inventory, it is difficult to see how this will not put pressure on prices across new and used vehicles.

With regard to the economic outlook, we expect used-market prices to fall slightly in 2019, driven not only by increasing levels of used supply, but also by more volatile credit conditions and increasing gasoline prices among other reasons.  

Preserve Brand Value Either Way

Perhaps the biggest concern posed by the affordability challenge revolves around how it affects consumer relationships with automotive brands.

As OEMs and franchise dealerships harvest profits from new vehicle buyers who are willing and able to pay the higher average transaction prices, now is the time to think about how to keep the rest of the market in the fold.

We believe it is important to invest effort and resources into elevating the role played by franchise service centers. J.D. Power has documented how the quality of the service experience ultimately improves the predisposition of consumers to go ahead and take on the higher cost of new vehicles when purchase time comes.

It also turns out that if consumers cannot upgrade or stay at the same level with a new-car purchase, strong service relationships can encourage them to stay in the brand at a lower level.

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Andrew Stowe is J.D. Power’s senior director-vehicle valuations.