5/9/2011 11:24 AM ET|
Car shopping? Wait 6 months
Demand is rising along with prices in this seller's market, so it's not the best time to purchase a new vehicle. But consumers could find reasons to buy not far down the road.
You're sick of $80 fill-ups, and you want a more economical ride. You nursed an old jalopy through the recession, and it's finally about to give out. Your family is outgrowing the jaunty little runabout you bought before having kids. Or maybe you just feel as if you deserve to indulge yourself.
There are plenty of valid reasons to buy a new car, and the rising pace of car sales so far this year shows that after three years of frugality, consumers are acting on their impulses. But it's suddenly looking like a seller's market that favors dealers over buyers. "If you really need a car, you should buy immediately," says Alec Gutierrez of Kelley Blue Book car research website KBB.com. "But if you can wait a few months, you should wait."
The unusual confluence of rising gas prices, supply-chain disruptions caused by the Japanese earthquake and a shrunken auto industry is making it a tough time for buyers. Here's why car shoppers might want to sit on the sidelines for a while:
Prices are rising
At the start of the year, automakers were still offering rebates and other familiar come-ons to move the metal. But a surprising spurt in the demand for cars has led to fewer incentives and a spike in the average transaction prices buyers are paying at showrooms.
KBB.com says the average transaction price of a car has risen by about 4.3% so far this year, with the prices of small cars and hybrids up by more than 10%. That doesn't usually show up in a higher sticker price. But as demand for certain cars goes up and manufacturers reduce rebates, dealers become more reluctant to haggle. So instead of dropping their price by, say, $1,500, they might drop it by only $500 -- a $1,000 price hike, in effect.
That trend seems likely to intensify, with prices peaking over the summer or in early fall. The huge earthquake and tsunami that struck Japan in March wrecked a number of supplier plants that provide paint, rubber components, processors and electronics to many automakers worldwide. It also left Japan with a nationwide power shortage that's causing rolling blackouts and forcing manufacturers to slow or shut down assembly lines.
Toyota, for one example, has cut its production in Japan to half-capacity, while production in U.S. factories has fallen even more, because of parts shortages. Toyota says production should pick up by summer but won't be back to normal until the end of 2011. Other Japanese automakers face slowdowns, too. The parts problem could hit some U.S. and European carmakers as well.
For most vehicles, the inventory on dealers' lots is typically two to three months' worth, in shipment or elsewhere in the pipeline. So shortages haven't hit dealers yet. But they're likely to arrive this month. That means prices will probably rise heading into summer even more than they have so far this year. A 1- to 3-year-old used car might seem like a decent alternative, but used-car prices have been rising as well, because a sharp slowdown in new-car sales over the past three years has left an unusually small inventory of used cars. And gas prices around $4 have had the usual effect on car buyers, boosting demand for high-mileage compacts and hybrids. Taken together, those trends are bad news for buyers.
"Transaction prices for new cars are near record levels, and used-car prices are up, too," economist George Magliano of forecasting company IHS Global Insight said at a recent conference in New York. "The question is, how high are they going to go?"
Selection is shrinking
The Japanese parts shortages may not lead to the outright disappearance of endangered models from showroom floors. What's likely instead is that some trim lines, options and colors may become unavailable, with the most popular choices probably running out first.
Dealers always like to say they have plenty of cars, and they don't want to publicize any problem that could discourage buyers from paying them a visit. So they may not acknowledge that the car you want isn't available. A better sales tactic would be steering buyers toward cars that are available. So buyers should be more diligent than usual about doing their research, knowing exactly what they want and heading for another dealer if they feel pressured.
Buyers should also remember that a shortage of some vehicles will boost demand -- and prices -- for competing models that aren't hampered by a parts shortage. Downsizing in the auto industry over the past few years has reduced capacity and lowered inventories for many models, so there's not necessarily a lot of excess supply should buyers switch in large numbers from one model to another.
A buyer who can't find the Honda Fit he wants, for example, might consider the Ford Fiesta instead. But if thousands of others did the same thing, Fiestas could temporarily run short, too. Or at least the most popular colors and options packages could.
Credit should get better
Car sales plunged in 2009 and 2010, partly because consumers didn't want to spend money, but also because banks cut back sharply on loans. Before the recession, the auto loan approval rate for people with top credit -- those able to qualify for 0% financing and other sweet offers -- was about 90%. It's since fallen to about 70%. And the approval rate for subprime borrowers has fallen from 70% to just over 10%.
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That pullback represents a necessary correction, but lenders have also gone too far and shut out many borrowers able to pay back loans. As unemployment improves and lenders become less gun-shy, more buyers will qualify for loans and more will get preferred, lower rates. Interest rates may rise a bit over the next 12 months or so, but most economists think the Federal Reserve will continue to keep rates low until late this year or early next.
Things look better 6 months from now
By fall, most automakers hit by parts shortages should be recovering. A production spurt could even lead to a glut of cars. Gas prices are more of a wild card, since they're based on the highly unpredictable politics of the Middle East, among other things. But a sharp move in either direction could aid buyers. If gas prices go well above $4 and stay there for a while, it could threaten another recession, an unwelcome development that would nonetheless lead to spending cutbacks and discounts meant to lure buyers to showrooms.
If gas prices fall to $3 or lower, demand could probably ease for high-mileage cars, which have seen the biggest price hikes so far this year. The smartest shoppers may end up being those who snag a deal on a fuel-sipper when gas is cheap -- if it ever is again.
This article was reported by Rick Newman for U.S. News & World Report.
VIDEO ON MSN MONEY
But it's suddenly looking like a seller's market that favors dealers over buyers. "If you really need a car, you should buy immediately,"
Now, good. Later, at higher prices, still good.........for the dealer.
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