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Dealers Hope Memorial Day Sparks Summer Car Sales

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After taking a pause in March and April, auto sales appear relatively strong for the month of May. Whether or not the industry ends May with the best monthly sales rate since January depends largely on whether or not dealers enjoy strong business Memorial Day Weekend.

If it sales are strong, dealers believe it could signal the start of greater demand in the second half of the year.

Analyst Adam Jonas with Morgan Stanley quotes a dealer in Canton, Ohio as saying, "The month started off slow but right now we're on fire. We'll definitely beat last month."

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Trifecta of Optimism Driving Sales

Three factors are pushing auto sales this spring and none of them show any sign of slowing down.

1) Consumer sentiment surging higher.

2) Housing starts creating truck demand

3) Leasing deals attracting those on the fence

This trifecta of catalysts has been gaining momentum all spring, so why hasn't that been reflected in a higher sales rate in showrooms?

One factor in April was a technical adjustment in the way the monthly sales rate was calculated. It's the reason few on wall street adjusted their full year sales estimates despite a monthly sales pace coming in below 15 million vehicles for the first time since last fall.

Also, the payroll tax increase gave some consumers a reason to pause as they felt its full impact in March and April. Now that many have seen exactly how much less they are taking home every month, dealers hope those people will work the numbers to see if they can swing buying or leasing a new car or truck.

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Used Sales Prices Easing

For those looking to buy or sell a used car Memorial Day Weekend, it's a mixed bag.

The growing supply of three year old vehicles in the U.S. means prices are starting to gradually pull back. Used car wholesaler ADESSA says prices have softened by 4-5% compared to the same month a year ago.

"There are more 3 and 4 year old models coming off of leases and going on sale as pre-owned," said Tom Kontos with ADESSA.

"Those vehicles are generally in great shape and they're giving dealers and buyers more options, so it's natural to see prices pull back."

It's important to remember the used vehicle market is driven by the supply of 3 year old models. Buyers want them for the relatively low mileage and the styling/features that usually match what they'll find in a new car or truck.

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Monthly Payments Holding Steady

The average monthly payment for a new vehicle in the first quarter was about $460 according to numerous research firms.

That figure is important for two reasons.

First, it's relatively close to the monthly average payment the industry has seen in recent years. Even though the average transaction price, or how much dealers are selling new models for, has edged higher and now tops $30,000 monthly payments have held steady due to buyers stretching out the length of the loan.

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Second, as long as dealers can hold monthly payments under $500 they believe they can succeed in closing potential sales. The sweet spot in actually closer to $350 per month according to many dealers.

Still, they can work with most buyers as long as they are under $500. And this Memorial Day many dealers believe the cards and cars are stacked up to make it a profitable weekend.

—By CNBC's Phil LeBeau. Follow him on Twitter @LeBeauCarNews

Questions? Comments? BehindTheWheel@cnbc.com

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