New Vehicle Market Becomes More Consumer-Friendly in February

The new vehicle market has shown signs of recovery and affordability in February, as supply levels increased and prices dropped. This is good news for consumers who have been facing high prices and low availability of new vehicles due to the COVID-19 pandemic and the global chip shortage.

New Vehicle Supply Reaches Highest Level Since June 2020

According to Cox Automotive, the total U.S. supply of available unsold new vehicles was 2.61 million units at the start of February, up 50% from the same time last year. This is the highest level since June 2020, when the inventory reached 2.66 million units. The average days’ supply across the industry was 80, up 38% from a year ago. This means that there are more new vehicles on dealer lots and online platforms for consumers to choose from.

New Vehicle
New Vehicle

The increase in supply was driven by several factors, such as improved production, lower demand, and higher trade-ins. Many automakers have ramped up their output after facing disruptions and delays due to the pandemic and the chip shortage. Some have also shifted their production mix to prioritize more profitable and popular models, such as SUVs and trucks. Demand for new vehicles has also cooled down after a strong rebound in the second half of 2020, as consumers faced economic uncertainty, rising interest rates, and tighter credit access. Additionally, more consumers have traded in their used vehicles for new ones, as the used vehicle market has remained hot and prices have soared.

New Vehicle Prices Fall for the First Time in a Year

The rise in supply has also led to a decline in new vehicle prices, which have been soaring for the past year due to the imbalance between supply and demand. The average new vehicle listing price opened February at $47,142, down 1% from a year ago. The average new vehicle transaction price in January was $47,401, down nearly 4% from a year ago and down almost 3% from December 2020. These are the first year-over-year and month-over-month drops in new vehicle prices since January 2020.

The lower prices are partly due to the higher discounts and incentives offered by automakers and dealers to clear their inventory and boost their sales. In January, discounts and incentives averaged 5.7% of the transaction price, up from 5.5% in December and nearly 100% higher than a year ago. Some of the most generous incentives were found on sedans, hatchbacks, and coupes, which have been losing market share to SUVs and trucks. However, some popular and profitable models, such as the Ford F-150, the Toyota RAV4, and the Tesla Model 3, still commanded high prices and low incentives due to their strong demand and limited supply.

New Vehicle Affordability Improves Slightly, But Challenges Remain

The improvement in new vehicle supply and price has also resulted in better affordability for consumers, according to the Cox Automotive/Moody’s Analytics Vehicle Affordability Index. The index measures how much income a typical household needs to purchase a new vehicle, based on the average transaction price, the average interest rate, the average loan term, and the average down payment. A lower index value means better affordability.

In January, the index value was 31.9, down from 32.7 in December and 33.3 in January 2020. This means that a typical household needed 31.9% of its annual income to buy a new vehicle in January, down from 32.7% in December and 33.3% in January 2020. The improvement in affordability was mainly due to the lower prices and the marginal income growth over the month of January.

However, the affordability picture is still not rosy for many consumers, as credit access has tightened and interest rates have risen. According to Experian, the average credit score for new vehicle loans in the fourth quarter of 2020 was 721, up from 717 in the same period of 2019. The average interest rate for new vehicle loans in January was 4.74%, up from 4.46% in December and 4.19% in January 2020. These factors have made it harder for some consumers, especially those with lower credit scores and incomes, to qualify for new vehicle loans or get favorable terms.

Outlook for the New Vehicle Market in 2021

The new vehicle market is expected to face more challenges and uncertainties in 2021, as the pandemic, the chip shortage, and the consumer preferences continue to shape the industry. According to Cox Automotive, the new vehicle sales forecast for 2021 is 15.6 million units, up 9% from 2020, but still below the pre-pandemic level of 17 million units in 2019. The supply and price situation may also fluctuate throughout the year, depending on the production, demand, and inventory levels.

However, there are also some positive signs and opportunities for the new vehicle market in 2021, such as the vaccine rollout, the stimulus package, the pent-up demand, and the innovation and competition. The vaccine rollout may help ease the health and economic impacts of the pandemic, and boost consumer confidence and spending. The stimulus package may provide more financial relief and support to consumers and businesses, and stimulate the demand for new vehicles. The pent-up demand from consumers who postponed or canceled their vehicle purchases in 2020 may also drive the sales recovery in 2021. The innovation and competition in the industry may also attract more consumers to the new vehicle market, especially in the segments of electric vehicles, hybrid vehicles, and autonomous vehicles, which are expected to grow rapidly in the coming years.

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