July vehicle prices hit all-time high while incentives vaporize

The average transaction prices for new vehicles are pushing vehicle purchases into unaffordable territory for shoppers – at least, for those who can find the vehicle they want. According to Kelley Blue Book, the average transaction price through July 2021 reached a never-before-seen high of $42,736, marking an 8.2% increase over July 2020.

Month over month, new vehicle transaction prices rose by $402, the fourth consecutive month of gains and record prices. All-time high prices are being tempered by lack of vehicle availability as the industry struggles to replenish dealer lots with new cars. Between the record-high prices and fewer vehicles to choose from, sales have slowed marginally in the past two months.

Incentives bottoming out

Vehicle affordability is becoming an issue in some cases with the sky-high average transaction prices. Manufacturer incentives have been vaporizing in recent months, both as consumer demand has been extremely strong and the inventory woes dig in deeper.

Cox Automotive Analyst Kayla Reynolds says, “While transaction prices marked new highs in July, new vehicle incentives continue to fall. Last month, incentives amounted to just 5.9% of average transaction price, the lowest amount in more than a decade. Excellent new vehicle deals are certainly hard to find.”

Comparatively, June 2020 had an average 10.1% incentive amount.

Affordability at stake

As car purchases relate to economical factors, vehicle affordability has taken a tumble in the past two months, according to the Vehicle Affordability Index by Cox Automotive and Moody’s Analytics. The index determines the median number of weeks of income a buyer needs to purchase a vehicle. For July 2021, it sits at 37.4 weeks.

With excellent incentives over the past decade and a strong economy, VAI had been trending in the consumer’s favor until June and July of this year. Previous peaks were at just barely over 36 weeks in late 2013 but have been hovering between 31 and 35 weeks since. A VAI of 37.4 weeks represents an incredible spike.

Sales are still booming right now, but the affordability factor can be worrisome for financing lenders especially. It wouldn’t be surprising for lending rules to tighten as a result, exacerbating vehicle unaffordability.

Prices up industry-wide

It would be easy to explain away the jump in ATP on a single mass-market manufacturer’s release of a popular high-priced model or model-year changeover, but that’s just not the case. Aside from Tesla, every major car brand in the US shows an increase year-over-year. Eight of 15 manufacturers reported double-digit increases with Volvo, General Motors, and Ford Motor Company all ringing in at increases over 14%.

Again, the segment breakdown shows similar data. Aside from a reporting problem with EVs, only one segment reported a decline year-over-year, and that’s for high-performance cars that shrunk back by just 1.5%. Minivans, luxury SUVs, midsize cars, and hybrids all demonstrated some of the highest ATPs in the industry.

‘Wild West’ auto industry

Auto retail continues to outperform almost every industry with its growth despite manufacturing woes, and it’s getting harder to predict the next few months, never mind a year or more into the future. AutoNation CEO Mike Jackson predicted the industry’s supply model could shift away from packed dealer lots, and used cars continue to push the bounds of anyone’s expectations. It’s anyone’s guess what the industry will look like in 2022 and beyond.

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