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Negative Equity Becoming a Problem as New-Vehicle Sales Close in on 2015 Record

SANTA MONICA, Calif. — The good news, according to Edmunds.com, is the industry is on pace to top last year's record new-vehicle sales total. The bad news is, the firm noted in a separate release, is car buyers are rolling over negative equity from their trade-ins in record numbers.

Edmunds forecasts that 1,365,369 new cars and trucks will be sold in the United States in November, a 2.7% increase from a year ago and a record high for the month. This projected figure, the company added, brings the month’s estimated seasonally adjusted annual rate (SAAR) to 17.6 million. It also puts the industry on pace to sell 15,844,726 new vehicles this year, which is essentially the same as last year's 15,838,458 sales record.

"Now that the presidential election is over, shoppers have more confidence in the economy than they had just a month ago, and that gives them extra motivation to make big-ticket purchases. If this month's forecast holds, December's year-over-year sales only need to be flat to set a new annual record in 2016. Get your popcorn ready because it's going to be a nail-biter,” said Jessica Caldwell, executive director of industry analysis at Edmunds.com.

However, while the firm is projecting that more consumers will be buying new cars this year than they did last year, it’s also urging them to think hard about whether they will want to finance or lease their next year car.

Through the first three quarters of this year, an estimated 32% of all trade-ins being rolled into a new-vehicle purchase were under water — the highest rate on record, according to Edmunds.com. The amount of negative equity car buyers are rolling has also reached a record high. On average, according to the firm, consumers trading in their vehicles for new cars are rolling $4,832 in negative equity.

"It's curious to see just how many of today's car shoppers are undeterred by how much they owe on their trade-ins," said Edmunds.com Sr. Analyst Ivan Drury. "With today's strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.

“In fact, shoppers with this mindset may want to consider jumping on the leasing bandwagon. They can get into a new car with great technology every few years without having to worry about how much they still owe on their trade-in."

Based on the firm's October data, more consumers seem to be gravitating toward this option. In general, according to the firm, new-car leasing is at its highest level ever. Through October, leasing accounted for 33% of new-vehicle transactions this year. By foregoing the financing route by choosing leasing, Edmunds estimates that consumers could save an average of $77 on their monthly payment. 

 

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