New vehicle affordability improved marginally in February as prices and interest rates declined and income growth continued, reflecting the car market’s slow but steady shift toward consumer-friendly conditions.
According to Cox Automotive, affordability improved on multiple fronts last month, repeating patterns observed in January. Monthly payments dropped 0.7%, from $749 to $744, while the number of weeks needed to buy a new vehicle dropped 0.8% month-over-month to 37.1 weeks. The typical payment observed in February was down 6.4% from the peak of $795 observed in late 2022. Average transaction prices dropped 0.1% in February from January and were down 2.2% from early 2023. Electric vehicles saw greater than average price declines, dropping 13% year-over-year.
New vehicle loan interest rates also declined in February. The average rate was 10.15%, down slightly from 10.28% the previous month. Although rates were lower in 2023, affordability was still higher this year due to the decline in prices and an increase in manufacturer incentives.
These factors and a 0.3% increase in the median income resulted in the most affordable car market seen since July 2021. They also led to an upsurge in sales. The seasonally adjusted annual rate jumped from 15 million in January to 15.8 million in February. Improvements in affordability can thus be tied to greater demand for new vehicles, even as inventory counts dropped heading into March.
While dealers’ concerns that improvements in affordability will hurt profit margins are warranted, consumer-friendly conditions lead to higher retention rates and allow more buyers to participate in the market. Furthermore, new vehicle prices still remain well above pre-pandemic averages; while they are likely to decline further in the coming months, the speed of change remains slow, giving dealers the opportunity to transition toward a pro-buyer market at a reasonable pace.
