Tight vehicle supply has contributed to a six-year low in incentive spending, higher prices, and positive retention values.
Incentive spend as a percentage of the average transaction price sat at 8.4% in February 2021, the lowest point since April 2015, Charlie Chesbrough, senior economist at Cox Automotive, said Monday during Cox Auto’s first quarter Industry Insights webcast. “As long as sales are not disrupted, there is a benefit to having tighter inventories,” he said, adding that incentives are likely to remain scarce as supply constraints continue.
Inventory levels were down 22% year over year in March at 2.7 million units, while supply sat at an average 71 days, a 30% YoY decrease. “Demand from retail buyers has been surprisingly strong during the pandemic, but it faces a growing headwind — supply,” he said. “The shutdown of factories last spring due to the virus, coupled with ongoing supply chain disruptions since has kept inventories from rebuilding.”
Still, the seasonally adjusted annualized rate has been “relatively healthy,” Chesbrough said. SAAR for total light vehicle sales is projected to reach 16.4 million units in March, an increase of 53% YoY and 10% from February, according to TrueCar.
However, the SAAR could change its path in the next quarter as inventory struggles to keep up with sales, Chesbrough noted. “Days of supplies spiked last year during the shutdown, but quickly fell and has been below previous-year levels since,” he said. “It may be too soon to declare tight supply a new normal, but it’s certainly a new normal for now, and certainly one for the remainder of the year.”
Low supply is also keeping vehicle prices high, with the average price sitting at $40,000 in March. Seasonality is a factor, but prices continue to increase YoY — climbing by 7% as of March.
Higher prices also contributed to an upward shift in retention values in 2020 that has continued this year. At the end of February, off-lease retention values on 3-year-old used vehicles increased 5.2% YoY to 66% of the car’s value, Chesbrough said, adding that lease maturities will be a “big opportunity” for the industry this year.
Cox Auto estimates that the industry will see 4 million lease maturities in 2021, many of which will carry equity because of higher-than-expected values when they expire, Chesbrough noted.
Despite several bright spots, inventory continues to be a “major obstacle” in the auto finance market, with the full impact expected to become clear in the next quarter, Chesbrough said.
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