When the auto industry reports May sales next week, the numbers will show a double-digit drop, which not only reflects slim inventories but also rising monthly payments, analysts note.

The seasonally adjusted annualized rate, or SAAR, for total new-vehicle sales is expected to be 13.6 million units, down 3.3 million units from 2021, according to J.D. Power. 

Power analysts estimated new-vehicle sales for May 2022, including retail and non-retail transactions, will reach 1,188,100 units, an 18% decrease from May 2021. Comparing the same sales volume without adjusting for the number of selling days translates to a decrease of 24.3% from 2021.

“May results reflect a continuation of what has become the norm for the U.S. new-vehicle sales environment,” said Thomas King, president of the data and analytics division at J.D. Power.  “For the 12th consecutive month, month-ending retail inventory will be below 1 million vehicles. The industry sales pace is being dictated by how many units are delivered to retailers during the month, and demand far exceeds supply. Record transaction prices are the result.”

Meanwhile, the monthly payments paid by consumers are steadily rising.

Prices and payments at record levels

New-vehicle prices continue to set records, with the average transaction price expected to reach a May record of $44,832 — a 15.7% increase from a year ago and the third-highest level on record despite rising interest rates.

Average interest rates for new vehicle loans have also risen. The average loan rate in May is expected to increase to 4.92%, but the average trade-in equity for May is trending towards a record of $9,922, a 59.4% increase from a year ago.

“Even with elevated trade-in values, the average monthly finance payment is on pace to hit a record high of $687, up $90 from May 2021. That translates to a 15.1% increase in monthly payments from a year ago, which is just below the 15.7% increase in transaction prices,” King said.

The growth in transaction prices means that, even though the sales pace is down 20.9% year over year, consumers will spend $45.4 billion on new vehicles this month, the second-highest level ever for the month of May but down 15.5% from May 2021, he said.

Better days lie ahead

“For retailers and manufacturers, the increase in transaction prices, coupled with the near elimination of discounts on new vehicles, has more than offset lower sales volume to deliver enhanced profitability,” King said.

For May, the average incentive spend per vehicle is $965, a decrease of 64.6% from a year ago. Incentive spending per vehicle expressed as a percentage of the average vehicle MSRP is trending toward a record low of 2.1%, down 4.4 percentage points from May 2021 and the fourth consecutive month below 3 percent. 

King said the sales environment is poised to evolve as the year progresses. Production volumes are likely to improve in the second half of the year, which will lead to increased sales rates. 

Record levels of pent-up demand from new-vehicle shoppers will mean any extra production should be sold quickly, but the increased production will challenge the industry’s ability to consistently increase transaction prices. During the past 12 months, new-vehicle prices have increased 15% — 20% year over year compared with just 2% — 3% between 2012 and 2018.

“For the balance of 2022, increased vehicle availability, higher interest rates and some cooling of used-vehicle values likely will lead to slower transaction price growth — but are unlikely to lead to declines,” king said.

King said vehicles continue to sell quickly and a significant number of vehicles are being ordered — or purchased — by buyers before they arrive at the dealership. 

“This month, 56% of vehicles will be sold within 10 days of arriving at a dealership, while the average number of days a new vehicle is in a dealer’s possession before being sold is on pace to be 19 days — down from 45 days a year ago,” he said.