Monday, May 09, 2011

A Topsy Turvy Car Market

Every now and then something comes along and disrupts the normal ebb and flow of the markets. It happened back in 2008 to the world financial markets. This was brought on by a lot of manmade factors like unrestricted extensions of credit and lack of enforcement of regulations on Wall Street and Banks. In the last quarter of 2009, the famous “Cash for Clunkers” program disrupted car markets, new and used, and this was also manmade program by our government. It artificially stimulated new car sales for a short period and also had the effect of raising the prices of used cars.

Now we have both manmade and God made events disrupting the car markets. Political unrest in the Middle East has driven up the price of oil along with increased consumer demand as we emerge from the recession. But we also have an “act of God” event which was the catastrophic earthquake-tsunami that devastated Japan last month. Not only has production of cars built in Japan been disrupted, but the lack of parts manufactured in Japan has interfered with the production of cars all over the world, including the USA. We can expect a severe shortage of economy cars until the end of this year.

This couldn’t have happened at a worse time for the American car buyer because she was just getting back on her feet after three years of the greatest recession since the Great Depression. There is large pent up demand from consumers who have delayed buying that new or used car in 2008, 2009, and 2010. When car buyers delayed their purchases, there were fewer used cars traded in. You put high demand together with a low supply and every economist will tell you that spells soaring prices.

The good news is that prices are soaring only on fuel efficient cars, not gas guzzling trucks, vans, and SUV’s. In fact, prices on those are actually declining. Some more good news is that used car values have never been higher. If you’re driving a fuel efficient car now, it has actually appreciated in value since the beginning of this year. For example a 2008 Ford Fusion, rose $1,800 to $11,375 between January and May. Incredibly, the average value of a hybrid car such as a four-door Toyota Prius jumped $3,775 to $17,040 in those four months.

What does all of this mean to you? First, it means that if you’re thinking of trading in an economy car, you have something that the car dealer wants very much to add to his used car inventory. He will allow you a lot more money for it today then he would a few months ago. But don’t just settle for one dealer’s opinion on the price of your trade. Get at least three bids. Pit one used car manager against the other. If you’re driving a Honda Civic, visit at least two other Honda dealers (A Honda dealer will pay more for a used Honda than another brand) besides the one from whom you’ve decided to buy your new Honda. If there’s a CarMax used car outlet in your area, get a bid on your used Honda Civic from them too. When you’re getting these competitive bids, tell the used car managers that you are not buying a new or used car, but just want to sell your old one. Do not rely on the “book value” of your used car. When the market moves this fast on used cars, the books are way behind the market.

If you’re not in the market for a car but you own an economy car that you can get by without, you should consider selling it now at the peak of the used car market. The largest wholesale seller of used cars in the world, the Manheim Auto auction has an index (like a stock index) and it’s at an all time high since they began the index in 1995. Selling your used car now would be like selling your stock on October 9, 2007 when the Dow was at 14,164. I can’t promise you that used car prices won’t go higher for a few more weeks, but I can promise you that they won’t go much higher and that they will come down significantly from here. You can’t time the exact high or low of any market. There’s a saying on Wall Street…”Pigs get fat but hogs get slaughtered”.

We’ve talked about buying and selling used cars, but what about buying a new one? I’ve always preached that you should be careful in buying a new vehicle and it’s even more important now than ever before. You are in the driver’s seat in selling or trading your used car, but the dealer is in the driver’s seat in selling you the new one. If you don’t have to buy a new car in the next few months, don’t. New car prices will be coming down toward the end of end of this year. Manufacturers are reducing and removing incentives on new cars now but the y will be back. Dealers are holding out for more profit now on economy cars, but they won’t be later this year.

If you have to buy a new car, get at least three competitive bids on the new car as well as your trade-in and financing. Watch out for “addendum stickers”. Dealers are marking up the MSRP of new cars by thousands of dollars. Be sure that the discount you’re offered is off the MSRP and not off the “dealer list” which is MSRP plus another profit markup and over priced dealer installed accessories.

Your best price on new or used car is the Internet price. You can get this price and shop as many dealers as you want without ever having to leave your home or office. Consumer Reports, USAA, AAA, Capital One, Bank of America, and American Express have car buying services operated by company named Zag. They pit dealers against one another for competitive bids and give you access to the lowest price on a specific car in your market.

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