CARY, N.C. -

The vehicle affordability factor: Think of it in terms of a great big elephant.

KAR Global chief economist Tom Kontos says that in purchasing a vehicle, people can consider various moving parts, such as lowering their monthly payment or putting more money down, “to try to make that elephant … something you can consume.”

“I love the analogy,” Jonathan Smoke said during AIADA’s December AutoTalk webinar, which was titled, “A 2019 Review and 2020 Projections.”

With the average transaction price of a new vehicle rising to around $38,000, Smoke, who is Cox Automotive chief economist, explained, “It means eventually, we’re going to need smaller elephants … or a used elephant.”

Smoke and Kontos participated in the Webinar, and Kontos said consumers participating in what he described as a payment-driven business might “eat that elephant one bite at a time” by modifying the number of months they take to pay the loan.

“So maybe we would see movement from new to used, because I think we’re kind of maxed out on (factors such as) the duration of the loan, amount put down, and maybe even rates,” Kontos said.

He added that consumers might choose the option to “maybe pick up a smaller elephant or go to a used car versus a new car, though I think affordability is definitely a dynamic that we will continue to see playing a role in the 2020 market.”

Kontos continued, “There still will be stress on consumers to figure out a way to purchase the vehicles that they’ve been buying. I think there will probably be a tendency to back off a bit.”

Sales projections: ‘Respectable’

Kontos noted toward the beginning of the webinar that he focuses on the used-car business.

“So I know nothing happens unless new cars are selling,” he said.

He continued, “Those are the used cars of the future.”

The year 2019 represented a fairly respectable year for retail sales of those used cars of the future, Kontos said, adding that sales of those new vehicles for the year would probably approach the 17 million mark.

But in expanding on Kontos’ projections, Smoke noted that the retail market “has been down all year long.”

Growth in fleet numbers is a key reason for total sales possibly reaching 17 million, he said. But he saw fleet sales decline over the past couple of months prior to December on a year-over-year basis.

“So I think we’ve about tapped out the demand that was primarily tax reform-related, and that’s what’s been fueling the growth in fleet for the last 18 months or so,” Smoke said.

He added that as those fleet numbers began to tail off, OEMs started to become more aggressive with incentives to help drive retail demand.

“So actually, the retail market has had some of its strongest months of the year in the last couple of months, and I think that’s why we’re going to very likely come very close to 17 million for the year or come up just short of it,” Smoke said.

Moving on to address projections for 2020, Smoke said that assuming 2019 sales of 16.9 or 17 million, he foresees a slight decline in total sales for 2020 to around 16.5 or 16.6 million.

He projects fleet sales to be flat or modestly lower. Retail sales will be down slightly less in 2020 than it has been in 2019.

“But the principle reason is an affordability challenge,” Smoke said.

He added, “if we end up at our worst number for next year at 16.5, that’s still a fairly robust market. It’s just one that dealers and OEMs alike are having to contend with marginal declines again.”

Kontos said he might be “a little more robust in my expectation” than Smoke, but he also expects a year-over-year decline to somewhere between 16.5 and 17 million.

Used projections

Kontos addressed used-vehicle sales volume, stating that he focuses on franchise and independent dealer sales of used cars, “namely retail sales.”

“Those numbers year to date are up close to 2%, but that’s mostly from franchise dealers,” he said.

He added, “So I would say independent used-car dealers have been pretty flat year over year on retail sales. And then … that 2% clip is about right for the amount of growth we had in 2019.”

Smoke went on to address the certified pre-owned market, stating he has seen three to four years of record sales in that area. He sees a good chance of that number increasing again in 2020.

“And that’s because even though we are finally at the peak of off-lease volumes, the mix of what’s coming off lease next year is increasingly, let’s say, a higher-quality mix,” he said.

That means more luxury vehicles, he said, in addition to more SUVs and pickup trucks.

Those vehicles benefit more from a certified pre-owned program that typically offers more attractive financing and sometimes an additional extended warranty, he said.

For certified pre-owned, “Let's just say that there's a lot of opportunity out there,” Smoke said.

He added, “Many brands we think will increasingly be focusing on that in the years ahead. So I don't think we're done with this run at CPO.”

Used alternative powertrains: EVs ‘performing less poorly’

Toward the end of the webinar, the discussion moved in the area of what webinar moderator Dan Barson of AIADA described as “evolving vehicle technology” such as the used retail market demand for hybrid-electric vehicles and other “alternative powertrains.”

Barson asked, What is the level of demand for vehicles such as a used Prius or used electric car?

“I certainly wouldn’t call it strong,” Smoke said.

In the used market, EVs continue to perform “relatively poorly compared to their siblings that are gas powered,” Smoke said.

But he added that they are performing less poorly now than in the past.

If range anxiety and consumer concern about battery performance is an issue for a new vehicle, that anxiety is amplified when it comes to an aged vehicle with uncertain data and experience regarding how those batteries will perform over their lifetime, Smoke said.

“But I do believe as the technology progresses and the new market becomes bigger with electric vehicles, then indeed, eventually the price performance will follow,” he said.

More on the affordability elephant

Smoke mentioned statistics showing an average loan term of more than 69 months in November, with an average payment of $600.

He returned to the subject of leasing and addressed the question, “Why don’t we see leased used?”

He answered that subscriptions might provide some of the answer.

Smoke said, “Eventually it’s going to be, we’re going to see subscriptions offered by OEMs and dealers alike, that will essentially provide many of the same benefits of the lease, and some additional benefits, and help to address a price point that solves some of this challenge for some consumers.”