Rising Incentives Will Fall Short of Pre-Recession Highs, NADA Says

Incentives for car-buying consumers should rise modestly in the near term, but they won’t go back to the destructive levels seen in the pre-recession days, according to a new report from the National Automobile Dealers Association.

In years past, incentives helped grow new-car sales levels ― but they also contributed to lower used-vehicle values. By 2004, used vehicles were a commodity, with prices down significantly, according to the NADA’s Incentive Analysis and Impact report. That dynamic has changed, though, since the recovery started.

More money is getting spent on finance and lease retention than on cash-back offers, NADA Senior Marketing Manager Larry Dixon told Auto Finance News. In all likelihood, manufacturers will continue to allocate marketing dollars that way, he said.

Average spending for all incentive types is $2,574 per unit, down 12% from 2004’s peak and down 2% from the pre-recession average of $2,631 recorded in 2007. Though incentive spending is still below pre-recession levels, it has ticked up 3% compared with last year.

Dixon said that these days, manufacturers have a better understanding than they did just a few years ago ― when the bells and whistles of cash incentives were louder than ever ― of the impact incentives have on the overall brand.

“They look at things in a more circular way, where as in the past it was about moving new product,” said Dixon, adding that the value preservation of used vehicles is as much a function of the type of incentives applied as it is of the total amount spent.

The NADA study noted that not all incentives resonate equally with customers, so they don’t have an equal impact on used-car prices.

With lease-payment subvention ― that is, buying down the rate ― the goal is to keep the payment as low as possible for the consumer. “Clearly if you have strong lease incentives or programs, that should lead to more vehicles leased, which means more will be coming back off lease,” Dixon said.

Leases comprise about 20% of all consumer deliveries, according to NADA, a level Dixon said was reasonable. Off-lease volume will grow, but it’s unlikely there will be a sudden shift to the levels seen in the late 1990s or early 2000s, he added.

“There is going to be some downward movement on used prices because of growth in the used-car supply overall, but we’re not talking about a significant or cataclysmic drop in value,” Dixon said. “Prices are still going to remain at a level that’s high over the next few years.”