Vehicle sales to reach record highs

Latest forecasts suggests vehicle sales are soaring amid the best auto industry and economic fundamentals for a decade, with the National Automobile Dealers Association (NADA) predicting record purchases this year and next, which will be good news for the auto leasing industry.

Steven Szakaly, NADA’s chief economist (pictured above), says sales of new cars and light trucks will continue their post-recession climb, reaching an all-time high of 17.46 million vehicles in 2016, up from 2015 estimate of 17.2 million. In comparison, sales in 2014 were 16.5 million, up 5.9% from 2013.

“Employment is doing very well, which is critical to new- and used-car sales, and we expect gasoline prices to continue to remain low,” Szakaly said. NADA forecasts that new-car dealerships will retail a total of 31.77 million new and used vehicles in 2015, an increase of 3.3% from 2014. (That figure includes 17.17 million new vehicles and 14.6 used vehicles retailed by new-car dealerships in 2015.)

There is support for this view from TrueCar, a car buying and selling mobile marketplace, which estimates US retail sales of new vehicles have increased by 4.2% in July, with the total industry expanding 2.6%. It estimates the Seasonally Adjusted Annual Rate (SAAR) should reach 17.2 million units in July, keeping the industry on pace to reach 17.1 million units this year which represents the highest volume for new light vehicle sales since 2001.

TrueCar estimates the average transaction price (ATP) for a new light vehicle was $31,691 in July, unchanged from a year ago, while average incentive spending per unit fell by $34 to $2,849.

“Right now the industry is genuinely vibrant, benefiting from robust consumer demand that is enabling automakers to pull back incentive spending,” said TrueCar president John Krafcik. “Consumers are feeling more affluent, and with more disposable income to invest back into the economy, the auto sector is thriving. These factors create an ecosystem that’s poised to deliver record high revenues.”

Future finance famine

However, NADA cautions that auto lenders may need to cash in now as future trend look like they could be less positive. After 2016’s highs, the dealer association expects new-vehicle sales of 16.65 million units in 2017, tapering off to 16.4 million in 2019.

The existing record for US light-vehicle sales is 17.4 million, set in 2000. If sales go as planned with increases in both 2015 and 2016, then NADA said that would be a record seven years in a row of sales increases. The bottom of the present cycle was the low of only 10.4 million vehicles sold in 2009.

Millennial minuses

NADA’s chief economist, Szakaly says demographics are likely to prove the biggest threat to auto sales as the US population ages. He noted: “It will take four millennials to replace the spending power of one Baby Boomer in the automotive-retailing marketplace.’

This is because the average income of millennials, that is those currently entering the workplace, is significantly lower than that of earlier generations. On average, millennials make $34,430 a year, compared with the $50,400 of Generation X (ages 35-49). Baby boomers and the older individuals combined (ages 50-87) make an average of $46,340.

Szakaly said: “Stagnating wages for millennials, along with increasing vehicle-transaction prices, will pose challenges in the long run.”

In addition, younger potential buyers have higher levels of student debt and are increasing turning to the ‘shared economy’, opting for services such as Uber and other technology-enabled options which allow them to swap to a vehicle usage rather than vehicle ownership model.

Millennial pluses

However, millennial car buyers opt to lease their vehicles at a higher rate than the overall car buying population, according to a new analysis from car-buying platform Edmunds.com. The finding suggests that millennials are more willing than older adults to sacrifice the long-term financial benefits of car ownership to get into bigger or more luxurious vehicles that are typically more affordable through leasing.

According to Edmunds’ analysis of car registration data, leasing accounted for 28.9% of all new car purchases by millennials (age 18-34) in 2015. The percentage exceeds the industry-wide lease penetration rate of 26.7%, and reflects a 46% increase in leasing by millennials over the last five years. By comparison, the share of leasing among all car shoppers has increased 41.7% during that period.

“Most millennials understand and accept that they’re on a tight budget and that they need to stick to it,” said Edmunds.com director of industry analysis Jessica Caldwell. “But it doesn’t mean that their financial constraints limit them only to the most basic vehicles to get from Point A to Point B. If they see a chance to get into a nicer car while staying within their budget, they’re likely to explore that opportunity. In most cases, leasing opens the door to the bells and whistles that they couldn’t otherwise afford.”

There is a dramatic difference between what millennial shoppers can afford when they choose to lease compared to when they choose to buy. According to a survey of millennials conducted in June by Edmunds and Morpace Inc., a global market research firm with a large practice in the automotive sector, a majority of respondents (57%) said that they are willing to put no more than $2,999 down on a new car purchase, and a similar majority (54.9%) said that they are willing to pay no more than $299 per month.

As a result, shoppers who choose to finance their purchase are generally limited to vehicles priced at under $20,000. On the other hand, shoppers who are willing to lease can apply the same upfront and monthly budget toward a vehicle priced as high as $35,000.