New or used, auto prices hit gas

Pandemic leaves too many buyers with too few cars for sale

In this image made from video, a worker washes a Jeep inside the service department of a LaFontaine auto dealership in Fenton Township, Mich., Thursday, Jan. 28, 2021. A chain reaction touched off by the coronavirus pandemic has pushed new-vehicle prices to record highs and dramatically driven up the cost of used ones. (AP Photo/Mike Householder)
In this image made from video, a worker washes a Jeep inside the service department of a LaFontaine auto dealership in Fenton Township, Mich., Thursday, Jan. 28, 2021. A chain reaction touched off by the coronavirus pandemic has pushed new-vehicle prices to record highs and dramatically driven up the cost of used ones. (AP Photo/Mike Householder)

FENTON TOWNSHIP, Mich. -- The viral pandemic has triggered a cascade of price increases throughout America's auto industry -- a surge that has made both new and used vehicles unaffordable for many.

Prices of new vehicles far outpaced overall consumer inflation over the past year. In response, many buyers who were priced out of that market turned to used vehicles. Yet their demand proved so potent that used-vehicle prices soared even more than prices for new ones did.

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

Yet that increase was nothing next to what happened in the used market. The average price of a used vehicle surged nearly 14% -- roughly 10 times the rate of inflation -- to more than $23,000. It was among the fastest such increases in decades, said Ivan Drury, a senior manager of insights for Edmunds.com.

The main reason for the exploding prices is a simple one of economics: Too few vehicles available for sale during the pandemic and too many buyers. The price increases come at a terrible time for buyers, many of whom are struggling financially or looking for vehicles to avoid public transit or ride hailing because of the virus. And dealers and analysts say the elevated prices could endure or rise even further for months or years, with new vehicle inventories tight and fewer trade-ins coming onto dealers' lots.

The supply shortage arose last spring after the coronavirus hit hard. Automakers had to shut down North American factories to try to stop the virus's spread. The factory shutdowns reduced the industry's sales of new vehicles and resulted in fewer trade-ins. So when buyer demand picked up late in the year, fewer used vehicles were available.

Compounding the shortage, rental car companies and other fleet buyers -- normally a major source of used vehicles for dealers -- have been selling fewer now. With travel down and fewer people renting cars, the fleet buyers aren't acquiring as many new vehicles, and so they aren't off-loading as many older ones.

"It's like a weird perpetual motion machine right now with pricing," said Jeff Goldberg, general manager of Goldie's Motors, a used vehicle dealership in Phoenix.

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

"There are millions fewer used vehicles that are going to be available starting next year, 2022 and 2023," he said.

The resulting price spike essentially has created three classes of auto buyers: Those affluent enough to afford new vehicles. People who can afford late-model used cars. And buyers with low incomes or poor credit who are stuck with older, less reliable vehicles.

The industry is still trying to recover from the pandemic's devastation last spring. The resulting factory closures shrank output by 3.3 million vehicles. Sales temporarily dried up, and so did the influx of trade-ins.

Once the factories restored production in May, demand turned hot. The problem was, the supply of vehicles fell well short of demand, especially for pickups and SUVs. Prices surged. And new-vehicle purchases for the year tumbled -- by nearly 2.5 million to 14.6 million.

'RIDICULOUS' TRUCK PRICES

When Larry Parsons of Hartland Township, Mich., went to buy a pickup in August, the question of whether to buy new or used was unfortunately an easy one.

"We did look at new trucks, but the price is excessive," he said. "Some trucks cost upwards of $70,000. It's to the point where it's ridiculous."

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

Vehicle prices had been rising well before the pandemic struck, with many buyers choosing loaded-out trucks or SUVs and taking on loans of six years or more to keep their payments low. Even so, used prices had remained relatively low, with an ample supply of 3 million-plus vehicles returning to the market each year from leases.

STIMULUS FUELS SALES

Then the virus hit. With it came 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'm going in at $40,000, I might as well spend $45,000," Drury said of buyers. "I might as well treat myself."

In recent years, automakers had set the stage for higher prices by scrubbing many lower-priced new vehicles that had only thin profit margins.

"The industry has been abandoning that $30,000-and-below price point," Chesbrough said. "Essentially, they've been forgoing that territory to the used car market."

Because many buyers have no other options, older vehicles with more than 100,000 miles on them are in high demand now, said Ryan LaFontaine, chief executive officer of a 20-dealer chain in Michigan that includes two used-only stores.

Unaffordable prices might open the door to a company that could profit on low-priced new cars with just basic features. That, Chesbrough notes, is what the Korean automaker Hyundai did to enter the U.S. market decades ago.

"I do think the industry does make itself kind of vulnerable," he said.

In this image made from video, cars drive through the used vehicle lot at a LaFontaine auto dealership in Fenton Township, Mich., Thursday, Jan. 28, 2021. A chain reaction touched off by the coronavirus pandemic has pushed new-vehicle prices to record highs and dramatically driven up the cost of used ones. (AP Photo/Mike Householder)
In this image made from video, cars drive through the used vehicle lot at a LaFontaine auto dealership in Fenton Township, Mich., Thursday, Jan. 28, 2021. A chain reaction touched off by the coronavirus pandemic has pushed new-vehicle prices to record highs and dramatically driven up the cost of used ones. (AP Photo/Mike Householder)
Larry Parsons, who bought a used pickup truck last year in part due to the high cost of new trucks, sits inside his Ford F-150 in Livonia, Mich., Tuesday, Feb. 16, 2021. A chain reaction touched off by the coronavirus pandemic has pushed new-vehicle prices to record highs and dramatically driven up the cost of used ones. (AP Photo/Mike Householder)
Larry Parsons, who bought a used pickup truck last year in part due to the high cost of new trucks, sits inside his Ford F-150 in Livonia, Mich., Tuesday, Feb. 16, 2021. A chain reaction touched off by the coronavirus pandemic has pushed new-vehicle prices to record highs and dramatically driven up the cost of used ones. (AP Photo/Mike Householder)

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