The auto industry is seeing a return in activity to pre-pandemic levels in many ways. For example, vehicle miles traveled for March 2021 surpassed 300 million miles for the first time since the summer of 2019.
Consumer confidence is also improving and jumped 21.3% in March 2021. Plans to purchase a vehicle reached a 13-month high. With sales in new vehicles increasing 59.7% year-over-year, even with 37% less new inventory and pre-owned at a 117% increase year-over-year, there’s no question that the consumer demand is there.
Short Supply, Rising Prices
Storm clouds are gathering given the limited supply of inventory of both new and pre-owned vehicles even with prices increasing. Wholesale supply of inventory has dropped to 18 days on hand compared to the normal of 23 days.
This shortage is being driven in large measure by a shortage in the semiconductor supply. These are chips that are used to run a variety of functions in cars: from your windshield wipers to the cruise control feature to calibrating the car’s fuel injection or adjusting the seats automatically.
Modern cars can have more than 3,000 chips built in, so many automakers have been forced to curtail production due to the lack of availability. Industry experts are not sure how long it may last, but some predict it could be up to a year before the situation returns to normal.
Predictably, the shortage in supply of new vehicles has driven up demand of used vehicles and with the demand surge, prices are also going up for used vehicles. Cox Automotive chief economist Jonathan Smoke recently announced how wholesale vehicle prices “leaped” last month.
The Manheim Used Vehicle Value Index increased 26.2% year-over-year to an all-time high of 179.2. Pickup trucks led the segment with the highest increase, 47.7%. Even Manheim Marketing Report (MMR) showed gains in the MMR Index for three-year-old vehicles, rising 6.4% in just four weeks.
The conditions are favorable for a perfect storm when you consider the two conditions above merging together, limited supply and rising prices. The result is the reawakening of affordability concerns. Also add into the mix, retention values have increased in one- to three-year-old vehicles by 12 percentage points in March from last year and 19 points from 2019.
Who’s impacted by this? Consumers and potential borrowers at your financial institution.
According to Experian, affordability remains a top concern for vehicle shoppers and leasing, a type of residual based financing, continues to be an enticing option due to lower monthly payments. Experian shows that in fact, the average lease payment has remained pretty constant over the last two years ($460 in Q4 2020 compared to $462 in 2019) but not so with conventional loans, where the average monthly payment increased by more than $10 ($563 in 2019 to $576 in 2020).
Consumers’ monthly budgets aren’t likely to keep pace with the increased prices. The result from this perfect storm’s impact is the damage done to consumers regarding vehicle payment affordability.
The Implications for Auto Lending
Lenders should do their part to offer all affordable payment options at the point of sale. Consumers don’t have to sail blindly into the perfect storm to get a monthly payment they can afford and the perfect vehicle.
Offering residual-based financing will help financial institutions stay competitive and offer borrowers the affordability and flexibility that they need in light of a rebounding demand for vehicles coupled with shortages in inventory.
Auto Financial Group’s residual-based financing programs can help navigate into smooth sailing waters. With lease and balloon loan programs on new vehicles and vehicles up to five years old, shorter lease/loan terms, and lower monthly payments compared to the conventional long-term loans, this is a consumer win.
Would you like to learn more about auto industry trends and the used car market?
Watch this recording of Michael Bor, CarLotz CEO, talking about trends in the automotive industry and in used car sales in particular during the Governmental Affairs Conference.
Auto Financial Group (AFG), a Houston-based company, provides an online, residual based, walk-away vehicle ﬁnancing product called AFG Balloon Lending, as well as vehicle leasing and vehicle remarketing to ﬁnancial institutions across the United States. For more information about AFG call toll free at 877-354-4234, or visit www.autoﬁnancialgroup.com.
Tim Kelly is president of Auto Financial Group and has more than 20 years of experience delivering solutions to financial institutions.