New or used? Either way, price hikes are forcing U.S. auto buyers

Associated Press

FENTON TOWNSHIP, Mich. (AP) – The viral pandemic has triggered a cascade of price hikes across the U.S. auto industry – a surge that has made new and used vehicles unaffordable for many.

New vehicle prices have largely exceeded headline consumer inflation over the past year. In response, many buyers whose prices were out of this market turned to used vehicles. Yet their demand turned out to be so strong that the prices of used vehicles soared even more than new ones.

The average price of a new vehicle jumped 6% between January of last year, before the coronavirus outbreak in the United States, and December to a record high of $ 40,578, according to data from Edmunds. com.

Yet this increase was nothing compared to what happened in the second-hand market. The average price of a used vehicle has jumped almost 14% – about 10 times the rate of inflation – to over $ 23,000. This is one of the fastest increases in decades, said Ivan Drury, senior knowledge manager at

The main reason for the explosion in prices is simple economic: too few vehicles available for sale during the pandemic and too many buyers. The price hikes come at a terrible time for buyers, many of whom are struggling financially or looking for vehicles to avoid public transport or get around because of the virus. And dealers and analysts say the high prices could persist or rise further for months or years, with new vehicle inventories tight and less trading on dealer lots.

The supply shortage came last spring after the coronavirus hit hard. Automakers have had to shut down factories in North America in an attempt to stop the spread of the virus. Plant closures reduced the industry’s sales of new vehicles and resulted in less trade. So when buyer demand picked up at the end of the year, fewer used vehicles were available.

Compounding the shortage, car rental companies and other fleet buyers – normally a major source of used vehicles for dealerships – are now selling less. With fewer trips and fewer people renting cars, fleet buyers are not acquiring as many new vehicles and therefore are not unloading as many older vehicles.

“It’s like a weird perpetual motion machine right now with the prices,” said Jeff Goldberg, general manager of Goldie’s Motors, a used vehicle dealership in Phoenix.

Charlie Chesbrough, senior economist at Cox Automotive, predicted a tight used vehicle market with high prices for several years to come.

“There are millions of used vehicles less that will be available from next year, 2022 and 2023,” he said.

The resulting spike in prices has essentially created three categories of auto buyers: those who are wealthy enough to afford new vehicles. People who can afford newer model used cars. And low-income or low-credit buyers who are stuck with older, less reliable vehicles.

The industry is still trying to recover from the ravages of the pandemic last spring. The resulting plant closures reduced production by 3.3 million vehicles. Sales temporarily dried up, as did the influx of trade-ins.

After factories resumed production in May, demand turned hot. The problem was that the supply of vehicles fell far short of the demand, especially for pickup trucks and SUVs. Prices have jumped. And new vehicle purchases for the year fell from nearly 2.5 million to 14.6 million.

When Larry Parsons of Hartland Township, Mich., Went out to buy a pickup truck in August, the question of whether to buy a new or used pickup truck was sadly easy.

“We have looked at new trucks, but the price is excessive,” he said. “Some trucks cost over $ 70,000. It’s so ridiculous.”

Instead, Parsons opted for a 2019 Ford F-150 with 29,000 miles on it. The truck, priced at $ 52,000 new, cost $ 37,000. He also bought an 84-month warranty to cover the vehicle while he still makes loan payments.

True, vehicle prices had risen long before the pandemic hit, with many buyers choosing loaded trucks or SUVs and taking loans of six years or more to keep their payments low. Despite this, used prices had remained relatively low, with an abundant supply of over 3 million vehicles returning to the market each year through leasing.

Then the virus hit. With that came the government stimulus checks, which many buyers used as down payments. Because they weren’t spending on restaurants or vacations, some people spent even more on vehicles than they otherwise would have.

“If I go for $ 40,000, I might as well spend $ 45,000,” Drury said of the buyers. “I might as well cure myself.”

Even with loans over 60 months old, the average monthly payments are between $ 500 and $ 500 for new vehicles, putting them out of reach for many. Right now, said Chesbrough, the economist for Cox Automotive, most of the growth in the new vehicle market is in the $ 50,000-plus range.

In recent years, automakers had paved the way for higher prices by cleaning many new, low-cost vehicles that had low profit margins. For the past five years, Ford, GM and Fiat Chrysler (now Stellantis) have stopped selling many sedans and sedans in the United States. Likewise, Honda and Toyota have canceled sales in the United States of low-cost subcompacts. Their SUV replacements have higher sticker prices.

“The industry has given up on that price of $ 30,000 and under,” Chesbrough said. “Essentially, they’ve given that territory away for the used car market.”

The increased demand and higher prices for the latest generation used cars have caused problems for low-income buyers, noted Art Ramos, who operates a used-vehicle store in McAllen, Texas, near the border. Mexican. Unemployed people who received unemployment assistance during the pandemic have struggled to get a loan. Those who can buy usually have to look at much older vehicles with significant miles on them.

“All the people who were out of work all those months – I couldn’t get them approved,” he said.

When low-income buyers can get loans, they typically have to pay higher rates – sometimes over 20% with some lenders, Ramos said.

Yet, with many buyers having no other options, older vehicles with more than 100,000 miles are now in high demand, said Ryan LaFontaine, CEO of a chain of 20 dealerships in Michigan that includes two stores. second hand.

In the past, dealers would not have cared about these exchanges; they would have sent them to regional auction houses. But automotive quality has improved markedly over the past decade. Thus, the LaFontaine group reconditions these cars and provides credit advice to low-income or low-credit buyers.

“Each year, we increase our ability to cost-effectively refurbish vehicles that we can showcase and support consumers,” said Mike Jackson, CEO of AutoNation, the nation’s largest dealer group.

Dealers say competition for used vehicles, especially from pushy online auto sellers Carvana and Vroom, has helped drive up prices with bidding wars at auctions. Still, Jackson argues that cars remain affordable because consumers typically get more money for their trade-ins. Interest rates also remain low. Unsubsidized new vehicle loan rates from automakers are on average 4.4%, according to Edmunds, while used loans are on average 7.8%.

Average prices fell a bit in January. But that could be misleading, said Drury of Edmunds. Fewer new and used luxury vehicles were sold during the month, he said, temporarily lowering overall prices.

Those on the front lines say competition for vehicles is intensifying as dealers stock up for buyers who may soon receive additional government stimulus checks and income tax refunds.

Meanwhile, a global shortage of computer chips for vehicles is forcing automakers to cut production. The chip shortage could potentially reduce the supply of vehicles again, which, in turn, would likely drive prices for new and used vehicles even higher.

Unaffordable prices could open the door to a business that could profit from new cars at low prices with just basic features. This, Chesbrough notes, is what Korean automaker Hyundai did to enter the U.S. market decades ago.

“I think the industry is making itself a little vulnerable,” he said.

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