How Much Longer Can This Keep Going?

One of the most remarkable stories in the car business this year has been the extent to which new-vehicle sales have rebounded from the depths of April and May. October is forecast to be the second consecutive month of year-over-year volume increases, and the seasonally adjusted annual rate (SAAR) is expected to be 16.4 million! Back in April, nobody in their right mind would have bet a dollar that the industry SAAR would reach 16.4 million in October. Incredible.

Most industry forecasters have been predicting a pullback in vehicle sales since August, but the new-car market just keeps charging forward, driven by strong consumer demand.

Not only have sales volumes been climbing, but average transaction prices are now near $39,000, up roughly $1,000 versus year-ago levels according to data from our Kelley Blue Book team. Americans continue to buy larger, more expensive vehicles while the smaller, more affordable ones gather dust on dealer lots. Incentives, too, are being kept in check, as OEMs in aggregate are thoughtfully managing incentive spend as inventories remain thin.

This unexpected strong consumer demand is being driven by a potent combination of home refinancing, sky-high used vehicle trade-in valuations, and likely, the emotional need for something to feel good about in 2020—Honey, let’s go buy a new car tonight.

There’s reason to believe the demand will continue in the months ahead. The new car market is largely driven by more affluent “work from home” professionals who have been less financially impacted by the pandemic. Massive white-collar lay-offs seem unlikely. Also, the automakers are continuing to ramp up production to improve their inventories and provide shoppers more selection. Interest rates will remain low for the foreseeable future, which bodes well for both the housing and auto sectors.  

The question on many people’s minds is just how much longer can this keep going on?

The two wild cards are a second stimulus package and a winter wave of COVID-19 infections. This past weekend the U.S. marked a record high with nearly 100,000 new cases, so dealers around the country are going to face new challenges as fresh measures are taken at the state level to curb the spread. As for stimulus, we will know more once the election is over. It’s not a question of if, but when and how much new money will be infused into the economy.

There are some warning signs that demand could be slowing down: Online shopping for new vehicles on KBB.com was down 14.9% in October from the prior month and Manheim has observed softening used-vehicle values, which suggests weaker demand. Consumer sentiment is still off 20% versus pre-COVID levels. 

Still, the fundamentals should remain pretty stable in the near term. The Q3 GDP growth numbers were largely driven by strong consumer spending on durable goods, while less money is being spent on services. This trend is good news for car dealers. The Cox Automotive Industry Insights team is forecasting full-year 2020 sales to reach 14.3 million. That means more than 2.5 million total new-vehicle sales in November and December are up for grabs. One thing is for certain: New-car dealers are optimists by nature, and the fundamentals are all pointing toward a continued strong new-car market.

Brian Finkelmeyer is senior director of new car solutions at Cox Automotive. The  Cox Automotive Rates & Incentives  (CAR&I) team has developed a methodology for measuring the accuracy of data used to calculate pricing and payment information presented through dealer service provider tools (e.g., dealer websites, inventory management, digital retailing & advertising, desking, equity, etc.). Approximately 17,500 individual dealerships –  rooftops, in automotive parlance –  in the U.S. rely on CAR&I  incentive  data  for powering  5 different software applications through Cox Automotive native software/sites and our many industry partners. In all, an estimated 90,000 applications are relying on CAR&I data in a given month, providing valuable information to 40 million shoppers.