Anyone looking to buy a car right now is likely to find fewer choices and higher prices — with very little room to negotiate.
The big picture: The pandemic has thrown off the natural balance between supply and demand for new and used cars, driving up vehicle prices and putting all the bargaining power into the hands of car dealers, who are enjoying fatter-than-normal profits.
What's happening: It's nothing like the Great Recession of 2008-09, which forced General Motors and Chrysler into bankruptcy and left other global automakers on the ropes.
- Back then, the banking and credit crisis caused sales to collapse suddenly, but manufacturers kept producing cars, albeit at lower levels.
- This time, the pandemic shut down production for two months, but buyers came back to the market sooner than expected.
- "This recession is unlike any the auto industry has seen before," says Jonathan Smoke, chief economist at Cox Automotive.
Between the lines: An extraordinary set of circumstances has created the perfect seller's market:
- In mid-March, every major auto manufacturer stopped production — for the first time since World War II.
- That led to a shortage of vehicles on dealer lots, in particular pickup trucks and SUVs.
- Used cars grew scarce too, as fewer people traded in vehicles or returned leases during the pandemic's early lockdowns. With many banks not collecting on bad auto loans, there were fewer repossessions, too.
But consumer demand proved resilient in the months after the initial crisis as dealers made it easier to shop online.
- Federal stimulus checks, plus the extra $600 weekly unemployment benefits, helped grease the market (though both programs are over now).
- Big incentives, including longer loans, helped put car payments within reach for many.
- Shifts in attitudes toward public transportation during the pandemic also drove more people into the car market, many for the first time.
It's basic economics: When demand is high for something that's in short supply, prices go up.
- The average transaction price on a new car is $38,414, up about $400 since January and $1,200 since last July, per Cox data.
- The spike is even more pronounced on used-car lots, where list prices are up $900 this year alone, to an average $20,445.
- At wholesale used-car auctions, dealers are fighting over scarce inventory, bidding up prices — which of course get passed on to consumers.
- On the flip side, you'll get more for your trade-in right now if you decide to upgrade.
The roller-coaster has dealers feeling flush — for the moment anyway. After a brutal spring, many are now seeing record profits on both new and used cars.
What to watch: The rest of the year remains a big question mark, and the volume of auto sales will likely depend on the virus and the government's response, says Smoke, the Cox economist.
Toyota sales chief Bob Carter, for one, is optimistic. "The industry is returning to health. The main issue right now is supplying the vehicles that customers want to buy — especially trucks and SUVs."
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