We’ve been studying car prices for nearly 100 years. They’re governed by a complex interplay of factors ranging from interest rates to the age of the average car on the road. But, in the end, the most important factor is always the same – inventory.
When dealers have too few cars for the number of shoppers, they can charge high prices. America learned what that means during the peak of the COVID-19 pandemic.
At the other end of that scale, when they have too many, they have to charge low prices. Dealers can’t sit on unsold inventory. They’re generally making payments on the cars on their lots. So, the longer they hold onto an unsold car, the more it costs them. Too many is a big expense. It means discounts.
Dealerships have a sweet spot. For most of them, it’s 60 days. When the supply on the lot equals about 60 days’ worth of sales, they’re operating near maximum profitability.
Oversupply Means Discounts
Today, the average dealership has 74 days’ supply. The numbers come from Kelley Blue Book parent company Cox Automotive.
An average is made up of extremes. Eleven brands have 101 days or more in stock at the average dealership.
That’s why the average new car price fell in May, even as inflation nationwide has barely stabilized according to the Consumer Price Index.
The average car deal last month included discounts worth 6.7% of the price – the highest average discount in three years.
Much of the automotive industry is overstocked and looking to make deals. In our surveys, car dealers say they’re worried about the state of their industry and are expecting a rough quarter.
They know they need to attract shoppers at a time when interest rates are high and likely not coming down soon.
Some Dealers Discounting, Others Don’t Need To
You won’t find deals at every dealership. Toyota, Lexus, and Honda are all well under the 60-day goal. Their dealers can count on selling most cars near sticker price.
Kia, Subaru, Porsche, Acura, and Land Rover are all nearly on target.
But nearly two thirds of auto brands are overstocked. At Ram, Jeep, and Dodge, previous model year vehicles heavily weigh down their inventory, as Dodge sits on nearly 48% of older inventory, some of the industry’s highest.
Americans are on pace to buy about 15.9 million vehicles this year – more than in 2023 but still well under the 17 million level of the pre-pandemic years.
