Yahoo Autos Consumer sentiment hits multiyear high as gas prices, interest rates decline
Consumers are starting to see the light at the end of the automotive market’s long, dark tunnel.
Consumer sentiment has hit its highest point in three and a half years, buoyed by declining gas prices and falling auto loan interest rates. New data from Cox Automotive shows that these economic improvements are sparking renewed activity in both new and used car markets, with retail sales surging compared to last year.
The Index of Consumer Sentiment from Morning Consult reported a 4.6% increase so far in November, continuing a steady rise over the last five months. The impact is clear: automotive sales were up significantly in October. Yet, new car inventory continues to grow, underscoring the need for greater incentives from automakers.
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Retail sales rev up after a year of slumps
October saw car sales up 13% compared to the same period last year, a clear sign of market recovery. Sales of both new and used vehicles have contributed to this rise, driven in part by better financing options.
Auto loan interest rates are still higher compared to pre-pandemic levels but are slowly starting to decline. The average new auto loan rate now stands at 9.25%, while used vehicle loans have dipped to an average rate of 13.79%. The share of loans with interest rates less than 3% are also up in November.
However, with interest rates still relatively high, automakers are also increasing incentives to try to capitalize on the improved consumer sentiment. Average incentive spending in October rose to 7.7% of the average transaction price (ATP), representing an extra $3,708 per vehicle.
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Dealership inventories continue to rise
Despite increased sales and incentive spending, new-vehicle inventory is currently at a multiyear high, with total inventory sitting at over three million vehicles as of Nov. 4. Days’ supply—a measure of how long inventory would last at the current sales pace—rose to 85 days, up 14% compared to the same period last year.
Bloated inventory is a boon for prospective buyers, according to analysts at Cox Automotive. “With the holiday season upon us, more incentives and discounts are expected to spur on rising consumer demand and deliver continued positive momentum in retail showrooms as inventory levels continue to creep higher,” an analyst at Cox Automotive wrote.
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High prices continue to challenge buyers
Despite these positive trends, one obstacle remains: vehicle prices. The average new vehicle listing price in October was $48,117, up nearly 2% from last year. High-priced luxury models have been incentivized the most, with vehicles in the $50,000–$80,000 range often exceeding 100 days’ supply. Automakers are betting on increased incentive spending to help buyers overcome rising MSRPs.
As a dollar figure, current incentives are nearly as high as they were back in 2019. However, car prices have also increased significantly during that time, making current incentives a significantly smaller percentage of the total transaction price—about 2.4% on average.
The used car market has seen more consistently positive signs. Prices have continued a steady decline, with the average used car list price at just over $25,000 in October. Used car sales also saw a significant bump in October, hitting the highest volume level in the last three years. But even declining prices aren’t enough to lure many buyers to the used car market, with recent Edmunds’s research finding that nearly 50% of prospective buyers say they’re still more interested in buying new cars over used ones.
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A balancing act ahead
As the holiday season approaches, automakers and dealers are betting on a combination of incentives and seasonal sales momentum to close the year strong. Stellantis, for instance, has successfully trimmed inventory for brands like Ram and Jeep, both of which had inventory levels far above the industry average just a few months ago.
For more consumers to return to the auto market, interest rates will need to decline further. As the Federal Reserve continues to cut interest rates, it appears that auto loans will be getting cheaper, but that decline might not happen as quickly as automakers and consumers would like. In the meantime, automakers will have to find other ways to attract buyers. Right now, their biggest tool to accomplish that is incentive spending, but companies can’t afford to keep up the momentum through ever-greater discounts alone.
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Final thoughts
The industry’s next challenge will be maintaining this momentum into 2025. With loan rates trending downward and automakers stepping up their incentive game, the stage is set for a healthy holiday sales season.
However, lasting success will depend on how effectively manufacturers and dealers can balance inventory levels, meet shifting consumer preferences, and address the lingering affordability crisis (call us crazy for not wanting to spend $50K on an average new car).
