High trade-in values offset lower Memorial Day incentives

Car travel is expected to pick up this Memorial Day weekend, but vehicle sales are on pace to decline relative to last year.

High vehicle prices and limited inventory, compounded by humdrum incentives, will likely deter buyers this holiday weekend, which is historically the kickoff for the summer car-buying season.

New-vehicle retail sales this month are expected to drop 20.9% year over year to 1,013,700 units, according to a joint estimate from J.D. Power and LMC Automotive. TrueCar issued a similar forecast this week.

The decline stems in part from higher prices and vehicle shortages. New-car prices continue to set records, with the average transaction price expected to hit $44,832 this month, 15.7% higher than the level recorded in May 2021, according to J.D. Power. Plus, vehicles are rolling off lots almost as soon as they roll in. Some of the most popular cars are sporting days-to-turn figures of five to seven days, according to Edmunds. In May 2021, an estimated 33% of vehicles were selling within 10 days of arriving at dealerships, according to data from J.D. Power and LMC Automotive.

It comes as no surprise then that consumers are hanging onto their vehicles longer than ever before. In fact, the average age of cars on U.S. roads is now a record 12.2 years, according to S&P Mobility.

Holiday rate hikes

While financiers typically lower rates to attract Memorial Day car shoppers, the opposite scenario has played out following the Federal Reserve’s 50-basis-point hike earlier this month. For instance, Honda has bumped up APR financing for many models by one percentage point — to 2.9% for 48-month loans, 3.9% for 60-month loans and 4.9% for 72-month loans. The OEM’s only cash incentive is $1,000 for existing Honda owners.

Infiniti, Tesla, Toyota and Volkswagen have also raised their rates in recent weeks. Infiniti tacked on two percentage points to its 1.9% rate, and its advertised lease payments ticked up $30 per month. Tesla raised its interest rate to 3.24% from 2.99%, while VW increased its rate to 4.7% from 4.3% in April. Toyota bumped up its 72-month financing rate to 3.75%, up from 2.99%.

Still, OEMs have lowered rates on certain vehicles in anticipation of the holiday weekend. For instance, Toyota has shaved rates for some of its shorter-term loans. Chrysler is offering 0% financing for 72 months on the 2022 Jeep Wagoneer, while Ford is offering a similar promo — plus $3,000 in bonus cash — on the 2022 Edge.

But Ford’s cash-back incentive is one of a dwindling group. Typical cash discounts for May are expected to come in at $965 per vehicle, down from $2,957 in May 2021, and from $4,825 in May 2020, according to J.D. Power and LMC Automotive.

In fact, OEMs have been reining in cash-back promos for months. General Motors, for one, is currently offering a $1,500 incentive on the Chevrolet Silverado 1500, which starts at $32,000. For Memorial Day 2021, GM was shelling out $4,000 on the same vehicle, which, at the time, cost $29,000. Similarly, Ford is offering $1,000 in bonus cash for its 2022 Expedition, compared with as much as $7,000 in bonus cash last year.

Dwindling incentives

As a percentage of total cost, incentives are averaging about 2% of MSRP, according to J.D. Power. By comparison, incentives averaged 7% to 8% of MSRP in May 2021 and 10% to 12% of MSRP in prior years, according to Cars.com.

The lower incentives and higher retail transaction prices combined with rising costs at the pump have consumers thinking twice about car purchases, particularly larger vehicles. GasBuddy predicts that gas prices on Memorial Day weekend will hover around $4.65 per gallon, a 51% increase from last year. In fact, gas prices will likely average $4.40 per gallon until Labor Day, GasBuddy noted.

The lone bright spot for potential car buyers is trade-in value.

J.D. Power estimates that trade-in equity in April shot up 72.1% year over year to $9,668. Car buyers have noted a similar trend. About two-thirds of car owners who traded in their vehicles received a higher offer than expected. Of those respondents, about half received more than $1,000 above their expected trade-in amount, while 20% reported receiving $3,000 or more, according to Cars.com. In some cases, consumers are raking in more money for their vehicles than they shelled out for them several years prior.

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