Top market influencers of 2024

Affordability - If there was one defining theme in 2024, it would be affordability. As consumers shifted from revenge spending to frugality, some OEMs were caught off guard as demand for used vehicles-especially CPOs-grew significantly. Several key factors drove this shift:

1. Auto loan rates remained near multi-decade highs. While the Fed cut short-term interest rates, longer-term treasury yields (which are closely tied to auto loans) continued to climb due to inflation concerns. As a result, consumers saw little relief on borrowing costs.
2. Vehicle prices stayed above pre-inflation norms. Used vehicle prices declined by nearly 3% in 2024 to an average of $27.9K, offering some relief. But new vehicle prices dropped by just 0.6%, stubbornly holding at $49.6K and leaving affordability out of reach for many.
3. The post-COVID luxury spending boom ended abruptly in 2024. With high rates and steep prices, consumers increasingly turned to more affordable vehicles to manage their monthly budgets.

New inventory surge - The pivot to affordability in 2024 played a key role in the surge of new vehicle inventory, which rose by 30.5% compared to the same time in 2023. As OEMs focused on producing higher-priced models and trims, many of these vehicles lingered on dealer lots longer than expected. Despite automakers' assurances to avoid inventory surpluses seen before the pandemic, the reality is more complex, resulting in the mixed inventory dynamics we see today.

While the national average market days supply (MDS) for new cars is 82, some automakers saw this metric exceed 100, including Stellantis (121 MDS), Ford (121 MDS), and Nissan (113 MDS). This surge was driven by overpriced vehicles, misaligned production strategies, and limited lineups that failed to meet evolving consumer demand.

Conversely, automakers with tighter inventory-such as Toyota (31 MDS), Subaru (59 MDS), and Honda (67 MDS)-maintained levels well below the national average. While this helps preserve margins and pricing power, it can pose challenges for consumers struggling to find certain models. For dealers, low inventory creates hurdles too. Since fewer new sales translate to fewer trade-ins, it becomes harder to source used vehicles.

Heading into 2025, all eyes will be on how OEMs tackle their unique inventory challenges-particularly with the potential wildcard of tariffs looming on the horizon.

Hybrids over electric vehicles (EVs) - All expectations pointed to EVs finally entering the mainstream in 2024. Instead, hybrids took center stage, driven by the broader shift toward affordability. Once again, it all comes back to cost.

The average list price of new hybrids dropped by 9.5% in 2024, to $47.6K. This brought hybrids below the average price of $47.8K for internal combustion engine (ICE) vehicles. (It’s worth noting that these averages aren’t directly comparable, as the vehicle mix in each category isn’t normalized.) Meanwhile, new EV prices saw a modest price decline of 1.3% during the same period, landing at $62K. As a result, EVs held a significant price premium over hybrids (nearly $15K)-even after accounting for federal tax credits. For consumers prioritizing lower monthly payments, hybrids offered a more compelling package, free from concerns about range or charging.

Interestingly, the story differed in the used vehicle market. A limited supply of used hybrids, coupled with strong consumer demand, led to a 4.4% increase in the average list price ($33.6K). By contrast, used EV prices declined 5.7% to $37.5K, while ICE vehicles dropped 3.2% to $27K. Although used hybrids haven’t yet achieved price parity with ICE vehicles, they remain an attractive option, with sales continuing to climb.

Used listing shortage - While the semiconductor shortage is a thing of the past for new vehicles, its legacy is beginning to ripple through the used vehicle market. Late-model vehicles became noticeably harder to find in 2024-a trend that’s expected to persist for several years.

What’s behind this dip in late-model inventory? The historically low levels of new vehicle sales and leasing during the shortage years left a lasting mark on the overall fleet. The effects became evident this year, with 2020 and 2021 model-years showing steep declines in availability compared to other years. Inventory for 2021 model-year vehicles dropped by nearly 22%, while 2020 models saw a 17% decline. In contrast, most other model years-particularly 2022 and newer-experienced increases on dealer lots, helping to rebalance the market.

While overall inventory levels have stabilized somewhat since the seasonal summer dip, gaps in late-model vehicle availability will likely remain a key factor shaping the used market in the coming years.

What to watch in 2025

Tariffs - The specter of tariffs looms over the U.S. auto industry. Historically, tariffs have had a lasting impact on the U.S. automotive landscape. For example, the 25% "Chicken Tax" on imported light trucks has incentivized automakers to localize production within North America, shaping the industry's structure for decades. However, much remains uncertain about potential tariffs in 2025. The key factor will be whether they are implemented immediately or announced with sufficient lead time.

Given the interconnected nature of the automotive industry-not only in vehicle assembly but across multiple tiers of parts and suppliers-a snap tariff could result in sharp price increases and a decline in new sales. On the other hand, a tariff with adequate notice could allow automakers and suppliers to adjust their strategies, mitigating its impact.

The outcome will largely depend on how policymakers approach this delicate issue, with potentially far-reaching consequences for the industry and consumers alike.

Tax Credits - The potential loss of EV and plug-in hybrid EV (PHEV) tax credits for new and used vehicles could have a significant depressive effect on sales. However, the extent of the impact remains uncertain. Much of the discussion has centered on the possible elimination of new clean vehicle tax credits, but the $4K Used Clean Vehicle Credit for models priced under $25K also faces scrutiny.

As of the end of November, one-third of used EV inventory was priced under $25K-a sharp increase from the low of 6% in August 2022. This shift reflects how declining new EV prices have expanded the pool of used EVs eligible for the credit. Demand for lower-priced EVs remains robust, with vehicles under $25K accounting for over 37% of sales year-to-date.

Should the credit disappear, consumers would still find some affordable options in models like the Tesla Model 3, Chevy Bolt, and Nissan Leaf-currently among the most widely available used EVs under $25K. However, the absence of incentives could slow adoption and reshape consumer purchasing decisions in this critical price segment.

Auto Delinquencies - Auto loan delinquencies are on the rise, raising concerns about a potential wave of defaults-especially among consumers who may now be significantly underwater on loans originated during the peak of vehicle pricing.

Throughout 2024, delinquencies have steadily increased as the effects of COVID-era stimulus faded from the market. While reports vary on whether delinquency levels have reached historic highs, the upward trend is clear. For several years, delinquencies and repossessions were artificially low, which kept the wholesale market tight. Now, as delinquencies return to more normal levels, there’s potential for an improved balance in used vehicle supply. However, the looming risk is that jumbo-sized loans taken out when vehicle prices peaked could push the market into a more precarious position.

With both new and used vehicle prices declining, more consumers may find themselves underwater on their loans-likely at higher percentages than in past downturns. If the market corrects sharply or if a recession occurs in the near future, defaults could spike-especially for those with significant negative equity.

This is a trend to watch closely in 2025 and beyond as the market continues its post-pandemic normalization. The interplay between loan balances, vehicle pricing, and broader economic conditions will be critical in determining the trajectory of delinquencies and defaults.

Still looking for a deal? - Will consumers continue to prioritize affordable vehicles in 2025, or will lower interest rates reignite demand for more expensive options?

This year was defined by affordability, but history shows that American consumers often revert to their old habits when market conditions improve. For instance, when gas prices spike, interest in fuel-efficient vehicles surges-only to fade just as quickly when prices stabilize, shifting demand back to SUVs and trucks.

We may see consumers reconsider higher-priced options as vehicle prices are expected to drop further in 2025 and additional Federal Reserve rate cuts could eventually lower auto loan rates. However, the question remains: will the pivot to affordability prove to be a lasting trend or simply a temporary response to economic pressures?