With rising interest rates, waning demand, growth in the used car market, and uncertain government policies, car makers have been searching for a new normal in 2019, according to a new midyear report by California’s Edmunds, which has a satellite office in Detroit.
“Automakers are fighting a war on multiple fronts right now: old cars are piling up on dealer lots, a glut of affordable off-lease vehicles are luring shoppers into the used market, and even with the Fed-anticipated lower rates in July, higher interest rates are here to stay,” says Jeremy Acevedo, manager of industry analysis at Edmunds. “Strong economic indicators such as consumer confidence and low unemployment are keeping sales at historically elevated levels, but automakers have also been relying a little too heavily on fleet sales to keep these numbers up as well, which isn’t a sustainable model.”
New vehicle sales were down 2.4 percent year-over-year through May, and Edmunds analysts maintain their forecast that 16.9 million new vehicles will be sold in 2019.
The midyear report also reveals that a strong economy is propping up a weaker auto market; unemployment is at 3.6 percent, the lowest level since 1969, and consumer sentiment is at its highest level of 2019.
Elevated industry levels are expected to lead to attractive deals over the summer. Inventory dipped below 4 million units in May, but analysts say this number is still too high given current demand. Interest rates are making it more expensive for automakers to offer bargain-basement deals, but shoppers can expect decent incentives at least until automakers can adjust production.
Increasing interest rates continue to create affordability issues for car shoppers. The average annual percentage rate on new vehicle loans is 6.2 percent this year. According to Edmunds data, a shopper will spend about $2,000 more in interest on average over the course of the loan in 2019 compared to three years ago.
Leasing prices are up, but so is the number of people leasing. Through May, lease penetration hit 32.2 percent, the highest Edmunds has on record since 2002. With higher interest rates, the average new vehicle lease in 2019 costs $1,965 more than it did in 2016, and the average monthly payment is $536, which is $46 more than in 2016.
Off-lease used vehicles offer a more affordable option to shoppers. This year, a 3-year-old used car costs an average of $13,535 less than a new car. This is up from $8,996 less in 2010.
Finally, automakers are still struggling to get electric vehicles to appeal to a wide audience. Edmunds anticipates 700,000 electric vehicles and hybrids will be sold in 2019. This is a new record, but the narrow appeal of electric vehicles to affluent males in coastal states limits further growth potential. So far this year, Tesla accounted for 82 percent of electric vehicles sold, and 28.9 percent of all Teslas sold this year were to men in California.
The full report is available here.
Edmunds offers online car shopping guidance.