By Patrick Manzi, Chief Economist of NADA

Recent media coverage of rising new vehicle prices ignores unprecedented market conditions in the automotive retail market. The following analysis (which is largely based on JD Power PIN data drawn from 42% of all consumer transactions for new vehicles) explains the key factors that determine vehicle pricing.

• The widespread shortage of microchips has sharply reduced vehicle production and reduced dealer inventories to their lowest level in 40 years, while consumer demand has remained strong. This imbalance between supply and demand has created significant upward pressure on the prices of new vehicles.
• These market forces caused the average price paid by consumers to increase by 13% in 2021. Even with such an increase, the average price paid by consumers in 2021 was still lower than the manufacturer’s suggested retail price (MSRP).
• Market forces simultaneously drove up used vehicle prices by 41%, significantly increasing trade-in values. These larger trade-in allowances more than offset the increase in new vehicle prices. Indeed, new-vehicle trade-in buyers paid an average of $305 less in 2021 than in 2020.

Headwinds to vehicle production and inventory

New vehicle transaction prices increased throughout the year due to a shortage of semiconductors New vehicle transaction prices increased throughout the year due to a shortage of electronic chips having reduced the supply of new vehicles while consumer and fleet demand remained stable. New vehicle inventory fell 59.1% in 2021, including a record high of 972,000 units in September 2021. This compares to a pre-pandemic inventory level of 3.5 million units at the end of 2019.

Vehicle inventory levels guide manufacturers’ decisions about incentives, such as rebates, promotional financing, and other incentives. In particular, manufacturer incentive spending historically rises and falls as inventory rises and falls. With such low inventory and such high demand, OEMs reduced their incentive spending every month last year, with reductions in available OEM incentives effectively raising prices for consumers. Average incentive spend per unit in 2021 fell from $3,482 in January to $1,516 in December. For the year, incentive spend per unit averaged $2,429, down 39.7% from full year 2020.

And the increase in vehicle prices has not been limited to traditional car brands. Direct sellers, like Tesla, also increased their prices in 2021. According to Kelly Blue Book data, the average transaction price of a Tesla in December 2021 was up 20.2% year over year. . While the MSRP of vehicles sold by franchise dealerships has seen only minor increases, the price increases Tesla implemented will likely remain permanent.

Despite upward pressure on prices, average prices for new vehicles remained lower MSRP in 2021

Due to the shortage of microchips, manufacturers prioritized the production of trucks and SUVs, and among these trucks and SUVs, they prioritized the production of top trim models, which contributed to the rising vehicle prices. Many consumers opted to order their custom vehicles directly from the manufacturer, and some also chose these top-trimmed trucks and SUVs.

Due to lower rebates, manufacturers’ production decisions and consumer preferences, the average transaction price moved closer to MSRP in 2021, increasing 13% from 2020. However, overall, the average transaction price was still below the average MSRP in 2021.

Soaring trade-in values—offsetting new car price increases

As the supply of new vehicles tightened, many retail and fleet buyers turned to the used vehicle market, driving up wholesale and retail used vehicle prices. Wholesale auction prices set records throughout the year. According to the JD Power Used Vehicle Price Index, used vehicle prices increased by 41% in 2021

Historically, used vehicles depreciate significantly over time, but in the limited-supply single market of 2021, used vehicles have actually appreciated throughout the year. As a result, consumers of new vehicles with trade-ins saw average trade-in quotas increase by 33.0% in 2021. Consumers suddenly had 58.5% more equity in their trade-ins, resulting in reduced trade-ins. new vehicle payments in 2021.

Indeed, after increasing year-over-year in 2019 and 2020, the difference between average trade-in value and average transaction price in 2021 decreased by $305, or 1.5%. This means that the average new-vehicle trade-in buyer spent less on a new-vehicle purchase in 2021 than they would have in 2019 and 2020.

Conclusion

New vehicle prices rose in 2021 due to reduced production, low dealer inventories, reduced OEM rebates and strong demand from retail consumers and fleet buyers.

The real impact on consumers is more complex. As used vehicle prices have appreciated at record rates in 2021, new vehicle trade-in buyers have been able to more than offset the increased price of their new vehicle purchase due to average trade-in values. higher.