Economic

The Federal Reserve held interest rates steady this week, but the message from Chair Kevin Warsh was unmistakable: restoring price stability remains the Fed’s top priority. The unanimous decision to leave rates unchanged, combined with the Committee’s commitment to achieving price stability, suggests policymakers remain cautious about easing monetary policy. As a result, interest rates are likely to remain elevated for the foreseeable future, keeping borrowing costs high for consumers and businesses alike.

There was one encouraging development. The reopening of the Strait of Hormuz allowed oil shipments to resume, helping ease concerns about another energy price shock. National gasoline prices have fallen approximately 5% from May highs, providing some relief to consumers. However, elevated shipping costs and the need to rebuild global inventories are likely to keep energy markets volatile through the summer.

Housing continues to reflect the impact of higher borrowing costs. The NAHB Housing Market Index fell to 32 in June, one of its weakest readings of the past several years, while housing starts declined to an annualized pace of 1.26 million units, the lowest level since 2019. Builders are increasingly relying on incentives and price reductions to stimulate demand, highlighting ongoing affordability challenges throughout the economy.

Consumer spending remains resilient despite those headwinds. Retail sales increased 0.3% in May after declining in April, while motor vehicle and parts sales rebounded as vehicle demand stabilized. Consumers continue to spend, but elevated financing costs and higher monthly payment obligations are putting increasing pressure on household budgets.

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Auto Market

New

New vehicle demand remains supported by stable employment and continued consumer spending, but affordability continues to be the industry’s largest challenge. Average new vehicle transaction prices remain near $48,800, while average monthly payments are still above $740 per month. Higher borrowing costs continue driving longer loan terms and increasing payment sensitivity among consumers.

To support sales, manufacturer incentives have continued to rise, averaging approximately 7% of transaction prices, the highest level seen in several years. Incentives are helping offset affordability concerns, but financing conditions remain restrictive and will likely remain so until inflation shows more meaningful improvement.

Used

Retail used vehicle demand remains healthy, particularly for well-priced inventory in the core affordability segments. Retail used vehicle values declined approximately 0.2% during the week across both luxury and non-luxury segments, reflecting normal seasonal softening rather than a material shift in demand.

The average retail used vehicle listing price remains near $25,000, while many dealers continue reporting strong demand for vehicles priced below $20,000, where affordability remains most attractive to consumers. Retail pricing has remained significantly more stable than wholesale pricing, helping preserve dealer margins despite recent market softening.

Consumers remain highly value-conscious, favoring vehicles with strong vehicle history reports, attractive financing options, and competitive online merchandising. Well-priced inventory continues to turn quickly, while aging inventory faces increasing pricing pressure.

Wholesale

Wholesale depreciation accelerated for the second consecutive week.

The 3-year-old MMR Index declined 0.4%, matching last week’s decline, while average depreciation across all model years increased to 0.5%. Older inventory between 7 and 10 years old experienced the largest declines at 0.8%.

Auction conversion rates softened as MMR retention slipped to 99.44%, and lane efficiency fell below 60% for 3-year-old vehicles for the first time this year. Buyers remain active but highly disciplined, concentrating purchases on the most desirable inventory while passing on average vehicles.

One notable bright spot continues to be electric vehicles, which posted another slight weekly gain. Meanwhile, wholesale values continue falling faster than retail values, allowing wholesale-to-retail spreads to widen further and creating attractive acquisition opportunities for disciplined buyers.

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Dealer Takeaways

• The Fed remains firmly focused on inflation, making lower interest rates unlikely in the near term.
• Consumer demand remains healthy, but affordability continues to be the industry’s primary headwind.
• Average new vehicle prices remain near $48,800, while monthly payments above $740 continue pressuring buyers.
• Manufacturer incentives averaging roughly 7% of transaction prices are helping support new vehicle sales.
• Retail used vehicle demand remains strongest in affordability-focused price segments below $20,000.
• Wholesale depreciation has resumed a more normal seasonal pace, creating improving acquisition opportunities.
• Buyers remain highly selective. Inventory quality, market desirability, and merchandising matter more than ever.
• Wholesale values are declining faster than retail values, preserving gross profit opportunities for dealers who remain disciplined with acquisitions and pricing.

Bottom Line: Focus on inventory turn, avoid chasing aging units, and capitalize on widening wholesale-to-retail spreads while acquisition costs continue to soften. Dealers who stay disciplined on pricing, merchandising, and inventory management remain best positioned heading into the second half of the year.