Falling U.S. Used Car Prices Will Drive Up New-Car Incentives

The U.S. auto industry will have to offer more discounts to maintain demand as prices for used cars decline. With auto sales recovering from their recession-era slump, the industry's supply of used cars has started to rise again, driving down prices. This in turn will pressure new-car prices and raise the stakes for automakers, which have enjoyed the new-car sales renaissance of the last four-and-a-half years.

To achieve annual sales above pre-recession levels of about seventeen million new vehicles, "the automakers are going to have to increase incentives more," said Larry Dominique, Executive Vice President of research firm TrueCar Inc. The company estimates used-car prices will drop 5.2 percent by 2017, while new-car incentives, now at about $2,700 per vehicle, will rise about eleven percent over the next two years to nearly $3,000. The National Automobile Dealers Association forecasts a nearly seven percent decline in the average used-car price to just under $15,000 in 2016 from $16,025 in 2014.

Meanwhile, new-car prices are rising because of the popularity of pricey features and more-expensive vehicles. They hit an average of $31,262 per vehicle last year and are expected to increase another two percent both this year and next. U.S. new-car sales averaged 16.7 million vehicles annually in the decade that ended in 2007, but they skidded to 10.4 million in 2009. Demand rose at a double-digit pace in the three subsequent years, increased another eight percent to 15.6 million last year, and is expected to top sixteen million this year. Many of those cars, especially the ones coming off three-year lease deals, will be resold as used.

Dominique said the average age of cars on the road, now topping eleven years, would creep down as newer-model used vehicles enter the market.

While the auto industry, including U.S. automakers General Motors Co and Ford Motor Co, largely refrained from dramatically increasing profit-sapping incentives after the recession, experts have questioned whether that will hold given pressures the companies will face to increase sales and maintain share as demand growth slows.

"As the wholesale prices decline with respect to new vehicles, clearly it's a negative," said Tom Webb, Chief Economist for Wholesale Car Auction Company Manheim. "You can get in somewhat of a downward spiral."

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