Trade-In Equity Could Dampen New-Vehicle Sales

New vehicle sales are on pace to top last year's sales. However, car buyers are rolling over negative equity from their trade-ins in record numbers, according to Edmunds.com.

Edmunds forecasts that more than 1.36 new cars and trucks will be sold in the U.S. 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 more than 15.8 million new vehicles this year, which is on par with last year's record of 15.83 million vehicles sold.

"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 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."

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.