Affordability is Key in This Market

Consumers are speaking loudly with their wallets in 2024. After years of revenge spending and purchasing ever higher-priced vehicles, concerns about the economy, coupled with high interest rates, have caused them to reverse course this year and look for more prudent options. New vehicles in the $20-$30k price bucket accounted for the largest change in year-over-year sales compared to other price segments, accounting for 42.8% of the YoY increases. Meanwhile, new vehicles priced over $100k accounted for a 45.8% decline in YoY sales.

This shift is even more pronounced in the used vehicle market, where all price segments with a list price under $30k experienced year-over-year sales growth, while cars over $30k experienced sales declines. In particular, the $15k-$20k price range surged, accounting for nearly 60% of year-over-year sales growth. This pivot to affordability is also evident in how many days it takes for a used vehicle to leave a dealer lot; vehicles priced over $35k remained on lots longer compared to last year. In 2024, the average days to turn for vehicles under $35k was 42, while those over $35k took 46 days, highlighting the importance of sourcing affordable vehicles for dealers.

Younger used vehicles are harder to find while older new vehicles are easier to come by

What a difference two years make. We’ve quickly pivoted from an inventory shortage to a surplus of new vehicles. We’re seeing vehicles sit longer on lots, with some for an extended period of time. At the end of September, 2.4% of new vehicles were two or more years old in model year terms, which is up 57.5% from the average share of listings in 2017-2019. These vehicles accounted for roughly 58k units, with an average list price of $54k and an average of 328 days on market.

While aged new inventory is on the rise, younger used vehicles are becoming harder to find. Listings of used vehicles one year or younger are down 21% compared to the 2017-2019 average, and listings of vehicles 2-3 years old are down 12%. With the shortage of late-model used vehicles, we’re now seeing an increase in the percentage of aged vehicles. While these vehicles help to present more price points for consumers, they create additional headwinds for the CPO market.

Immediate Impact of Interest Rate Cuts Might Be Muted

The Fed changed courses in September and cut interest rates by 50bps. However, that shift might not immediately lead to relief for consumers looking to purchase a vehicle. First, auto rates tend to follow 2- and 5-year treasury rates more closely than the short-term Fed Funds Rate. This means that even though the Fed is cutting rates, consumers will not immediately see a 0.5% drop. Additionally, with auto loan delinquencies rising, financial institutions may be more hesitant to lend out credit or to quickly lower interest rates.

Moreover, the impact of interest rate cuts will not be as significant due to the substantial increase in vehicle prices. Currently, the average new vehicle loan is 66 months at 8.3% with an average list price of $49,964, while the average used vehicle loan is 66 months at 16.6% with an average list price of $28,424. Under these terms, a 50bps rate cut, if it fully flowed through, would reduce the monthly payment by $12 and $8, respectively. In fact, we would need to see a 2% and 3.5% rate cut to achieve the same monthly payment reduction as a $2,500 price cut. For consumers to feel relief going forward, we’ll need to see more interest rate cuts, as well as more price reductions.

Presidential Election Impact on Vehicle Demand

Does a presidential election impact vehicle sales? CarGurus analyzed vehicle sales from 2002 onward, after December seasonality settled into its current trend, and excluded select years where sales were abnormally impacted: 2005 (GM’s employee pricing for all), 2008-2009 (Great Recession), and 2020-2021 (COVID). When comparing the seasonality of non-presidential years to presidential years, sales progress normally through July. However, presidential election years feature a decline in sales demand in August, October, and November. The slight overperformance in September for election year sales appears due to the depressive impact on sales in the surrounding months.

How are sales progressing in 2024? This year might become one of those outlier years as the CDK hack in June 2024 depressed sales. It looks like presidential concerns arrived early, likely due to the earlier-than-usual debates, as July sales were far below trend. However, sales volume recovered in August, falling between the historic trends. September sales underperformed, likely due to five fewer selling days and the potential impact of hurricane season, making it challenging to determine how much of an impact the election is having as we approach voting day.

Hybrids Having the Sales Year We Expected for Electric Vehicles (EVs)

There were large expectations for EVs in 2024; however, the anticipated growth for the EV market is instead occurring with hybrids, and there is a clear reason why. Year-to-date, hybrids account for over 10% of total retail sales, while EV retail sales account for 4.1% of sales (excluding direct-to-consumer sales volumes), and Plug-in hybrid electric vehicles (PHEVs) account for 2.1%. Hybrid retail sales volumes are up 43.5% YoY, and PHEVs are up 21.6%, showing that interest in traditional hybrid technology is growing at more than double the rate of plug-ins.

What’s driving this surge in hybrid demand? As with the overall market, it all comes down to affordability. The average price of a hybrid-powered vehicle in September 2024 was $44.9k, down nearly 23% year-over-year and lower than even gasoline-powered vehicles at an average price of $48k. Why are hybrids so much more cost-effective? Much of it comes down to product mix, where hybrids are more likely to be found in body types and segments that have lower prices, like sedans and smaller CUVs,. This affordability is translating to hybrids sitting on lots for less time, as the average days-on-market in September was 49.5 days vs. 86.1 for gasoline, 98.1 for EVs, and 153.7 days for PHEVs.