A few months ago a woman visited Jeff Schrier’s site car a lot in Omaha, Nebraska. She was on a tight budget, she said, desperately looking for a vehicle to commute to work.
She was shown three cars that were at the limit, about $ 7,500. Schrier said the woman was stunned.
“‘That’s what I get for $ 7,500?'” He recalled her saying. The vehicles were much more old or mileage than she expected to replace a car that had been totaled in an accident.
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The woman eventually settled on a 2013 Toyota Scion with a whopping 160,000 miles. Schrier isn’t sure if he made a profit on the deal. “We just helped her,” he said.
With used car prices exceeding any seemingly rational level, this scenario is playing out at many dealerships across the country. Prices have skyrocketed so quickly that buyers are increasingly being excluded from the market.
Note that the average price of a used car in the US in November was $ 29,011, according to Edmunds.com – a staggering 39% more than just 12 months earlier. And for the first time anyone can remember, more than half of American households have less incomes than they think is necessary to buy the average used car.
The days when almost anyone with a steady income could wander into a car parking lot and grab a reliable late-night model car or buy their kids’ first car for a few thousand dollars are essentially gone.
“I’ve never seen anything like it before – it’s madness,” says Schrier, who has been selling cars for 35 years. “It’s pretty frustrating for so many people right now.”
When the government announced that consumer inflation had risen 6.8% in the twelve months to November – the largest increase in nearly 40 years – the biggest factor besides energy was used cars. And while the rate of increase is slowing, most experts say the inflated vehicle prices will not subside for the foreseeable future.
The guilt can be directly traced back to the March 2020 pandemic outbreak. Auto factories shut down production to slow the spread of the virus. As new car sales fell, fewer people traded in used cars and trucks. At the same time, the demand for laptops and monitors from people stuck at home led semiconductor manufacturers to shift the production of automobiles that depend on such chips to consumer electronics.
When a faster-than-expected economic recovery boosted demand for vehicles, the auto plants sought to restore full production. But chipmakers couldn’t react quickly enough. And rental car companies and other fleet buyers unable to acquire new vehicles stopped unloading older vehicles, exacerbating the shortage of used vehicles.
As bleak as the market for used car buyers is, the lack of computer chips has also pushed new car prices higher. The average new vehicle, says Edmunds.com, is heading towards $ 46,000.
Nonetheless, used car prices are more likely to come closer to new car prices. Since the pandemic began, used car prices have increased 42% – more than double the increase for new cars. Most recently, the average used car price was 63% of the average new car cost. Before the pandemic, it was 54%.
At this point, Schrier has to tell low-income buyers that he has very few used cars for sale.
“What used to be a $ 5,000 car,” he said, “is now $ 8,000. What used to cost $ 8,000 is now $ 11,000 or $ 12,000.”
Including taxes, fees, a 10% down payment, and around 7.5% interest, the average used vehicle now costs $ 520 a month, even with an average of nearly six years in funding, Edmunds calculated.
To make that payment and pay for other necessities like housing, groceries, and utilities, a household would need to take home about $ 60,000 a year, or $ 75,000 before taxes, said Kimberly Palmer, a personal finance specialist at NerdWallet . In 2020, the average pre-tax U.S. household income was $ 67,521, according to the Census Bureau.
“The average person,” said Palmer, “can’t afford the average used car right now.”
Ivan Drury, a senior manager at Edmunds, said that while he does not track used car prices in relation to household income, he believes November marked a “worst possible affordability” record.
The monthly payments for the average used vehicle were $ 413 two years ago, $ 382 five years ago, and $ 365 a decade ago. The average November payment of over $ 500 for a used vehicle, Drury said, is roughly the average it took for a brand new vehicle five years ago.
“People are going to have to make tough decisions, maybe downsizing in other areas,” said Palmer. “That means it’s stressful for a lot of families.”
Used vehicle prices are so high that Karl Hogan of Canonsburg, Pennsylvania, near Pittsburgh, quickly sold his 2007 Toyota Tacoma van with more than 170,000 miles on it last month. Despite the vehicle’s age and mileage, an Ohio man gave over $ 6,500 for it.
Hogan didn’t have to deviate from the asking price. When some would-be buyers offered him less money, he told them, “I’ve got 12 other guys behind you.”
A week before it went on sale, when he bought his new Tacoma, Hogan was on the other side of the equation. The dealer wouldn’t budge from his sticker price of $ 38,000.
“If I didn’t take it,” said Hogan, “there were three people waiting. I couldn’t get out, but I wanted a new truck.”
David Paris, Senior Manager at JD Power, noted that used car prices are directly tied to new costs. Although some automakers report that the supply of computer chips is gradually improving, the prices paid by dealers at used car auctions continued to rise through November, Paris said.
“We’re not seeing a drop in prices, which is extremely rare for this time of year,” he said.
New car dealers nationwide have around 1 million vehicles on offer – almost a third of the normal range, said Paris. And most of them have already been sold.
With consumer pent-up demand, new car prices are expected to remain historically high until supply bounces back to around 2 million or 2.5 million and automakers resume discounts, which could last well into 2023. As soon as new car prices subside, the pressure on used car prices would eventually follow.
But even after that, vehicle availability will be scarce, as traditional used vehicle sources – cars that are leased and traded in or sold by car rental companies – have essentially dried up.
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Over the past decade, cars returning from two- and three-year leases have been a leading source of nearly new used cars. But that was when more than a third of US new car sales were leased, a number that has now dropped to 22%, Edmunds’ Drury said. Since there aren’t many new cars out there, people with expiring leases often buy these cars when the lease ends.
Car rental companies, another major source of new model used cars, cannot buy new ones now and keep the ones they have. Some car rental companies even buy used vehicles. Given all of these factors, Paris expects the used car shortage to worsen by 2024.
Among the few consumers who can benefit are those who want to sell a used car and don’t necessarily need to replace it. The average trade-in value in October was $ 9,000, according to Paris – twice as much as last year.
But for people who have no vehicles to trade in and have modest incomes, there are few to no options. Palmer of Nerdwallet said people on lower incomes may simply have to pay for repairs to keep a current vehicle running for as long as possible. However, even this option can become prohibitively expensive.
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JD Power’s Paris says buyers should consider a new vehicle if they can afford it. He recently managed to cut a few thousand dollars off the sticker price for a new Ram pickup truck, despite having to travel from Washington, DC to Philadelphia to reach a willing dealer whom he found by searching internet forums.
“If you search hard enough and are willing to wait and travel,” he said, “you can find deals on most brands.”