And despite soaring interest rates for auto loans.
By Wolf Richter for WOLF STREET.
The average transaction price (ATP) of new vehicles sold by dealers to retail customers in June reached a stunning new record high of $45,844, up 14.5% from a year ago, and beating the previous record set in May, according to estimates. by JD Power, even as the pace of new vehicle deliveries to retail customers in June is expected to have fallen 18% from a year ago, as many dealerships ran out or ran out of models that will would sell in large numbers, as automakers continue to battle semiconductor shortages, triggering production shortfalls.
With overall inventories near historic lows and barely improved from last year’s desperate levels, prices have continued to rise, driven by historically weak automaker incentives and dealer addendum stickers, but also by prioritizing the most expensive trim sets and models by automakers, and that’s how the ATP hit a new record.
Since June 2019, the ATP has climbed 36%, or more than ten thousand! The graph shows the ATPs for December and June of each year. Note the pre-pandemic seasonality, where ATP peaked in December but fell from there to June each year. But in June 2020, the ATP was at December level for the first time. From then on, the ATP only increased without taking seasonality into account, including in June. The green line connects the Decembers:
The inventory nightmare.
June started with new vehicle inventories at desperately low levels as automakers continued to battle semiconductor shortages that will now stretch into 2023. Many automakers months ago stopped taking orders for some models for the 2022 model year, where the waiting lists were so huge that they won’t be able to be built this year, given supply constraints. For example, Ford has stopped taking orders and reservations for the 2022 Maverick baby truck (hybrid), F-150 Lightning (EV), and Mustang Mach-E (EV).
June therefore began with 1.13 million new vehicles in stock at dealer lots and in transit, down 70%, or 2.68 million vehicles, since the start of June 2019, according to a separate report. from Cox Automotive, based on its Dealertrack data. Over the whole of 2019, new vehicle inventory averaged 3.66 million vehicles, with many models simply out of stock and not even orderable. A few months ago, an additional inventory problem emerged: customers, battered by soaring gas prices, began to turn to more fuel-efficient cars and compact SUVs that no one was prepared, and the dealers ran out.
So record gross profit per vehicle at dealerships.
The combination of sufficient demand that cannot be built due to semiconductor shortages and these historically low inventory levels that have resulted in record ATPs has resulted in dealerships achieving record gross profits per vehicle.
Total gross profit per vehicle delivered — which includes gross vehicle profit plus profit from finance and insurance (F&I) sales — jumped to a record $5,123, up $1,174 from levels already dizzying from June 2021, according to JD Power Estimates. This gross margin per vehicle at dealerships is over 2.5 times from what it was in normal times in June 2019.
On a per-vehicle level, the amounts of money earned by dealers is nothing short of staggering, as consumers pay for whatever happens, including the big addendum stickers. This reflects the inflationary mindset, and dealerships and automakers are adjusting prices to take advantage of it. Consumers might as well go on a buyer’s strike and refuse to buy or order at these ridiculous prices, which would put an end to these price spikes, but they haven’t done so yet.
Those massive gross profits per vehicle saw all dealerships combined earn $4.9 billion in total across their sales departments, up 10% from June last year, and the fourth-highest profit important every month, despite the drop in volume.
Automakers cut incentives to record lows, leasing incentives are dead.
The average amount automakers have spent on incentives, either paid out to dealerships or given back to retail customers, has fallen 59% from already low levels on record a year ago, to just $930 per vehicle on average, the second month in a row below the $1,000 mark. , according to JD Power estimates. This includes incentives for leases, and these have been eliminated entirely.
Incentive spending as a percentage of MSRP in June fell to an all-time high of around 2% of MSRP. By comparison, in 2019, incentive spend was around 10% of MSRP.
Incentive spend is how automakers adjust prices since MSRPs are set at the start of the model year and are not changed during the model year.
This massive reduction in incentive spending translates into huge gross profits per vehicle for automakers.
The average interest rate on new vehicle loans rose to more than 5% in June, according to JD Power estimates. And despite a record recovery value due to the ridiculously high price of used vehicles, which is driving down the amount to be financed, the average monthly payment jumped 12.8% compared to last June.
But still at this point consumers who can afford it are paying anything to get a new vehicle, and a lot of them are ordering it now, and they’re paying for extra stickers, and they’re paying higher interest rates high, and demand always exceeds supply.
Most consumers might as well drive what they already have for another year, two or five years, making new vehicles a discretionary purchase, unlike food. And consumers might react to those prices and interest rates, but they haven’t yet, which shows that the inflationary mindset is unleashed.
At some point, future Fed rate hikes could ultimately lead to auto loan interest rates so high that they reduce demand below the level of supply, allowing inventories to build, prices to stabilize and inflationary pressures to recede, but not yet.
It remains difficult to see what real demand would be under these conditions if supply returned to normal pre-pandemic levels. And all of this shows that inflationary pressures on new vehicles are not receding yet because enough consumers continue to play the game.
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