New or Used, Buying a Car Gets More Expensive

The reason is supply, supply, supply.

By Brendan Moore

09.29.2009

United_States one dollar bill obverseIf you’ve been shopping for a car lately, you may have noticed that deals and discounts are almost nowhere to be found.

The reason on the new-car side of the equation is that the manufacturers, particularly the domestic manufacturers, have finally been able to more or less match production to market demand.

What this means to the public from a practical perspective is that there are less cars on the blacktop from consumers to pick from, and far less incentives being offered on the cars available.

What this means to the auto manufacturers is that their profit on a per-unit basis is up, way up from previous levels. In the past, the constant state of manufacturing over-capacity meant that the manufacturers were always running some sort of fire sale to shed themselves of excess vehicles, and that meant a lot of incentives doled out to consumers.

According to J.D. Power and Associates, the average retail price of a new domestic vehicle has risen approximately $2000 USD since the same time last year.

Yes, it used to be all about market share for the Detroit Three, but no longer. It is finally about a profitable existence, no matter how the volume shakes out. This new discipline should manifest itself in their marketing programs as well, since the companies can no longer trumpet “the deal”, and will instead have to pitch the car itself.

Good news for the advertising agencies as some of the money previously allocated to rebates and incentives will now go towards marketing the vehicles and the manufacturers thereof.

On the used-car side, the dynamic is more straightforward; there simply are not enough used vehicles to go around. Even the recent surge in new-car sales didn’t replenish the inventory of used cars as it usually does, since a high percentage of the trade-ins were crushed under the Cash For Clunkers program.

Prices are up at every large wholesale used car auction company that the dealers use, and still climbing. The practical effect of this diminished supply of used vehicles is that there are fewer cars to pick from on used-car lots across the U.S., and, that the retail prices of those used vehicles are less flexible than in the past.

Consumers have certainly taken notice.

Usually, just some waiting on their part will see the buying public through these moments of market restraint.

Unlike previous periods of inventory drought, however, this one may have real legs, and show some staying power. This could conceivably be the “new normal” at least until the end of 2010, given the economic indicators now in play.

There is the chance that one or more of the manufacturers will mistakenly over-produce between now and then, starting the vicious cycle of sales incentives again, but it seems unlikely in this overly-cautious environment. Good for them, but not so good for consumers that are looking for deals.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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15 Comments

  1. Is it possible that demand will be hampered by the cash-laden consumers who are on the sidelines waiting for the next generation of technology – i.e. gas-electric hybrids and plug-in electrics to become de rigeur?

  2. I’ve been looking for a three or four year old Audi A3 everywhere over three states and there is not much to pick from. The dealers are really holding firm on their price, too.

    I’m going to have to buy something soon, so I guess I’ll have to pay the price.

  3. After the clunker incentive, car companies are going to see a huge slump… Makes me wonder if they can really stave off from offering incentives to make any kind of numbers at all.

    The the issue of the rise of MSRP prices, I’m also curious if it had to do with the artificial raising of prices for the C4C deals.

  4. There isn’t a lot of Fusion inventory to pick from around here in Seattle, not many Fusions on the lots of the Ford dealers.

  5. Having a heck of a time finding a deal here in Austin. Been successful getting some pretty good prices on trucks…but not much in the used market. Funny how an 06 accord can sell for 16 when you can get a brand new 2009 for 20. Worried that buying something used as a placeholder right now will really bite me later on when i go to trade for something new.

  6. some will say that this was a plan to push people into public transportion, as the working and poorer can not buy a car feed it and insure it let alone fix it.

  7. “some will say that this was a plan to push people into public transportion
    (sic), as the working and poorer can not buy a car feed it and insure it let
    alone fix it.”

    I don’t know who would say that as it seems to not make any sense
    whatsoever.

    Are you suggesting that all of the auto manufacturers that sell cars in
    America have secretly banded together and colluded on pricing in order to
    drive up that pricing, with the ultimate aim of pushing people into public
    transportation, which by the way, works directly against their economic
    interests? Because people who are riding on public transportation are not
    buying new cars, which is what the auto manufacturers sell.

    And since holding a profit margin on their cars is a recent development for
    the domestics only, and since the Japanese and Germans have done it for
    decades, are you also suggesting that the auto manufacturers kicked off this
    plan over thirty years ago, and it is only now coming to fruition?

    Your conspiracy theory involves an incredible amount of foresight, planning
    and cooperation among the auto manufacturers spanning decades. It also
    requires those auto manufacturers to have an intense desire to commit
    suicide.

  8. I don’t think the companies are going to be able to hold off on the incentives, either. They’re going to weaken in their resolve as their sales keep dropping. September numbers will be real bad, and October numbers will be bad, too, so we’ll just see what happens in terms of incentives when the inventory starts piling up.

  9. I wonder if we might witness the creation of an another economic “bubble” with car prices?

    On the other hand however, if Renault-Nissan decide to bring the Renault-Dacia Logan aka Nissan Aprio in Canada and the US, I wonder if we might see a good bunch of buyers going for some bang for the bucks? When the Logan arrived in France, Renault didn’t expected then it taked a good bunch of sales who hurted the used car market and to a latter extent, the Renault line-up itself since the Logan attracted buyers of Clio and Megane. Could history repeat here in North America?

  10. plenty of cars on the lots here in DC area

  11. There are not a lot used cars available, period, in the little town where I live. The selection has really gone down since August.

  12. Seems like a good time to buy a motorcycle.

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