Switching to used isn't always a solution for negative equity buyers

With interest rates and monthly new-vehicle payments on the rise -- plus the specter of threatened vehicle tariffs likely pulling ahead demand -- the market favors customers moving from new to used in droves. But switching from new to used might not be enough for customers re-entering the market upside down in their loans, Cox Automotive Chief Economist Jonathan Smoke says.

Customers are no longer able to trade in an older vehicle for a newer model without a higher monthly payment. For customers with a vehicle worth less than what they owe, dealers report they are increasingly unable to help roll the debt into a new-vehicle purchase or lease.

"The prices will eventually stop even a used-car buyer to be able to improve their situation," Smoke told Automotive News.

The average amount of negative equity per deal set a record in the first quarter this year and remained more than $5,000 each month until August, according to Edmunds. The amount improved slightly each month, and in August it was $4,938.

Of the 3.3 million new vehicles retailed in the first quarter of 2018, 43 percent of buyers had a trade-in vehicle, Edmunds told Automotive News. Of those, 32 percent -- or 457,000 vehicles -- had negative equity, representing 14.1 percent of the new-vehicle market.

On top of that, in Experian's State of the Automotive Finance Market report, released Aug. 30, average new-vehicle payments increased 4 percent -- or $20 -- year over year to $525 per month, while used-vehicle payments rose 3.6 percent -- or $13 -- from the year earlier to $378 per month.

Dealers don't really benefit from short-term pricing gains, Smoke said, even when the metal is moving rapidly off the lot. With used-vehicle prices climbing in part because concerns about potential tariffs are pulling ahead demand, the used-vehicle market is no longer a haven for consumers set back by negative equity.

"Eventually, you have to pay that check. You can't continue to be borrowing from the future in this market," Smoke said.

The phenomena playing out also means that dealers are hard-pressed for used-vehicle inventory.

Low inventory was the No.1 factor holding business back this summer for all dealers, franchised and independent, in the latest Cox Automotive Dealer Sentiment Index released this week. That means dealerships are having trouble securing vehicles at the right prices for underwater customers. Used vehicles are appreciating even as they accrue more miles.

"We can't bet on the supply to solve the problem," he said. "But also, within the cycle, we can't grow the supply volumes -- they're fixed. They're a function of what's really out there."

If consumers are unable to improve their situation with trades, they will end up holding their vehicles longer, Smoke says.

That means dealers will have to focus on F&I and service not only to remain profitable but to retain those customers priced out of new vehicles.

You can reach Jackie Charniga at jcharniga@crain.com -- Follow Jackie on Twitter: @jccharniga

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