Car Buying Articles

A High-Priced, Low-Choice Summer for Car Shoppers

Fewer Choices in New Cars, and Used Cars Will Cost More


  • Cars on Lot Picture

    Cars on Lot Picture

    Car dealers have been told they'll receive half or less than their usual allocation of some Japanese-brand cars. | May 03, 2011

4 Photos

It's been nearly two months since an earthquake and tsunami wracked Japan, and while U.S. car buyers might not yet feel the effect, it's coming, according to Edmunds analysts and car dealer groups. Both Honda and Toyota have told dealers that in the next few months, they will deliver half of their usual allocation of cars — or even less than half, in the case of Toyota's U.S.-built vehicles. Inventories are tightening already, and by summer, consumers can expect to find an increasingly spotty and expensive car-buying market.

There could still be good deals on some vehicles, but shoppers might need to be flexible in their choices. First of all, car buyers can expect higher prices on new cars as manufacturers discontinue incentives. Prices will be higher for used cars, too, and dealers are scrambling to acquire them in order to compensate for thinning new-car inventories. On a brighter note, Toyota and Honda have said they will extend leases for current customers to tide them over until normal production resumes and their first-choice cars are again available. Other carmakers can be expected to follow suit, Edmunds analysts say.

"There may be some good deals available to car buyers this summer but they might not necessarily be available on their first or second choice of vehicles," says Edmunds.com CEO Jeremy Anwyl. "It looks like it's going to be a bumpy ride on dealer lots through the next few months, so if you know you need a new vehicle this summer, Edmunds.com suggests buying right now." If you can afford to wait until fall or winter, do so. That's when analysts expect vehicle inventories to rebound.

Inventories already have been tightening, especially for small, fuel-efficient cars that are particularly popular as gas prices approach $4 per gallon (or exceed them, as already has happened in some states). Toyota's Prius hybrid in particular is in "extremely short supply," says Anthony Pordon, senior vice president of investor relations for the Penske Automotive Group. The group operates 326 retail franchises and represents 39 brands.

"As we progress in the summer, there will be fewer and fewer new cars to choose from," Pordon says, noting that other large dealer groups have made similar predictions. "We have been told to expect production cuts of 50 percent from Toyota and Honda because of the disruption from the earthquake. We don't know, however, if that means 50 percent of each model or 100 of one and 2 percent of another." Nissan has not supplied exact percentages for its drop in production, Pordon adds.

In the face of such production cuts, dealers will be reluctant to cut their prices during negotiations. Penske, for example, has told dealers to avoid discounting "simply to sell units," the company's president, Roger Penske, said in an earnings call Thursday.

This halt in sales incentives has already come into play for Los Angeles-area Toyota dealers, says Edmunds Senior Analyst Jessica Caldwell. The automaker's RAV4, for example, is still available at zero-percent financing or $500 cash back. But Toyota has dropped its financing, customer cash back and dealer cash incentive programs for the Highlander Hybrid, which is produced only in Japan. That's also the case for the Prius.

At first blush, you might think that the supply disruption would present an opportunity for U.S., European and Korean brands to grab market share. But consumers can't expect to see super-low prices as a result, according to Edmunds analysts. Korean brands Kia and Hyundai have their own production constraints. And many U.S.-based carmakers have suppliers in Japan, so they're not immune to supply issues, either (though those may mainly affect the availability of certain colors or options packages). In an interview with CNBC this week, AutoNation CEO Mike Jackson said that at the moment, U.S. and German manufacturers "don't have a chance to increase production beyond their original plans to take advantage, if you will, of a shortage of product in the marketplace." AutoNation has 243 new vehicle franchises.

Given the tumult the domestic carmakers have endured in the last few years, they're hesitant to change production for what is effectively a short-term issue, Caldwell says.

With that kind of constrained supply, dealers will have the opportunity for "margin expansion," Jackson said. In plain English, this means higher new-car prices.

Some car buyers might instinctively turn to a used car if they can't find a good new car deal. But they'll be hard-pressed to find bargains there. The True Market Value® (TMV®) prices of 3-year-old used cars are already up virtually across the board. The average TMV price for a used Honda Civic was up 10.4 percent in March, compared to the previous year. Other popular used-car models with price increases over the last year include the Nissan Sentra (up 11.8 percent), the Toyota Camry (up 7.2 percent) and the Hyundai Sonata (up a steep 20.2 percent).

Edmunds' current list of new cars that are cheaper than their used counterparts reflects these changing conditions, says Edmunds analyst Ivan Drury. "As we see a combination of inventory squeeze and a reduction of incentives on small vehicles, the savings on new cars will diminish, used car values will increase and new cars will transact closer to MSRP," he says. "This scenario is not a good one for consumers looking to buy a small car, but if they feel like trading in or selling their fuel-efficient used vehicles, there might be some benefit."

If you do want to sell that car, Penske and other dealers would likely be interested in buying it. Penske is aggressively building up its used-car inventory beyond the usual trade-ins and lease returns. It's also hanging on to trade-in cars it previously would have sent to auction, converting loaner cars to sales stock, and "buying more cars at the curb," Roger Penske said in the earnings call.

"We're buying cars directly from consumers," Penske representative Pordon says. "We anticipate being even more active in that — purchasing from you even if you don't purchase from us." He also notes, "Our guys and girls in stores look in newspapers, Craigslist and eBay and will go out and acquire those cars." This will probably be a disheartening development for private-party buyers, who suddenly have more competition for used vehicles.

But it's not all bad news — for some consumers, at least. Honda and Toyota are two carmakers so far which have said that they will work with customers whose leases are expiring, to arrange extensions with the same monthly payments. That will be a huge help to dealers, Pordon says. If the customer doesn't have to turn in an off-lease car immediately, this gives the dealers breathing space until they once again have the model color and features the customer wants in his replacement car. Toyota Financial Services told Penske it will extend leases for up to 12 months, Roger Penske said.

The best advice for the summer car shopper, Pordon says, is to be "flexible but diligent." Edmunds' TMV tracks changes in car prices, so consumers can gauge whether a particular dealer's quote is reflective of prices in the local market or simply an opportunistic play to maximize his profit margin. As Edmunds CEO Anwyl says, shoppers might want to accelerate their plans and buy in May to beat the looming supply chokepoints. Or, if they can be patient, they might just sit out what promises to be an uncertain shopping season.

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