Tariff Impact Evolves as Regulatory Changes Loom

The initial frenzy following April’s tariff announcement has now given way to a more nuanced market reality as of July. Consumer demand for new vehicles has eased from its earlier peak, though retail sales haven’t yet turned negative with the CarGurus New Vehicle Demand Index showing a 10.5% increase month-over-month (MoM). Still, a combination of economic uncertainty, pull-ahead purchases, and anticipated price hikes could lead to softer new-vehicle sales, growing inventory levels, and potential crossover demand into the used market as we move deeper into the second half of the year.

New Vehicle Market Faces Uncertain Second Half

The rapid consumption of pre-tariff inventory has reduced new vehicle availability, with inventory levels now down nearly 3% year-over-year (YoY). By the end of July, more than three-quarters of the new vehicles listed had arrived on dealer lots after tariffs took effect. Perhaps most surprising is that despite this significant turnover, the average list price of new vehicles is currently 1% lower than it was pre-tariff, sitting at approximately $49.4k.

Automakers have largely absorbed the cost impact of tariffs thus far, but sustaining this strategy could become increasingly difficult as expenses compound. The ongoing rollout of 2026 models provides a natural opportunity for automakers to begin offsetting these tariff-related costs. Currently, just over 13% of listed vehicles are from the 2026 model year, concentrated primarily among a few Original Equipment Manufacturers (OEMs). While initial releases haven’t yet shown notable price increases, a gradual rise in vehicle prices is expected throughout the second half of the year and into 2026, rather than the sharp spike initially anticipated following the tariff announcements. Additionally, we may see automakers increasingly pivot to higher-margin trims and nameplates, similar to strategies employed during the semiconductor shortage, potentially exacerbating consumer affordability challenges just as those pressures were beginning to ease.

To sustain sales momentum amid an uncertain macroeconomic environment, automakers continue to rely on promotional efforts. However, overall incentives have decreased since late 2024 as companies strive to balance demand against rising tariff-related costs. Should vehicle prices begin to climb further while incentives continue to decline, conditions in the new vehicle market could grow notably more challenging.

Used Vehicle Market Shows Continued Resilience

Meanwhile, the used market continues to perform well despite facing its own set of macroeconomic headwinds. Used vehicle inventory is at a three-year high, up 9.2% YoY, driven largely by increased availability on franchise lots. Average list prices continue their incremental rise (+2.3% YoY), primarily fueled by a shortage of 3- to 4-year-old vehicles, which are seeing some of the strongest pricing gains. Strong sales performance in July (+8.9% MoM and +3.6% YoY) helped reduce overall market days' supply MoM. However, despite this improvement, the higher number of listings means the supply situation remains healthier compared to last year.

EV Market Faces Headwinds

The electric vehicle market faces increased uncertainty as regulatory incentives begin to fade. The looming expiration of EV tax credits and leasing loopholes under upcoming changes in the "One Big Beautiful Bill" is the primary factor driving this uncertainty. This regulatory shift is likely to trigger a short-term surge in EV interest ahead of the September 30th tax credit deadline, though it may also place longer-term pressure on overall demand.

Used vehicle buyers, however, will find the highest proportion of EVs qualifying for tax credits (priced $25k or less) seen so far, with over 34% of listings now falling below the price threshold. Popular affordable models currently dominating listings under $25k include the Tesla Model 3, Chevrolet Bolt EV, and Nissan Leaf.