Cash incentives may help sell new vehicles, but those incentives can have a sizable impact on used-car prices, says the latest NADA Used Car Guide.
A $1,000 new-vehicle customer-cash incentive reduces the price of a 1-year-old version of the same model by $563. A 3-year-old model would take a $381 hit and a 9-year-old model would get a $133 price reduction, NADA reports. The study assumed other market conditions -- including the economy, time of year, level of supply and sticker prices -- remained constant.
Other forms of incentives do less damage to used-vehicle prices and residual values. If $1,000 is offered to consumers as a finance incentive, it reduces the price of a 12-month-old used version of the same model by $165. If the same $1,000 is offered as a lease incentive, the drop in the one-year-old used vehicle's price is just $89.
This discrepancy happens because not all incentives carry the same message with consumers, Jonathan Banks, NADA Used Car Guide analyst, said in a statement.
"In many cases, it's more difficult for a consumer to translate the savings from finance or lease incentives, and as a result, the power to sway consumer demand -- and negatively affect used prices -- isn't as great on these incentive types," Banks said.
Currently, industrywide incentives of all types average $2,574 per vehicle, NADA says. That is up 3 percent from last year, but down 12 percent from the peak of $2,932 in 2004 and off 2 percent from the pre-recession average of $2,631 in 2007.
"Looking ahead, NADA expects that slower new sales growth and fiercer competition will see incentives rise modestly in the coming years," Banks said. "But we don't foresee an imminent return to destructive levels of the past."
NADA says it expects manufacturers to focus discounts around lease and finance strategies rather than customer or dealer cash, and to continue to push superior products.
"The industry as a whole is building what is arguably the best product ever," Banks said, "which minimizes the need for a dramatic shift in incentive spending."