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Best option for car shoppers: Postpone buying

Inventory shortages caused by the effects of Japan's earthquake have led to rising prices for new and used vehicles, creating what one analyst describes as a 'huge seller's market.'

May 22, 2011|By Jerry Hirsch, Los Angeles Times
  • Service manager Juan Sanchez holds an ad that Power Nissan of South Bay hangs on customers' mirrors.
Service manager Juan Sanchez holds an ad that Power Nissan of South Bay hangs… (Bob Chamberlin, Los Angeles…)

Attention all car buyers: The era of cut-rate financing, generous cash-back offers and big discounts is coming to an end.

With the effects of the earthquake in Japan rippling through the industry and causing shortages, prices are rising for both new and used cars, and fewer models and options will be available come summer, especially for the hybrids and fuel-efficient vehicles that Japan produces.

That's prompted many experts to voice something rarely said in the sales-happy auto industry: With consumers facing the toughest market in recent memory, if you can, put off purchases until things sort out, probably early next year.

"If you don't have an immediate need, you are probably better to wait and figure out where the market is headed," said Jesse Toprak, an analyst with auto information company TrueCar.com.

Toprak concedes his reluctance to give such advice. TrueCar collects referral fees for new-car sales to visitors to its website.

Yet he's not a lone voice.

"If people were paying attention they would have bought in March and April. Now, if they have the latitude, it is probably best to wait," said Jeremy Anwyl, chief executive of Edmunds.com, an auto information company that makes money from Internet-based auto industry advertising.

(OK, so the transmission on your clunker went out and you don't want to shell out big bucks to fix it. If you have to purchase a car, see the accompanying story for buying tips.) || Related: If you must buy a car now, here's what to do

Tom Libby, an automotive industry analyst at R.L. Polk & Co., intended to replace his aging Ford Explorer this spring but said he's abandoned the plan for now, even though his SUV has 125,000 miles on the odometer and he needs it to commute every day.

The disruptions caused by the March 11 earthquake have triggered "the huge seller's market we are seeing now," Libby said. "The customer has lost all leverage, and that is going to last at least into the fall."

With Toyota Motor Corp.'s U.S. factories operating at just 30% capacity this month because of Japan-related parts shortages and Honda Motor Co. warning that its supply of vehicles is diminished, some of the bestselling cars, including Toyota's Camry and Corolla and Honda's Civic and CR-V SUV, will become scarce.

Toyota and Honda — including their respective Lexus and Acura brands — account for about a quarter of all U.S. auto sales and an even larger share of the retail market.

Analysts at IHS Automotive estimate the industry has fallen millions of vehicles behind its expected global production. Although automakers will work hard to catch up during the second half of this year, ultimately about 700,000 vehicles will never be built because of the quake.

The shortfall has allowed Toyota and competitors such as General Motors Co. and Ford Motor Co. to raise sticker prices. At the same time, just about every manufacturer has cut back on deals, either killing or reducing cash-back offers and raising auto loan interest rates.

The reduction in incentives will hurt shoppers the most, Anwyl said.

"Dealers charging a few hundred dollars more is not as bad as manufacturers cutting incentives by $1,000 or $1,500. That's just huge," he said.

The unfriendly consumer environment can't be blamed solely on the earthquake and supply crunch. Rather, the earthquake — combined with strengthening U.S. auto sales — marked the tipping point in a series of events going back several years.

The seeds for the current price rise in used and new cars began in 2008, when the car market started to contract and Americans scrapped more vehicles than they purchased for the first time in years, shrinking the size of the U.S. auto fleet.

As the recession took hold, the gap widened. About 2 million fewer people bought new vehicles in 2009 compared with the previous year, slashing the number of cars traded back for sale on used lots. It also set the table for the renewed demand the industry is seeing today. People can put off car purchases for a while, but eventually they need to replace aging vehicles.

At the same time, rental car companies slashed their purchases by 25% from 2008 because the recession hurt the travel industry. Then leasing fell off the map, accounting for barely more than 13% of vehicle sales in 2009, down from a rate of about 19% in each of the three previous years.

The dip in sales to rental car companies and the plunge in leasing are haunting the market now, and will for at least the next year. That's because autos owned by rental companies and vehicles coming off leases are among the biggest contributors to the inventory of late-model used cars for sale. But those sources aren't supplying nearly as many vehicles as they have for much of the last decade, and that's pushing up used-car prices.

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