Thousands of dollars over sticker? I just don’t get this. Something big has changed in the brains of enough (but certainly not all) Americans.
By Wolf Richter for WOLF STREET.
Sales of new “cars” (mostly sedans but also muscle cars, such as the Mustang) dropped to 195,400 vehicles in November, down 45% from November two years ago, and the second lowest sales figure since Adam and Eve, or at least since the 1970s, the extent of the monthly data I have access to. Back in the 1970s and 1980s, “car” sales, which included the now extinct station wagons, regularly exceeded 1 million per month. The lowest car sales in that entire time span occurred in April 2020, when many auto dealers were shut down.
Sales of “trucks” – the booming category of pickup trucks, SUVs, vans, and compact SUVs that are built on what was essentially a car chassis – fell to 805,900 vehicles in November, the second lowest since lockdown-April 2020, and down 23% from November 2019, as buyers strolled through nearly empty dealer lots and were shown prices of thousands of dollars over MSRP, on units that hadn’t even arrived at the dealer yet.
Sales of “cars” have been plunging for years because Americans have lost interest in them and stopped buying them, and the Big Three US automakers, after failing for years to revive interest in them, have abandoned them by killing their sedan models, leaving that segment to Tesla and foreign brands.
I have long called this shift away from cars the era of “Carmageddon.” But the semiconductor shortage has accelerated the trend as automakers are prioritizing their highest-margin and most expensive models, namely loaded trucks and SUVs, at the expense of cars.
Due to the large month-to-month variability and seasonality of auto sales, the industry has long used the Seasonally Adjusted Annual Rate (SAAR) of sales, which adjusts for the number of selling days per month and for seasonal factors and extrapolates those adjusted monthly sales out to a 12-month sales figure.
The SAAR for November for all cars and light trucks combined fell to 12.86 million vehicles, according to the Bureau of Economic Analysis today, down 19% from November 2020, and down 25% from November 2019.
The now widespread practice of selling new vehicles at MSRP or even at thousands of dollars over MSRP, and in some cases at tens of thousands of dollars over MSRP, even at vastly diminished unit-volume, has inflated dollar-revenues and per-vehicle gross-profits. And along with the prioritization of high-end units in the sales mix, the Average Transaction Price (ATP) has spiked.
In November, the ATP hit $44,043, according to J.D. Power estimates, up 18% from November 2020:
Automakers have responded to the semiconductor shortage and the production cuts that it caused by not only prioritizing high-margin high-end models, but also by slashing incentives in terms of dealer incentives and consumer rebates.
The average incentive spending by automakers per vehicle sold dropped to $1,612 in November, according to J.D. Power estimates, down by 65% from November 2019 ($4,538).
As a percent of MSRP, average incentive spending dropped to 3.6% of MSRP, down from 11% of MSRP in November 2019.
This drop in incentive spending means that consumers are having to pay it, plus some. This is the way automakers raise prices because MSRPs are fixed by automakers when they release the new model-year pricing and doesn’t change during the model year. What changes is incentive spending, which is how automakers respond to the market.
To make up for the slashed incentive spending, and to inflate their gross profits further in this crazy market, dealers are sticking additional dealer profit figures – “addendums” or whatever they call them – on the MSRPs.
These ridiculously high prices that consumers eagerly paid – I mean, who’d ever have thought that otherwise astute American car buyers would ever pay thousands of dollars over sticker? – more than overcame the plunge in unit sales volume:
Consumers, according to J.D. Power, forked over $41.1 billion to purchase new vehicles in November, the highest for any November on record, and up by 68% from a year ago.
And dealers’ average gross-profit per unit sold, including Finance and Insurance (F&I) income, soared by 68% from a year ago to a record of $5,164.
In terms of aggregate gross profits from new-vehicle sales, including F&I, this dreary November goes down in dealer history as the most profitable month ever, producing $4.8 billion in gross profits from new vehicle sales, up 226% from November 2019.
And I just don’t get this, it keeps astounding me every day: Why are Americans still buying new vehicles at these crazy prices? Most of these buyers, instead of trading in their current vehicle, could just drive it for a couple more years, which would stop these crazy price increases in their tracks and fill up dealer lots with unsold inventory.
But no. Something big has changed in the brains of enough – but certainly not all – Americans starting last year, and they no longer care about prices, and they’re just buying to buy, and they’re eagerly paying whatever. And in terms of the overall inflation scenario, this is a huge change.
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