Vehicle Incentives Drop To Lowest Levels In 5 Years

Do you get the feeling that you could have purchased the SUV you’ve been eying cheaper a month ago than right now? Do you sense that the used sports coupe that you have been considering is a lot more expensive now than when you first started research? If this is you, we have news for you: your perception is not wrong. According to vehicle research and buying site, TrueCar, incentives and special deals on new cars are down precipitously from as recently as a month or so ago. And they are way down from “peak incentives” that occurred backing 2019. Meanwhile, used vehicle values are up, confusing the issue still more.

TrueCar projects average new-vehicle incentives of $3,102 for the just-completed month of April. That’s down 28% from April 2020 ($4,297). This is the lowest level in five years, according to MotorIntelligence historical data.

Prior to Pandemic

Intriguingly, the strongest incentives occurred before the onset of the COVID-19 pandemic, although the pandemic then influenced carmakers to continue to feature rich incentives like cash-back offers and subsidized lease deals throughout the spring and summer of 2020.

“Incentives peaked at the tail end of 2019 — December — but remained strong through the initial onset of the pandemic,” said Nick Woolard, lead industry analyst at TrueCar. “April 2020 saw seasonally strong incentives with many manufacturers offering 0% for 84 months in an effort to spur sales as the industry began to contract due to COVID. Starting in October we began to see incentives start declining year over year. “

While incentives typically ebb and flow gradually, the most recent decline in incentives was relatively rapid, reflecting an economy that is speeding up considerably as it opens up as COVID-19 lockdowns end and vaccinations rise. Tight automotive inventories, some attributable to the current semiconductor shortage and some attributable to production pauses related to COVID-19, have also had a role in motivating carmakers to cut incentives.

“The biggest driver of lower incentives is the imbalance we are seeing in demand versus supply,” Woolard said. “Economic recovery has led to surging car demand, and at the same time a global microchip shortage has led to a reduction in new vehicles available for sale at dealer lots.”

Luxury Buyers Get Bigger Perks

In the midst of the rapid decline in incentives one thing that hasn’t changed is the incentives still existing in the marketplace are sweeter for luxury car buyers than for mass market purchasers.

“Luxury vehicles have historically had more generous incentives than mainstream vehicles. That was true during the height of incentives and that premium percentage remains relatively unchanged today versus the historical average,” Woolard said.

A complicating factor is the strength of the used-car market, partly buoyed by the desire of many consumers to avoid public transportation. This has spurred lower-income consumers to purchase a used car instead of taking the bus, subway, or train. In turn, the rise in used-vehicle values has affected incentives. Woolard says TrueCar has seen a clear shift in buying patterns.

“As used car values increase the gap between new and used narrows,” he told us. “As expected, we have seen more used shoppers purchase new vehicles in recent months measured as used leads that convert to new sales. Similarly, we have seen fewer new car shoppers purchase used vehicles.”

Incentives Will Continue to Drop

With the economy continuing to open up, sales humming, and inventory challenges continuing to face carmakers and car dealers, the likelihood is that customer cash, subsidized lease offers, and other incentives to buy will continue to wane.

“I would expect incentives continue to decline through the summer and start gradually increasing towards the latter months of the year, however still at levels below recent years,” Woolard said.

So what does this mean to you if you are on the fence about buying a car now or waiting until incentives get off their five-year low? We asked Woolard that question.

“This is a difficult question and the answer will vary depending on the car buyer’s unique situation,” Woolard said. “The best advice I have is to buy a car when you need a car. In terms of buying now versus waiting, it appears that the chip shortage will last at least through the coming few months and even then it will take some time before automakers can build inventory back to historical levels. So if you plan on waiting, it may be some time before we see incentives back at levels we saw in 2019.”

So while the currents deals on new cars aren’t what they were a year ago, it seems there’s a good chance they’ll be even worse as the year goes on. And that could keep used-car values high as well.

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