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New-Vehicle Incentives Depress Used-Car Prices
McLEAN, Va. -- A cash incentive of $1,000 on a new vehicle reduces the price of a one-year-old used vehicle by nearly $600, says the National Automobile Dealers Association Used Car Guide.
In comparison, $1,000 spent on finance and lease incentives reduces the price of a one-year-old used vehicle by $165 and $89, respectively.
If market conditions -- the economy, time of year, level of supply and manufacturer suggested retail prices -- remain constant, an incentive of $1,000 on a model with no other discounts would result in the price of a one-year-old version of the same model to fall by $563, according to NADA’s latest Used Car Guide Used Vehicle Price Report: Incentive Analysis and Impact.
For a three-year-old version and a nine-year-old version of the same model, the price would drop by $381 and $133, respectively. “This pass-through effect means cash incentives continue to exert a sizable negative influence on prices far removed from more recent model years,” said Jonathan Banks, executive automotive analyst at the NADA Used Car Guide.
Not all incentives resonate equally with customers, so they don’t have an equal impact on used-car prices, either, Banks added. “By comparison, in many cases it’s more difficult for a consumer to translate the savings from finance or lease incentives, and as a result, the power to sway consumer demand -- and negatively affect used prices -- isn’t as great on these incentive types,” he said.
Currently, average spending for all incentive types is $2,574 per unit, down 12% from 2004’s peak and 2% below 2007’s pre-recession average of $2,631. While total incentive spending remains below pre-recession levels, it has ticked up by 3% compared to last year. “Looking ahead, NADA expects that slower new sales growth and fiercer competition will see incentives rise modestly in the coming years,” Banks noted. “But we don’t foresee an imminent return to destructive levels of the past.”
As NADA’s analysis has shown, value preservation of used vehicles is as much a function of the type of incentive used as is the total amount spent. Today, manufacturers have a much better understanding of how some incentive strategies can depress used-vehicle prices as they continue to balance profitability with market share goals. “Plus, the industry as a whole is building what is arguably the best product ever, which minimizes the need for a dramatic shift in incentive spending,” Banks said.
Considering these points, manufacturers will likely protect price advances by continuing to focus their discount strategies around finance and lease subvention rather than customer or dealer cash, NADA predicts. “While we expect to see incentive spending increase moderately in 2014, a prudent discount mix and a commensurate rise in MSRPs will keep new vehicle transaction prices from falling, and this, in turn, will mitigate downward pressure on used vehicle prices,” Banks reported.
The National Automobile Dealers Association represents nearly 16,000 new-car and -truck dealerships with more than 32,000 franchises, both domestic and international.
Published by The Business Journal, Youngstown, Ohio.
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