Soaring prices jam up buyers

0
144



“That’s what I get for $7,500?”

A new report from Edmunds.com via AP on the skyrocketing cost of used cars in America contains that quote from a woman in Omaha, Nebraska, whose car had been totaled in a crash, and who desperately needed basic transportation for work. She got basic, all right — a 2013 Scion with 160,000 miles on it. 

The U.S. Bureau of Labor Statistics’ Consumer Price Index reported last month that the average transaction price of a used car in November was $26,000. Well, Edmunds says that average has now moved to $29,000. That’s right, up another $3 grand in a month.

That’s an increase of 39% in the past year (compared to average new car transactions that are up 13% and, Edmunds says, are approaching an average of $46,000). And used cars are one of the biggest drivers of the 6.8% inflation rate we’re feeling throughout the economy.

It’s such a rapid and seemingly irrational increase that a lot of people who need a car are being priced out. More than half of U.S. households have less income than is considered necessary to buy a car at that $29,000 price point. In other words, unless or until this trend reverses — and industry forecasters say that’s not happening anytime soon — the days when anyone at about any income level can afford a car, to get around in a society based on car ownership, are gone. The days of a kid using savings from a part-time job to buy a car for college, also gone.

As we’re pretty much all aware by now, a historic sequence of events can be blamed for the increase:

  • The pandemic lockdown led to auto production shutdowns.
  • Lowered demand for new cars during lockdown, and fewer in inventory, meant there were fewer trade-ins.
  • People stuck at home bought new computers and other electronics, so semiconductor production shifted away from vehicles. 
  • When the lockdowns lifted, the economy roared back, and auto production resumed, but was hamstrung by the chip shortage.
  • The chip shortage posed a new restriction on new-car inventories, so people needing cars turned to the used market instead.
  • And rental car companies, which had dumped fleets during lockdown, were suddenly snapping up used cars.

Lower supply and greater demand, meet higher prices.

Last month, the average used vehicle price was 63% of the average new vehicle cost. Before the pandemic, it was 54%.

Including taxes, fees, a 10% down payment, and an interest rate of around 7.5%, the average used vehicle now costs $520 a month, even when financed for the average of nearly six years, Edmunds calculated.

To make that payment and afford such other necessities as housing, food and utilities, a household would have to take home about $60,000 a year, or $75,000 before taxes, said Kimberly Palmer, a personal finance specialist at NerdWallet. In 2020, the U.S. median pretax household income was $67,521, the Census Bureau says.

“The average person,” Palmer said, “can’t afford the average used car right now.”

Ivan Drury, a senior manager at Edmunds, said that while he doesn’t track used vehicle prices relative to household income, he thinks November marked a record “in the worst way possible for affordability.”

Monthly payments for the average used vehicle, he noted, were $413 two years ago, $382 five years ago and $365 a decade ago. The November average payment of $500-plus for a used vehicle, Drury said, is about the average that was needed five years ago for a brand-new vehicle.

“People are going to have to make hard decisions, maybe cut back in other areas,” Palmer said. “It means that it’s stressful for a lot of families.”

David Paris, a senior manager at J.D. Power, noted that used vehicle prices are directly tied to the cost of new ones. Though some automakers report that the computer chip supply is gradually improving, prices paid by dealers at used vehicle auctions kept rising through November, Paris said.

“We’re not seeing any softening in prices, which is extremely rare for this time of the year,” he said.

New vehicle dealers have about 1 million vehicles available nationally — scarcely one-third of the normal supply, Paris said. And the vast majority have already been sold.

Given pent-up demand from consumers, prices for new vehicles are expected to remain historically high until the supply returns to around 2 million or 2.5 million and automakers resume discounting, which could take well into 2023. Once new vehicle prices do ease, the pressure on used-vehicle prices would eventually follow.

Yet even after that, the availability of vehicles will be tight because traditional sources of used vehicles — autos turned in from leases and trade-ins or sold by rental companies — have essentially dried up.

For the past decade, cars returning from two- and three-year leases were a leading source of almost-new used vehicles. But that was when more than one-third of U.S. new vehicle sales were leases, a figure now down to 22%, said Edmunds’ Drury. Because there aren’t many new autos, people with expiring leases are often buying those cars once their leases end.

Rental companies, another key source of late-model used cars, can’t buy new ones now and are holding the ones they have. Some rental companies are even buying used vehicles. Given all those factors, Paris expects the shortage of used cars to worsen through 2024.

Among the few consumers who stand to benefit are those who want to sell a used car and don’t necessarily need to replace it. The average trade-in value in October, Paris said, was $9,000 — twice what it was a year earlier.

But for people who have no vehicles to trade in and only modest incomes, the options are few to none. Palmer of Nerdwallet said lower-income people may simply have to pay for repairs to keep a current vehicle running as long as possible. Even that option, though, can become prohibitively expensive.

J.D. Power’s Paris says that if they can afford it, buyers should consider a new vehicle. He recently managed to get a couple thousand dollars whacked off the sticker price on a new Ram pickup, though he had to travel from the Washington, D.C., area to Philadelphia to reach a willing dealer he had located by searching internet forums.

“If you look hard enough and are willing to wait and travel,” he said, “you can find deals across most brands.”

Contains material from The Associated Press



Source link

Leave a reply

Please enter your comment!
Please enter your name here