Rising Vehicle Prices Remain a Speed Bump for U.S. Auto Sales

New vehicle purchase intent fell for the second straight month in October, reflecting the growing deterrent effect of high vehicle costs, as well as the rising popularity of gently used vehicles.

Consumer demand for new vehicles decelerated this month, as high car prices and rising interest rates keep an increasing number of potential buyers from entering the market. TechnoMetrica’s Auto Demand Index fell six points, or five percent, in October to a score of 112, marking the second straight monthly decline in the measure. Thus, we expect new vehicle sales to continue easing from the stellar pace set during the first half of the year, though the industry will remain in good shape thanks to a growing demand for SUVs.

TechnoMetrica Market Intelligence developed the Auto Demand Index, or ADI, as a way to measure the intent of consumers to buy or lease a new vehicle within the next six months. Raghavan Mayur, president of TechnoMetrica, explained that the ADI, which is conducted monthly, is based on the response to a key question posed to more than 900 adult Americans: "How likely is it that you will buy or lease a new vehicle within the next 6 months?"

The recent downtrend comes after vehicle purchase intent reached record levels this past summer. Faced with uncertainty over rising interest rates and trade tariffs, Americans rushed to make auto purchases during the first half of 2018, pulling ahead new vehicle sales from later on in the year. Auto sales jumped two percent in the first six months of the year, compared with a two-percent drop during the same period in 2017. However, demand dropped precipitously in the waning days of summer, with vehicle sales falling 5.5 percent year-over-year in September.

Even amid a booming U.S. economy, the specters of high vehicle prices and rising interest rates are deterring some consumers who are looking to replace their current vehicles. Thus, an increasing number of consumers are rushing to the growing used vehicle market, where they can acquire a near-new vehicle, with all the bells and whistles regarding in-car technology, at a comparatively lower price.

Raghavan Mayur

President of TechnoMetrica Market Intelligence

In addition, the share of American drivers planning to acquire a new vehicle within the next three months has plummeted 13 points since July, from 33 percent to 20 percent.

Despite the sharp weakening in consumers’ intent to purchase new vehicles, auto sales should remain healthy through the final months of 2018, as consumer confidence hovers around its highest levels in nearly two decades. For instance, October marks the Index’s fifth straight month above 100, signifying sustained high levels of auto demand.

The strength in purchase intent levels is further demonstrated by recent trends in the Index’s moving averages. For instance, both the three-month and 12-month averages improved in October, with the short-term average rising for the sixth consecutive month. In addition, the three-month average registered above both the 12-month and six-month moving averages for the fourth month in a row, indicating that purchase intent levels may even pick up again in the near future.

“Even amid a booming U.S. economy, the specters of high vehicle prices and rising interest rates are deterring some consumers who are looking to replace their current vehicles. Thus, an increasing number of consumers are rushing to the growing used vehicle market, where they can acquire a near-new vehicle, with all the bells and whistles regarding in-car technology, at a comparatively lower price,” said Raghavan Mayur, president of TechnoMetrica.

Nearly every demographic group reported strong demand for new vehicles this month, reflecting a widespread optimism about U.S. economic conditions. In all, 17 of the 19 segments that TechnoMetrica monitors each month posted an Index score above 100, indicating heightened levels of auto demand. The African American/Hispanic segment and consumers earning an annual income over $100,000 showed the strongest intent to acquire new vehicles, as both groups recorded a robust score of 143. Traditionally disadvantaged minority groups such as Blacks and Hispanics are especially benefiting from a tighter labor market, as employers look beyond their usual candidates to fill jobs. Hence, unemployment among both African Americans and Hispanics has hit record lows this year, boosting income prospects within the communities.  

Parents of children under 18 (140) are also highly likely to purchase new vehicles in the near future, despite posting a 10-point decline in the Index reading. Research suggests that parents are fueling the growing popularity of larger vehicles. In 2017, nearly half of parents (45 percent) were driving either an SUV or a truck, according to data from CivicScience.

Demand among the 25 to 44 (139) and 45 to 64 (137) age cohorts has spiked since the spring season, reflecting an improved employment situation in the country. Between April and October 2018, the two age groups recorded gains of 65 percent and 36 percent, respectively, in Index levels. Prime-age Americans (25 to 54 years old) sidelined by the last recession have been steadily returning to the labor market. In July, the share of Americans aged 25 to 54 with jobs reached a 10-year high of 79.5, according to Federal Reserve data. 

Midwestern consumers (129) have also reported a surge in purchase intent. The region displayed a 21-point gain in the auto demand measure this month, posting its best score since March 2017. A resurging manufacturing industry has boosted job growth in the region over the past year. Between September 2017 and September 2018, Midwestern unemployment has declined by 12 percent, from a rate of 4.1 percent to 3.6 percent, the largest drop of any U.S. region.

Meanwhile, new vehicle demand eased among seven groups this month, up from four in September. Young adults aged 18 to 24 (minus 27 points) showed the most significant waning in intent to purchase new vehicles, as the cohort recorded its lowest Index reading since November 2017. Ballooning student debt, coupled with tighter credit conditions, are forcing many younger Millennials and Generation Zers to delay key life milestones, such as buying a home or purchasing a new vehicle. Americans currently owe around $1.4 trillion dollars in student loan debt, up nearly 500 percent from the $241 billion level set in 2003. Research suggests that younger adults are bearing most of the brunt of sky-high loan debt. According to a 2016 study from Pew Research, nearly four in 10 (37 percent) Americans between 18 and 29 have outstanding student loans, compared with 22 percent of those aged 30 to 44, and a mere seven percent of the 45 to 59 age cohort.

Northeasterners have also tempered plans for purchasing new vehicles, as the region registered its greatest decline in the Index (minus 20 points) in around four years. The decline in demand may be driven by concerns over the provision in the new tax reform bill that reduces the federal tax deduction for state and local taxes. However, purchase intent among residents of the Northeast remains strong, as October marks the region’s fifth consecutive month with an Index score above 100.

Demand also weakened among consumers earning between $30,000 and $50,000 a year (minus 16 points), who posted their lowest levels of purchase intent since last October. This is only the third month this year in which the income cohort has reported an Index reading below 100, compared with a total of nine months throughout all of 2017.

The deceleration in new vehicle purchase intent has largely been fueled by concerns over affordability, as sky-high vehicle prices are keeping some potential buyers out of the market. The average transaction price of a new vehicle hit an all-time high of $36,495 in December 2017, up almost 20 percent from the $31,392 average sticker price during the second quarter of 2013, according to automotive research site Edmunds. Rising vehicle costs, coupled with high gas prices, may be scaring away consumers who are returning to dealerships for the first time in four or five years.

Borrowing has also become an increasingly expensive option for consumers amid rising interest rates and tighter credit conditions. The Federal Reserve has imposed three rate hikes so far this year, lifting the annual percentage rate on a new car loan a full percentage point over the past year, from 4.8 percent in September 2017 to a 5.8 percent rate in September 2018. In addition, generous incentives are becoming increasingly harder to find, with the share of zero-percent loans dropping to a 13-year low of 5.6 percent in September. As a result, the average down payment on a new vehicle hit $4,198 in September, up nearly 10 percent since the year before, according to Edmunds. Further, an analysis from Experian determined that the average monthly loan payment for a new vehicle rose to a record high of $523 during the first quarter of 2018.

With new vehicle prices hovering near historic levels, consumers are increasingly turning to the pre-owned vehicle market. Close to four million vehicles are coming off of leases this year, providing likely buyers with a broad selection of near-new autos, many of which include state-of-the-art in-car technology, at what amounts to a discounted price. In fact, as per Edmunds, the gap between the price of a new and used vehicle is near its highest in more than a decade. As of the second quarter of this year, a new auto had an average price tag of $35,828, compared with a transaction price of $22,489 for a three-year-old used vehicle.

Aside from measuring consumers’ intent to purchase new autos, the Auto Demand Index also monitors their preferences for vehicle types. SUVs remain the most desired vehicles among Americans, despite a slight decline in preference share this month. Just over one-quarter (26 percent) of likely buyers say they plan to acquire a small or large SUV as their next vehicle purchase, down from 29 percent in September. A booming economy and a shift in consumer preferences towards larger vehicles have lifted the SUV’s market share in recent years, at the expense of sedans, which have been diminishing in popularity. In August, passenger cars made up less than 30 percent of total vehicle sales for the first time on record.

At the same time, however, demand for mid-size vehicles did improve this month, rising two points to a share of 20 percent. Mid-size cars represented one of only two vehicle types to show acceleration in preference share in October. Meanwhile, the share of likely buyers planning to acquire a pickup truck inched lower by one point this month, to 14 percent. Preference for full-size vehicles remained unchanged from September, at 10 percent. This marks the fourth straight month in which full-size cars garnered 10 percent or more of the likely buyer population. A similar share of likely buyers (eight percent) preferred minivans and compact cars in October. The market share for minivans grew by five percentage points over the past month.

In terms of brand preferences, Chevrolet remains Americans’ top choice. Demand for the brand improved two points from September to a share of 16 percent, marking the fourth consecutive monthly gain in the reading. Ford garnered a 12 percent share of likely buyers, a slight drop from the previous month. Japanese makes Honda and Toyota both posted declines this month, with each brand holding 10 percent of the market. Toyota has now reported three straight monthly declines in preference share. Rounding out the top five was Dodge, which was chosen by six percent of likely vehicle buyers.

Each month, TechnoMetrica uses Random Digit Dial telephone methodology to conduct live interviews with more than 900 respondents, using both landlines and cell phones. The margin of error for the survey is +/- 3.2 percentage points. In addition, recent statistical analysis has shown a strong correlation between the Auto Demand Index and actual U.S. vehicle sales.

Source: TechnoMetrica


Categories: Automotive

Tags: Auto Demand, Auto Purchase, Auto sales, Detroit


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