(Bloomberg) — James Forcinito is itching to replace his 16-year-old Hyundai with almost 200,000 miles on it. The school psychologist browsed at new car dealers, but found few models on the lot and steep prices. So he turned to the all-caps come-ons and flapping flags at the used-car lots lining Northern Boulevard in Queens, New York — but he suffered another round of sticker shock there.
Since the pandemic, Forcinito, 35, says he’s “just spending a lot more of my life in my car, so I want to improve that experience.” But after finding few tires to kick and used cars priced like new ones, he called it quits for the day. “It’s not like there’s a lot of stuff to choose from right now,” he said, shrugging, but vowing to continue the search.
The used-car lot, ordinarily a haven of haggling and wheeling-and-dealing, is now a hotbed for wallet-busting transactions. Soaring used-car prices accounted for more than one-third of the recent increase in the consumer price index, which in June rose at the fastest rate in 13 years. A rush of buyers enjoying loosening pandemic restrictions has put demand in overdrive even as inventory on dealer lots is already running thin.
Average used-car prices reached a record $26,457 last month, up almost 30% from the beginning of last year, according to automotive researcher Edmunds.com. The run-up is a consequence of how the pandemic has upended the auto industry: Factory shutdowns due to the health crisis and the global semiconductor shortage have hobbled auto production over the past year, with output cut in North America by 5 million vehicles. That has led to historically low inventory in the new car market and pushed the average price of a new vehicle above $40,000 — an all-time high that would’ve been considered a luxury price tag not long ago.
In turn, would-be new car buyers are taking refuge in used-car lots. Researcher Cox Automotive predicts used-car sales will hit a record 21.5 million vehicles this year, as consumers aim to adapt to lifestyle changes brought on by the pandemic. Some are eager for a new set of wheels as they head back to the office or navigate suburban neighborhoods after escaping big cities to more easily practice social distancing. There is fresh demand for personal transportation that spares people from sharing space on a train or in an Uber ride. Road trips are on the rise, too, as travelers continue to avoid congested airports and planes.
“All the issues the auto industry is facing right now, both positive and negative, are related directly to the pandemic,” said Jeff Schuster, senior vice president of forecasting at researcher LMC Automotive. “We are looking at a retail market that’s probably the best it’s ever been.”
Indeed, many buyers will not be deterred. It helps that, amid unprecedented prices, car shoppers can keep their monthly payments on a pricey vehicle more manageable thanks to cheap financing and high-trade in values.
“Extraordinarily stimulated demand, combined with extremely tight supply, came together to form the most frenzied spring that you could actually ever have imagined,” said Jonathan Smoke, chief economist for Cox Automotive. “We’ve never seen this kind of run of price increases before.”
In almost 40 years of selling cars, Brian Benstock has never seen anything like this. The general manager of Paragon Honda and Acura in Queens has about one-tenth of the inventory he normally would have. And even though the dealer isn’t negotiating on price, buyers keep snapping up his vehicles.
“Picture a trapeze: a car goes in, a car goes out, a car goes in, a car goes out,” Benstock says in his showroom, surrounded by a sparse supply of vehicles on the lot. “We’re staying at about that six-day supply of cars, which is very, very thin.”
With stock so short, the showroom floor has become something of a cage match among the sales staff.
“It’s really cutthroat,” said Jared Luner, a car salesman at Columbia Honda in Missouri, who recently had a colleague sell one of the lot’s few vehicles out from under him. “Normally we’re all friends and co-workers, but right now, when someone pulls up, it’s a little edgy.”
And if buyers have their hearts set on a specific model in a particular color, Luner says he often has to “shake their hand and tell them ‘Have a good day and good luck.’”
Desperate to fill their used lots, dealers have resorted to bombarding their customers with pleas to part with their existing vehicles, offering generous trade-in prices and even agreeing to buy out leases months before they are set to expire.
CarMax Inc., the largest seller of used vehicles in the U.S., said it bought 236% more cars from its customers this year than last. That has left the nationwide chain with what it says is the country’s biggest used-car inventory of about 40,000 vehicles, but that is still down by 10,000 cars from last year.
“They are often pleasantly surprised with a higher offer than they anticipated,” Jim Lyski, executive vice president of corporate strategy, marketing and product for CarMax, said in response to emailed questions. “We would expect pricing to stay elevated in the near term.”
Even clunkers are worth more than ever. Used vehicles with 100,000 to 109,999 miles on the odometer fetched an average of $16,489 in June, up 31% from $12,626 last year, according to Edmunds. Pickup trucks are the most valuable in the over-100,000-mile (161,000-kilometer) fleet. A Chevrolet Silverado 1500 that had hit that mark sold for an average of $26,914 last month, up 49% from last year, while a Ford F-150 of similar vintage commanded an average of $25,924, a gain of 43% from a year ago.
“This is breaking down the myth that at 100,000 miles a car is dead and has no value,” said Ivan Drury, an analyst for Edmunds. “Consumers with an old truck in their driveway are in the best position to take advantage of this wild market.”
Dealers aren’t just nabbing inventory from individual consumers; they also depend on auctions to help fill their used-car lots. Even though they have to pay high prices at auction right now and don’t usually drive away with as many models as they’d hoped, they’re stuck scrounging them in order to have something to offer shoppers. Manheim Auto Auctions, the largest car auctioneer in the U.S., has about one-third as much inventory on its lots as it had two years ago.
The auction lanes — where the action is akin to the trading floor of a stock exchange, except with big vehicles rolling through — have become so pricey that bidders might feel like they’ve walked into a fine art sale.
“There’s a lot of disbelief in the prices they’re seeing — they’re shaking their heads and there’s a lot of reluctance to raise their hand,” said Matt Trapp, a regional vice president for Manheim. “But as soon as they see their competitor from across the street raising their hand on a car, they’re like, ‘Well, shoot, I need cars on my lot.’”
This record run-up in prices has probably peaked, says Cox economist Smoke. Beyond the supply and demand imbalance, the spring selling season was supercharged by government stimulus checks.
“We had the mother of all springs because we had two rounds of stimulus in the first three months of this year, combined with the tax refund season,” Smoke said. “All that cash certainly encouraged the peak frenzy in demand we saw.”
But deals on wheels will remain hard to come by.
“The bad news is I don’t think there’s really a lot of relief coming,” said LMC’s Schuster. “We’re so far from normal that these high used-car prices are projected to be with us certainly for the remainder of the year.”