This Week in Car Buying: New or Used?

Who wouldn’t like a new car? And it seems that these numbers are growing as Kelley Blue Book data show that new car sales jumped 5.4 percent in October, an increase of 1.27 million units year-over-year and a rate that’s on its way to hitting 16.3 million for the calendar year. One of the reasons behind the increase in new car sales is the growth in incentive spending by manufacturers, which may be good for consumers but worries industry observers. "One cause for concern is the rising levels of incentive spend in the industry, which in recent months has drifted close to an average of $3,000 per vehicle," said Alec Gutierrez, a senior analyst for KBB. "The ratio of incentive spend to average transaction price is at its highest since 2010, but remains below pre-recession levels. Since inventory levels have remained consistent, it isn’t a red flag quite yet, but it does underline that the natural industry growth we’ve had in recent years is slowing." The fastest growing segment remains the compact SUV/crossover category, which KBB predicts will grow at 13.6 percent for the month. Full-size pickup trucks are expected to grow as well thanks to incentives on Ram and GM pickups coupled with the introduction of an all-new F-150. Among specific brands,

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Chrysler remains on a roll due to hot Jeep sales, with an expected growth in volume of about 20 percent. Nissan is also posting robust sales thanks to strength among its Versa and Sentra models. Used car wave building While manufacturers are upping the ante with increased incentives to maintain momentum on their retail business, a wave of used vehicles resulting from robust new car sales over the past three years is building and may soon wash across the market. These used and off-lease units will depress used vehicle values, putting pressure on car dealers on both new vehicle sales and certified pre-owned programs. Already some of the larger dealer groups are beginning to feel the impact of this squeeze. According to Automotive News, which reported at Group 1 Automotive, the third-largest dealer group in the nation, saw a 12-percent increase in used vehicle sales but a corresponding growth in profit that was exactly half at 6 percent. "There was some pressure in the used-car business in the quarter," Group 1 CEO Earl Hesterberg told the trade journal. He attributed some of the pressure on more off-lease vehicles as well as aggressive new car incentives which captured some used car buyers. Manheim Auctions predicts the number of off-lease vehicles will increase by 400,000 units to 2.1 million and that leasing will continue to grow with 300,000 more contracts being written this year over 2013 for a total of 3.5 million, or nearly one in four new vehicle sales. Manheim expects 3.9-million off-lease vehicles to hit the market by 2020. Tom Webb, chief economist for the auction company, doesn’t expect used vehicles to collapse, but they will soften. And it will mean more choices for consumers in the used car market as they become more affordable than new cars.

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There will also be an effect on new car sales, as manufacturers are expected to rely either on price reductions, incentives or more content to buoy up new vehicle sales. On the radar The Los Angeles Auto Show gets underway in mid-November and among the launches there will be an all-new 2016 Ford Explorer. Once the undisputed king of SUVs with sales averaging over 400,000, it’s popularity has diminished in the face of growing competition from crossover SUVs. To stay competitive, it moved from its traditional body-on-frame construction to a unit body like all the other mid-size crossovers on the market today. With new, more efficient Ecoboost powertrains, a fresher style and revamped interior, perhaps Ford can rediscover some of the Explorer’s magic. Right now, Ford is looking to clear out stocks of existing models with rebates of $1,500. Interest edges up New and used car loan interest rates edged up last week and rates could go higher as the U.S. Federal Reserve officials ends it program of "Quantitative Easing" or officialspeak for printing more money to keep interest rates down. Rates on 36-, 48- and 60-month new car loans edged up one basis point to 3.96, 3.99 and 4.04 percent. Rates on used vehicle loans rose much higher, a half point on 48 month loans to 4.98 percent, while 36-month contracts went up an overage of .4 percent to 4.9 percent, according to Bankrate.com.