Price shifts

It's not surprising that vehicle prices have been impacting consumers' views. For years now, “prices are high" has been ranked as the top reason for a "bad time to buy" in the University of Michigan's Surveys of Consumers. This concern is driving search behavior - consumers shopping on CarGurus are increasingly looking for used vehicles under $10k, up by 20.5% in Q1 2024 compared to Q1 2023. We see a similar trend for new vehicles, with searches under $30k jumping 33.3% over the same period. Consumers are clearly seeking deals in the current market where prices are improving, but stubbornly high-interest rates are counteracting any savings.

However, the impact of COVID and the semiconductor shortage has had a long-term effect on vehicle inventory, particularly for budget-friendly options. Compared to Q1 2020, Q1 2024 saw a 95% decrease in new vehicle listings priced under $20k and a 59% decrease in listings between $20k and $30k. The used vehicle market shows a similar trend, with a 46% reduction in vehicles priced under $10k. To make matters worse, these same budget-friendly used vehicles have seen an average mileage increase of 10.4% over the same period, indicating a decrease in overall quality.

Thankfully, there's a trend towards price normalization. Vehicle prices outpaced general inflation during supply chain disruptions, leading to market corrections in both new and used vehicles. There's room for further price reductions - potentially around $3.6k for new vehicles and $3.9k for used vehicles. However, the pre-COVID price landscape is likely gone forever. We may see a new baseline price of around $46k for new vehicles (up from $38.2k) and $24.7k for used vehicles (up from $20.5k).

Inventory bounceback

A welcome trend from 2023 that continued strongly into the first quarter is the recovery of new vehicle inventory levels. Since its low point in November 2021, the CarGurus New Vehicle Availability Index has increased by an impressive 270%. However, new vehicle inventory remains 26.9% down from its peak in March 2020. This surge in inventory means vehicles are sitting on dealer lots longer, with average days-on-market increasing by 29% in March 2024 compared to March 2023.

The reduction in new production and sales over the past few years is also impacting used inventory, particularly the availability of late-model used vehicles. There has been a significant decrease in the number of used vehicles two years old or younger on dealer lots, with a 19% decline from Q1 2024 compared to Q1 2020. The availability of used vehicles three to four years old has also dropped by 10% over the same period. This shift in used vehicle inventory is likely to continue impacting the industry for several years to come, until new vehicle sales and production reach pre-pandemic levels and remain steady for an extended period.

Rising demand

After a disappointing spring selling season last year, the auto industry was cautious heading into tax season this year. Thankfully, 2023 appears to be an outlier, as sales demand for both new and used vehicles has bounced back strongly in 2024. According to filing season statistics for the week ending March 22, 2024, the average tax refund amount is up 6.1% year-over-year to $3,081, providing a welcome financial boost for consumers. Interestingly, despite interest rates near multi-decade highs and vehicle prices remaining elevated, though moderated, consumers are showing strong interest in purchasing vehicles. This suggests pent-up demand from those who held off during the peak of vehicle pricing or the trough of new vehicle inventory.

One example of strong consumer interest in a particular segment is the new Tesla Cybertruck. In March, the Cybertruck saw a views-to-inventory ratio of 17x compared to all other used Teslas, despite accounting for only 0.3% of all used Tesla inventory. This high ratio indicates significant consumer interest for a limited supply, highlighting the unique appeal of this vehicle.

Green interest increasing

Consumer interest in green vehicles continues to rise, although the focus might be shifting more towards hybrids compared to electric vehicles (EVs), particularly for new vehicles. The percentage of views for hybrids and EVs combined, as a share of total views for new vehicles, increased by 7.4% year-over-year. Used EV/hybrid views showed a much stronger increase of 28.8%, with EVs in particular growing at 35.6%. This suggests that consumers are responding positively to price cuts on used EVs.

For new EVs, while interest is up year-over-year, it's down compared to the fourth quarter and lower than the peak levels seen in 2022 when gas prices were significantly higher. This highlights how sensitive consumers are to gas prices when considering EVs. With strong growth in interest for new hybrids over the same period, it's likely that the higher price point of new EVs is a key factor holding back interest. As more cost-effective EVs hit the market, we'll likely see a rise in views.

Looking geographically, states like California, Florida, and Texas are leading the way in terms of increasing hybrid and EV inventory on dealer lots for both new and used vehicles. When it comes to the most viewed models, Ford takes the top two spots for new EVs, while Tesla dominates the used EV market with the top four spots.

A look around the bend

Interest Rates

Inflation has remained stubbornly high, exceeding expectations and raising questions about the Federal Reserve's ability to cut interest rates in 2024. While the Fed has reaffirmed its plans for three cuts this year, totaling a 0.75% reduction, persistently high inflation increases the risk that these cuts won't happen, keeping interest rates elevated. Higher interest rates for a longer period could dampen potential vehicle sales in 2024.

Return of Leasing

New inventory levels and rising incentives are creating a potential return for leasing. With vehicle prices still high, leasing could be an attractive option for getting consumers into new vehicles. However, used vehicle prices are likely to remain volatile for the next few years, which could limit finance companies' interest in increasing lease availability.

Another leasing-related trend to watch is how consumers ending their three-year leases (myself included!) will react to the significantly higher cost of a new lease this year. Will these former lessors take a closer look at the used car market?

How long can it last?

The spring selling season has been a welcome surprise, but with interest rates still high, there are questions about how long this momentum can be sustained. We'll be closely watching how used vehicle demand, which is normally seasonally strong in the second quarter, continues this year.

Plateau or peak?

Automakers and dealers have been vocal about their desire to avoid pre-pandemic new inventory levels. However, with inventory already at roughly three-quarters of the way back to those levels, the question remains: will inventory stabilize at current levels or climb even higher? Alternatively, will we see a peak in inventory with a surplus of vehicles after the spring selling season?