Best option for car shoppers: Postpone buying
Attention all car buyers: The era of cut-rate financing, generous cash-back offers and big discounts is coming to an end.
With the effects of the earthquake in Japan rippling through the industry and causing shortages, prices are rising for both new and used cars, and fewer models and options will be available come summer, especially for the hybrids and fuel-efficient vehicles that Japan produces.
That’s prompted many experts to voice something rarely said in the sales-happy auto industry: With consumers facing the toughest market in recent memory, if you can, put off purchases until things sort out, probably early next year.
“If you don’t have an immediate need, you are probably better to wait and figure out where the market is headed,” said Jesse Toprak, an analyst with auto information company TrueCar.com.
Toprak concedes his reluctance to give such advice. TrueCar collects referral fees for new-car sales to visitors to its website.
Yet he’s not a lone voice.
“If people were paying attention they would have bought in March and April. Now, if they have the latitude, it is probably best to wait,” said Jeremy Anwyl, chief executive of Edmunds.com, an auto information company that makes money from Internet-based auto industry advertising.
(OK, so the transmission on your clunker went out and you don’t want to shell out big bucks to fix it. If you have to purchase a car, see the accompanying story for buying tips.) || Related: If you must buy a car now, here’s what to do
Tom Libby, an automotive industry analyst at R.L. Polk & Co., intended to replace his aging Ford Explorer this spring but said he’s abandoned the plan for now, even though his SUV has 125,000 miles on the odometer and he needs it to commute every day.
The disruptions caused by the March 11 earthquake have triggered “the huge seller’s market we are seeing now,” Libby said. “The customer has lost all leverage, and that is going to last at least into the fall.”
With Toyota Motor Corp.'s U.S. factories operating at just 30% capacity this month because of Japan-related parts shortages and Honda Motor Co. warning that its supply of vehicles is diminished, some of the bestselling cars, including Toyota’s Camry and Corolla and Honda’s Civic and CR-V SUV, will become scarce.
Toyota and Honda — including their respective Lexus and Acura brands — account for about a quarter of all U.S. auto sales and an even larger share of the retail market.
Analysts at IHS Automotive estimate the industry has fallen millions of vehicles behind its expected global production. Although automakers will work hard to catch up during the second half of this year, ultimately about 700,000 vehicles will never be built because of the quake.
The shortfall has allowed Toyota and competitors such as General Motors Co. and Ford Motor Co. to raise sticker prices. At the same time, just about every manufacturer has cut back on deals, either killing or reducing cash-back offers and raising auto loan interest rates.
The reduction in incentives will hurt shoppers the most, Anwyl said.
“Dealers charging a few hundred dollars more is not as bad as manufacturers cutting incentives by $1,000 or $1,500. That’s just huge,” he said.
The unfriendly consumer environment can’t be blamed solely on the earthquake and supply crunch. Rather, the earthquake — combined with strengthening U.S. auto sales — marked the tipping point in a series of events going back several years.
The seeds for the current price rise in used and new cars began in 2008, when the car market started to contract and Americans scrapped more vehicles than they purchased for the first time in years, shrinking the size of the U.S. auto fleet.
As the recession took hold, the gap widened. About 2 million fewer people bought new vehicles in 2009 compared with the previous year, slashing the number of cars traded back for sale on used lots. It also set the table for the renewed demand the industry is seeing today. People can put off car purchases for a while, but eventually they need to replace aging vehicles.
At the same time, rental car companies slashed their purchases by 25% from 2008 because the recession hurt the travel industry. Then leasing fell off the map, accounting for barely more than 13% of vehicle sales in 2009, down from a rate of about 19% in each of the three previous years.
The dip in sales to rental car companies and the plunge in leasing are haunting the market now, and will for at least the next year. That’s because autos owned by rental companies and vehicles coming off leases are among the biggest contributors to the inventory of late-model used cars for sale. But those sources aren’t supplying nearly as many vehicles as they have for much of the last decade, and that’s pushing up used-car prices.
In 2007, a 3-year-old Ford Explorer would bring about $7,100 as a trade-in for a new car. Now, a 3-year-old Explorer gets double that amount — $14,200 — according to auto price information company Kelley Blue Book. The trade-in value for a 3-year-old Honda Civic has jumped by $3,500 to $12,200 in the same period.
Some cars are seeing their values go up in just a matter of months. Used prices for fuel-efficient sedans have risen about 20% since January, according to Kelley Blue Book. High gas prices are behind the increase.
Another factor in the most recent appreciation is the strategy by large auto dealer chains of stocking up on used cars so they will have something to sell as new-car inventories shrink.
AutoNation Inc., the nation’s largest auto retailer, has aggressively moved into the used-car market to ramp up its inventory in anticipation of a new-car shortage. It launched a program at many of its dealers last week to induce customers to sell their used cars to the company.
Many AutoNation dealers are hanging brochures from the rearview mirrors of vehicles brought to their stores for service, offering owners “as much as 120% of the current book value for your vehicle…whether you buy another car from us or not.”
“It shows you how tight the market is. They are willing to go out and scavenge for used cars. They are doing everything they can to keep things going,” said Libby, the Polk analyst.
Libby believes the market will start to regain some stability in late fall.
But Rebecca Lindland, an IHS Automotive analyst, said it could be as late as early next year before consumers start to see better choices and lower prices.
That’s because after years of cutbacks, domestic car companies don’t have much latitude to increase production to fill the gap left by the Japanese, she said.
The GM and Ford factories that produce their most popular models already are running at full speed. Hyundai and Kia, South Korean brands that have emerged as popular alternatives to the Japanese makes, also are at full capacity.
“You just can’t say to a supplier, ‘Give me 50,000 more parts and we will start making more cars,’ ” Lindland said. “It takes time to get this industry running at a faster pace.”
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