Driving into December: How Rising Negative Equity and Surging Inventories Are Shaping the Automotive Market
Increasing Vehicle Inventories
Sunday, December 22nd
As December 2024 concludes, the U.S. automotive market is experiencing significant developments that are reshaping industry dynamics. Key trends include:
• Rising Negative Equity Among Car Owners
• Increasing Vehicle Inventories
• Evolving Consumer Preferences
Understanding these developments is crucial for stakeholders across the automotive sector.
Surge in Negative Equity
Negative equity, where car owners owe more on their auto loans than their vehicles’ current value, is becoming increasingly prevalent. Recent data indicates that 24.2% of trade-ins toward new vehicle purchases had negative equity, up from 23.9% in Q2 2024 and 18.5% in Q3 2023. The average amount owed on upside-down loans has reached an all-time high of $6,458.
This trend poses significant challenges:
• Trade-In Difficulties: Consumers with substantial negative equity may find it financially unfeasible to trade in their vehicles, leading to longer ownership periods and delayed new car purchases.
• Financial Strain: Elevated negative equity can strain household finances, especially when combined with rising interest rates and vehicle prices.
Increasing Vehicle Inventories
Vehicle inventories have been on the rise, signaling a shift toward a more buyer-friendly market. December auto sales in the U.S. are estimated to hit 1.45 million units, translating to an estimated sales pace of 16.5 million units (seasonally adjusted annual rate: SAAR). This would match the previous month’s reading and result in a fourth-quarter selling rate average of 16.4 million units, the highest quarterly average since Q2 2021.
Implications of rising inventories include:
• Potential for Discounts: Dealers may offer increased incentives to move stock, providing opportunities for consumers to secure better deals.
• Market Saturation Concerns: Excessive inventory levels could lead to market saturation, potentially impacting vehicle resale values and dealer profitability.
Evolving Consumer Preferences
Consumer preferences are shifting, influenced by economic factors and changing market dynamics:
• Leasing Trends: Leasing now accounts for 25% of new vehicle registrations, up from 17% two years ago. For electric vehicles (EVs), leasing is even more prevalent, with nearly 80% of new EVs leased from dealerships. Automakers are enhancing leasing attractiveness through incentives, discounts, and federal tax credits, making EVs more accessible without reducing manufacturer suggested retail prices (MSRPs).
• Electric Vehicle (EV) Adoption: Despite increased leasing, interest in EVs is declining, with only 25% of buyers considering an EV, a 2% drop from last year. Tesla’s share of EV sales has also decreased in 2024, indicating heightened competition and shifting consumer sentiments.
Market Outlook
Despite these challenges, the market shows signs of resilience:
• Sales Projections: U.S. new vehicle sales are projected to rise by 7.3% in December 2024, with a seasonally adjusted annualized rate (SAAR) of 17.2 million units. Looking ahead, U.S. auto sales are anticipated to reach 16.18 million units in 2025, a 1.2% increase from this year, although affordability issues will persist.
• Affordability Concerns: High interest rates and vehicle prices continue to impact affordability, influencing consumer purchasing decisions and potentially prolonging vehicle ownership cycles. The average used car listing price sits at $25,571, with new car incentives pulling buyers away from the used car market as year-end sales commence.
Conclusion
The U.S. automotive market in December 2024 is characterized by rising negative equity, increasing inventories, and shifting consumer behaviors. Stakeholders should closely monitor these trends to navigate the evolving landscape effectively.
