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

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FENTON TOWNSHIP, Michigan (AP) The viral pandemic has sparked a cascade of price hikes in the Americas’ auto industry, a surge that has made new and used vehicles unaffordable for many.

New vehicle prices have far exceeded headline consumer inflation over the past year. In response, many buyers whose price was excluded from this market turned to used vehicles. Yet their demand has turned out to be so powerful that the prices of used vehicles have risen even more than new ones.

The price of an average new vehicle jumped 6% between January of last year, before the coronavirus erupted 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 used market. The average price of a used vehicle jumped almost 14%, or about 10 times the rate of inflation, to over $ 23,000. It was one of the fastest such increases in decades, said Ivan Drury, senior news director for Edmunds.com.

The main reason for the price explosion is a simple economic reason: 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 last or rise for months or years, with new vehicle inventories tight and fewer trade-ins on dealer lots.

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

To compound the shortage, car rental companies and other fleet buyers are normally a major source of used vehicles for dealerships who are selling less now. With trips down and fewer people renting cars, fleet buyers aren’t buying as many new vehicles and therefore unloading as many older vehicles.

It’s like a weird perpetual motion machine right now with prices, said Jeff Goldberg, general manager of Goldies Motors, a used car dealership in Phoenix.

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

There are millions less used vehicles 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 poor credit buyers who are stuck with older, less reliable vehicles.

The industry is still trying to recover from the devastation caused by 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.

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 an easy one.

We have looked at new trucks, but the price is excessive, he said. Some trucks cost over $ 70,000. It’s to the point where it’s ridiculous.

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

True, vehicle prices had risen long before the outbreak of the pandemic, with many buyers choosing loaded trucks or SUVs and taking loans of six years or more to keep their payments low. Even so, used prices had remained relatively low, with a sufficient supply of over 3 million vehicles returning to the market each year from lease contracts.

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

If I go to $ 40,000, I might as well spend $ 45,000, Drury said of the buyers. I might as well treat myself.

Even with loans over 60 months old, the average monthly payments are in the middle of the $ 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 eliminating many new, cheaper 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 prices.

The industry has dropped that price tag of $ 30,000 and under, Chesbrough said. Essentially, they ditched that territory in favor of the used car market.

Increased demand and higher prices for newer model used cars have created turmoil among low-income buyers, noted Art Ramos, who operates a used vehicle store in McAllen, Texas, near the. Mexican border. Unemployed people who were receiving unemployment assistance during the pandemic struggled to get a loan. Those who can buy usually have to look at much older vehicles with significant mileage.

All the people who were unemployed all those months, I couldn’t get them approved, he said.

When low-income buyers are able to 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 currently in high demand, said Ryan LaFontaine, CEO of a chain of 20 Michigan dealerships that includes two stores. opportunity.

In the past, dealers would not have bothered with these exchanges; they would have sent them to regional auction houses. But the quality of the automobile has improved markedly over the past decade. The LaFontaines group therefore reconditions these cars and provides credit advice to low-income or low-credit buyers.

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

Dealers say competition for used vehicles, especially from online auto sellers, Carvana and Vroom, has helped drive up prices with auction wars. Still, Jackson argues that automobiles remain affordable because consumers typically receive 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 slightly in January. But that could be misleading, Edmunds Drury said. Fewer expensive new and used luxury vehicles were sold during the month, he said, which temporarily lowered overall prices.

Those on the front lines say competition for vehicles is intensifying as dealerships 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 reduce the supply of vehicles again, which in turn would likely drive up prices for new and used vehicles.

Unaffordable prices could open the door for a business that could profit from new, low-cost cars with only basic functionality. That’s what Korean automaker Hyundai did to break into the U.S. market decades ago, Chesbrough notes.

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

Copyright 2021 The Associated Press. All rights reserved.

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