New or used, vehicle prices are soaring
Tight inventory adds to wealth gap among buyers
Eric Young started shopping for a new vehicle in early January, an SUV high on his list.
The features he wanted and what he could afford were two different things. He realized it meant looking at smaller vehicles if he wanted to remain in the new car market.
“I told myself a number, and that was the max I would go, $32,000, and the lower I could come to $27,000, the better,” Young said. “I thought about the used car market, but that’s tough because I don’t know how the previous owner treated” the vehicle.
On Feb. 6, Young, who works for a software company and lives in Orange County, California, bought a silver 2021 Toyota Camry sedan for $27,132.
Young said he loves the car and he feels lucky he got his deal just in time, noticing a rise in new car prices. New and used vehicle prices are soaring and show no signs of leveling any time soon as inventories for each remain skimpy.
Tight inventory equals high prices. The accelerating prices have created a divide between the haves and the havenots for at least a year. Wealthy people buy pricey large pickups and SUVs, benefiting from low interest rates and robust markets in housing and stocks, analysts said.
Working-class and poor people are pushed into the used car market as affordable new small cars are increasingly scarce, especially from domestic carmakers who opted to build trucks to meet changing consumer tastes.
“The (domestic) automakers have killed off the sedans that were affordable, so you’ve been funneled to different brands if you’re a sedan purchaser, you have to go to a Korean or Japanese automaker for one,” said Ivan Drury, Edmunds’ senior manager of insights. “A new car purchase ... is a luxury purchase. If you are buying a midsized SUV from a mainstream brand, it’s $40,000 or more and that’s luxury territory.”
As a result, there is more cross shopping between new and used vehicles this year compared with previous years as car buyers search harder for the vehicle they need at a price they can afford, Drury said.
‘Buying a lot of car’
In January, the average transaction price for a new vehicle was $39,144 compared with the year-ago period when it was $38,259, Edmunds’ data said. Four years ago, in January 2017, a new car sold for $34,898 on average.
For the month of January, the average transaction price for used cars shot up to $22,676 compared with $20,409 a year ago. Four years ago, it was $19,085, Edmunds’ data shows.
“The dealer is more in control of what you’re going to pay,” Drury said. “Your negotiation skills likely will not come into play. Paying full MSRP (manufacturer suggested retail price) is not likely, but you’ll pay closer to it.”
New vehicle inventory for the week of Feb. 22 was 17% lower than it was a year ago. Inventory of used vehicles is 12% lower, said Cox Automotive’s Charles Chesbrough, executive director for strategy and research.
“We are looking at new vehicle prices
growing at a 5% to 6% clip,” Chesbrough said. “The new car market will be tough for the working-class folks.”
New vehicle sticker prices and average transaction prices are driven higher by other factors: Many new models are heavily loaded with expensive technology that commands fat sticker prices.
“It’s crazy the acceleration we’ve seen in pricing because people are buying SUVs and pickups, and those are very expensive,” Drury said. “People are buying a lot of car, too, expensive trims and treating themselves. Once you get to that price range, it’s a lot easier to justify a $3,500 sunroof and other features.”
The average transaction price in January for a full-size pickup was $53,657, up 2.9% from a year ago, according to Edmunds. For a full-size SUV, it was $68,859, up 5.5% from January 2020.
‘The unfortunate truth’
Another trend contributing to high prices is that many buyers keep a car longer, Chesbrough said.
Those who purchase rather than lease keep their cars seven to eight years compared with five years or fewer in years past, “so they want those leather seats and sunroofs,” Chesbrough said.
Last year, as the pandemic forced businesses to shutter and many workers lost their jobs, lower-income people were pushed out of the new and used car buying market, Chesbrough said. Even middle-class people had to instead look to used.
“Even a $35,000 vehicle is a really expensive loan payment when you have to pay it for six or seven years,” Chesbrough said. “A lot of American families can’t make that commitment of $700 a month for that long.”
It was mainly the upper-income folks who bought new, thus sales of expensive SUVs and pickups had a great year, Chesbrough said.
Expect to search harder in either market than might have been required in the past. Drury said that in January last year, consumers reported they were willing to travel 45 miles to buy a 2019 model year vehicle. This January, consumers said they were willing to travel 65 miles to shop for a 2020 model year.
Driving 100 miles
Tyler Arciaga, a high school athletic director and head football coach in San Diego, wanted to pay cash for a new vehicle
in September, he said. His budget was $25,000.
“It was just too pricey, and nothing fit in the price range for what we were looking for. We wanted an SUV with a third row, and there was nothing new in that price range,” said Arciaga, a father of two kids and a third on the way.
He started shopping in the used vehicle market. In October, he found a threerow, base trim 2017 Buick Enclave in black with 33,000 miles. He bought it for about $20,400 before taxes, a deal he considers fair. He had to drive 100 miles to the dealership to get it.
“I do feel pretty fortunate I found it, but I had to search and I had to expand the search radius to 150 miles,” Arciaga said. “We wanted to avoid debt as much as we could and so the new car prices pushed us in this direction.”
Best to buy
Jake Fisher, Consumer Reports senior director of auto testing, knows the average price of a new car is skyrocketing, but that doesn’t mean an educated consumer can’t get one for a good price.
It might require looking at different brands and maybe not getting the exact color or other desired features.
“The Toyota Corolla is a very affordable vehicle, and the Camry, they have a lot of value, reliability and safety,” Fisher said. “The Mazda CX5 is under $25,000 and it’s reliable, fun to drive and good quality.”
There’s no shortage of Asian automakers’ compact SUVs and sedans if a person wants a new car for a good price, he said.
“The market is changing so quickly. If you’re in the market today for a threerow SUV, you’re going to have a hard time negotiating because a lot of people are looking for that vehicle,” Fisher said. “But if you’re looking for a Corolla or a Camry, there are opportunities there.”
Consumer Reports tested 2021 new models across all brands for safety, comfort and reliability. It also studied owner satisfaction surveys and created these top picks by price category, Fisher said.
For less than $25,000:
• Mazda CX30 subcompact SUV.
• Toyota Corolla compact car.
For $25,000 to $35,000:
• Toyota Camry sedan.
• Toyota Prius EV.
• Subaru Forester compact SUV.
For $35,000 to $45,000:
• Subaru Outback.
• Kia Telluride.
• Honda Ridgeline.
For $45,000 to $55,000:
• Lexus RX sedan.
• Tesla Model 3 EV.
Money in your driveway
Not all is lost if you’re looking for new wheels this year. If you have a car to trade, that’s an advantage.
“You usually see upticks in used car values in the summer months, but it’s happening much earlier because of the new car shortage,” Drury said. “So the consumer might have a lot more negotiation ability in a used car value when you trade it in.”
Drury suggested shopping the tradein value either online with dealers or listing it as a private sale because, “dealers are stocking up on used cars right now, so you have an edge. You have more money in what’s in your driveway than you do in getting a discount.”
Given the competitiveness among carmakers, there will still be some factory incentives on new vehicles, in some cases even on certified pre-owned rides, analysts said.
Honda and BMW have offered low financing, and BMW has given cash back of up to $1,500 for buying a used vehicle, Drury said.
Cox’s Chesbrough agreed that consumers will get discounts, but “they’ll probably not be as aggressive as they would be because of the economy and tight inventory, so there are no fire sales happening. And to get the vehicle you want, the color you want and the trim, could be more of a challenge. We have 17% fewer vehicles out there, so we have less to choose from.”
Tax season bounce
Spring is typically a hot time for the used market.
Most people get their tax refunds around this time, and the average down payment on a used car – about $2,500 – is close to the average tax return, Drury said. On a new car, the average down payment is $4,500, he said.
This year, people earning $75,000 or less may receive a $1,400 check if Congress passes coronavirus aid legislation, Chesbrough said, which might provide a bounce in used car sales this spring.
That bounce could lead to even tighter inventories in used vehicles, inflating selling prices.
On the new car side, prices are expected to remain steep and sales uncertain.
“It’s a volatile year,” Chesbrough said. “We still have the vaccine distribution to address, the semiconductor chip shortage and inventory shortages … so there’s a lot out there that could disrupt a new vehicle sales recovery.”
The auto industry has been confronting a global shortage of semiconductor chips that has disrupted vehicle production.
The chips are used in a variety of car parts and are in big demand for personal electronics.
If vehicle prices continue to climb, they won’t discourage Young.
He intends to keep buying new vehicles and is willing to downsize if he must.
“If one day I can’t afford a Camry anymore, I will go get a Corolla,” Young said. “Buying a used car for me is tough – if I knew the owner, that’s a different story.”