Shock sticker: Average used car price is $29,000 and buyers are appalled
DETROIT (AP) — A few months ago, a woman visited Jeff Schrier’s used car yard in Omaha, Nebraska. She was on a tight budget, she said, and was desperate for a vehicle to get to work.
He was shown three cars priced at his limit, around $7,500. Schrier said the woman was stunned.
“’Is this what I get for $7,500? ‘” he recalled her words. The vehicles were much older or had a lot more mileage than she had expected to replace a car that had been destroyed in an accident.
The woman ultimately settled on a 2013 Toyota Scion with 160,000 miles. Schrier isn’t sure he made a profit on the deal. “We just helped her,” he said.
As used vehicle prices rise above any seemingly rational level, that’s the kind of scenario unfolding at many car dealerships across the country. Prices have soared so high, so fast, that buyers are increasingly shut out of the market.
Consider that the average price of a used vehicle in the United States in November, according to Edmunds.com, was $29,011, up 39% from 12 months earlier. And for the first time in anyone’s memory, more than half of American households have less income than is considered necessary to purchase the average-priced used vehicle.
The days when just about anyone with a stable income could walk into a car lot and grab a reliable late-model car or buy their child’s first vehicle for a few thousand dollars are all but gone. .
“I’ve never seen anything close to that – it’s madness,” said Schrier, who has been selling automobiles for 35 years. “It’s quite frustrating for so many people right now.”
When the government announced that consumer price inflation had jumped 6.8% in the 12 months to November – the biggest jump in almost 40 years – the most important factor, aside from energy, was used vehicles. And while the rate of increase is slowing, most experts say inflated vehicle prices aren’t expected to subside for the foreseeable future.
The blame can be placed directly on the outbreak of the pandemic in March last year. Auto factories have suspended production in an attempt to slow the spread of the virus. As new vehicle sales fell, fewer people traded in used cars and trucks. At the same time, demand for laptops and monitors from people stuck at home has led semiconductor makers to shift production from automobiles, which rely on these chips, to consumer electronics.
When a faster-than-expected economic rebound boosted demand for vehicles, auto factories attempted to restore full production. But chipmakers couldn’t react quickly enough. And car rental companies and other fleet buyers, unable to acquire new vehicles, stopped offloading older ones, worsening the shortage of used vehicles.
As gloomy as the market is for used car buyers, the shortage of computer chips has also pushed up prices for new vehicles. The average new vehicle, according to Edmunds.com, is approaching $46,000.
Even so, used car prices are expected to approach new car prices. Since the start of the pandemic, prices for used vehicles have jumped 42%, more than double the increase for new vehicles. Last month, the average price of a used vehicle was 63% of the average cost of a new vehicle. Before the pandemic, it was 54%.
At this point, Schrier must tell low-income buyers that he has very few used vehicles for sale.
“What was once a $5,000 car,” he said, “is now $8,000. What was once $8,000 is now $11,000 or $12,000.
Including taxes, fees, a 10% down payment and an interest rate of approximately 7.5%, the average used vehicle now costs $520 per month, even when financed on average over nearly six years, Edmunds calculated.
To make that payment and afford other necessities like housing, food and utilities, a household would need to bring in about $60,000 a year, or $75,000 before taxes, said personal finance specialist Kimberly Palmer at NerdWallet. In 2020, the median pre-tax household income in the United States was $67,521, according to the Census Bureau.
“The average person,” Palmer said, “can’t afford the average used car right now.”
Ivan Drury, senior executive at Edmunds, said while he doesn’t track used vehicle prices relative to household income, he believes November marked a record “in the worst possible way for affordability. “.
Monthly payments for the average used vehicle, he noted, were $413 two years ago, $382 five years ago and $365 ten years ago. November’s average payment of more than $500 for a used vehicle, Drury said, is about the average that was needed five years ago for a brand new vehicle.
“People are going to have to make tough decisions, maybe cut back in other areas,” Palmer said. “That means it’s stressful for a lot of families.”
Used vehicle prices are so high that Karl Hogan of Canonsburg, Pa., near Pittsburgh, was able to quickly sell his 2007 Toyota Tacoma small pickup last month, with more than 170,000 miles on it. Even with the vehicle’s age and mileage, an Ohio man paid over $6,500 for it.
Hogan didn’t have to budge from the asking price. When some potential buyers offered him less money, he told them, “I’ve got 12 other guys behind you.”
A week before the sale, when he bought his new Tacoma, Hogan was on the other side of the equation. The dealership didn’t budge from its sticker price of $38,000.
“If I didn’t take it,” Hogan said, “there were three people waiting. I couldn’t get out of it, but I wanted a new truck.
David Paris, senior executive at JD Power, noted that used vehicle prices are directly related to the cost of new vehicles. Although some automakers are reporting that the supply of computer chips is gradually improving, prices paid by dealers at used-vehicle auctions continued to rise through November, Paris said.
“We are not seeing any price declines, which is extremely rare at this time of year,” he said.
New-vehicle dealers have around 1 million vehicles available nationwide, barely a third of the normal supply, Paris said. And the vast majority have already been sold.
Given pent-up consumer demand, new vehicle prices are expected to remain historically high until supply returns to around 2 million or 2.5 million and automakers resume discounts, which could last until ‘in 2023. Once new vehicle prices come down, pressure on used vehicle prices would eventually follow.
Yet even after that, vehicle availability will be restricted as traditional sources of used vehicles – cars returned from rentals and trade-ins or sold by rental companies – have essentially dried up.
Over the past decade, cars returning from two- and three-year leases have been a major source of near-new used vehicles. But that was back when more than a third of new-vehicle sales in the United States were leases, a figure now down to 22%, Edmunds’ Drury said. Because there aren’t many new cars, people with expiring leases often buy those cars after their lease is up.
Rental companies, another key source of late-model used cars, cannot buy new ones at this time and are holding on to the ones they have. Some rental companies even buy used vehicles. Considering all these factors, Paris expects the used car shortage to worsen until 2024.
Among the few consumers who will benefit are those who want to sell a used car and don’t necessarily need to replace it. The average trade value in October, Paris said, was $9,000, double what it was a year earlier.
But for people who don’t have a vehicle to trade in and have only modest incomes, the options are few, if any. Nerdwallet’s Palmer said low-income people might just have to pay for repairs to keep a current vehicle running for as long as possible. Even this option, however, can become prohibitively expensive.
Paris of JD Power says if they can afford it, buyers should consider a new vehicle. He recently managed to get a few thousand dollars off the list price on a new Ram pickup, although he had to travel from the Washington, D.C., area to Philadelphia to reach a willing dealership he found in searching internet forums.
“If you look hard enough and are willing to wait and travel,” he said, “you can find deals at most brands.”
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