Shortage of New Cars Results in Fewer Choices and Higher Prices
Last updated April 29, 2021
You may be in for an unpleasant surprise when you go car shopping these days. It could be more difficult to find the vehicle you want at a price you can afford.
For years, buyers have been in the driver’s seat as manufacturers and dealers tried to sell off a glut of new cars. Not anymore.
With demand up—in some cases, back to pre-pandemic levels—and inventories down because of global manufacturing problems, it’s now a seller’s market. That means fewer choices, higher prices, fewer incentives, and less motivation for dealers to negotiate.
Inventory of new cars was down more than 30 percent in March from a year earlier, according to data from Edmunds.
“It’s to the point where automakers don't have the production to keep up with how many people want to buy new cars,” said Jessica Caldwell, executive director of insights at Edmunds. “That means buyers may not have the choices they did previously in terms of the trim levels, or even perhaps the vehicle they want.”
At Heartland Toyota in Bremerton, Wash., 65 miles north of Seattle, customers are making deposits on vehicles that are not even built yet, general manager Mike Seney told Checkbook.
“Demand is high and supply is the lowest I’ve ever seen, and I’ve been doing this for about 20 years,” Seney said. “There's never been a time where I could tell a customer, honestly, if you leave here, there's a very good possibility this car is not going to be here when you come back. That’s where we are right now.”
At Sport Honda in Silver Spring, Md., sales manager Andrew Cort describes the shortage of vehicles as even “more severe” than anticipated.
“We’re busy, but we’re seeing a lot of holes in our inventory,” Cort said. “And if the car is not there, it’s not there. There’s no way around it. We can make suggestions, but…”
You may be able to order what you want from the factory, “but there’s no guarantee how long it will take,” or if that vehicle will even be built, Cort told Checkbook.
Much Less to Choose From
In normal times, new car dealers stocked about a 60-day supply of vehicles. Now, some dealers only have a 10–20-day supply of some popular models, including upscale SUVs and pickups, according to Paul Eisenstein, publisher and editor-in-chief of TheDetroitBureau.com news service.
“It does vary by models and region, so shortages may be more severe in some parts of the country than others,” Eisenstein told Checkbook. “About the only vehicles where there are enough in showrooms right now, that a consumer can walk in and get pretty much what they want, is when you're talking about slow-selling sedans and coupes, and maybe sports cars.”
Brad Brotherton, who owns Cadillac, Buick, and GMC dealerships in the greater Seattle area, is dealing with “a massive reduction” in inventory.
“As an example, we used to have 40 to 50 Escalades on the ground; today we don’t have any,” Brotherton told Checkbook. “Everything that comes in is presold. As soon as we get a VIN (vehicle identification number) from the manufacturer, customers sign up and they wait three to six weeks to get delivery of their car.”
How Long Will This Last?
Manufacturers are struggling to rebuild that inventory, but a pandemic-induced shortage of microprocessors (also called “semi-conductor chips” or simply “microchips”), which control many electronic functions in vehicles, has caused production delays. As a result, some manufacturing plants have closed. Foam needed for seats is also in short supply.
“Virtually every single automaker has been impacted by the microchip shortage. As a result, we’ve seen closures at a number of manufacturing plants,” Eisenstein told me. “Ford this past month had to shut down at least three of the factories making some of its best-selling products, like the Ford F-150 pickup.”
No one knows when the industry will get back to full production. It all depends on how long the shortage of those desperately needed microprocessors lasts. Today’s cars are really computers on wheels. Each car requires dozens of microchips to manage engine performance, safety equipment, climate control, and the entertainment system.
Expect to Pay More
The average cost of a new car in March was $40,472, up $1,600 (4.3 percent) from the year before, according to Kelley Blue Book. That upward trend is likely to continue if the supply-demand balance increases.
Even now, there’s little or no negotiation with some popular trucks and SUVs. If you want that vehicle, you may have to pay the full sticker price—or above MSRP in some cases.
“It’s harder to score a really great bargain right now,” The Detroit Bureau’s Eisenstein said. “And at the same time, manufacturers have cut back on their popular models.”
Mike Jackson, CEO of AutoNation (American’s largest car retailer), noted that its dealerships “adjusted pricing” to reflect the supply-demand imbalance. The result as reported in AutoNation’s first-quarter report: Same-store gross profit per new vehicle was $2,749, up $1,041 (61 percent) from the first quarter last year.
One bright note: Demand for used cars is so high right now, dealers are paying top dollar for trade-ins.
The average value for all used vehicles traded in during March hit an all-time high of $17,080, compared to $14,1609 a year ago, according to Edmunds. Trucks have the highest trade-in prices of all consumer vehicles, the data show.
Tip: Before trading in your car, find out how much retail dealerships like CarMax will pay for it so you’ll know how much it’s worth wholesale. You can get an appraisal online at various sites, including Edmunds (which partners with CarMax). Simply type in your license plate or VIN and provide other pertinent info (mileage, condition, equipment) and you’ll get an instant price quote that’s good for seven days. You may be pleasantly surprised at how much your old vehicle can reduce the cost of your new one.
How to Get the Best Deal
“Limited supply is a savvy shopper’s biggest enemy,” said Jack Gillis, author of The Car Book.
So how do you deal with this new reality? If you don’t need to replace your car right now, maybe you should wait.
Gillis expects the computer chip shortage and other repercussions of the pandemic will ease-up by the end of the year or early 2022.
If you need to buy now, shop around by asking several dealerships in your area to provide competitive bids on the make and model of vehicle you want. Even if the car you want is in short supply, the only way to obtain the best price for it is to force dealers to compete with one another. Click here for instructions from Checkbook on how to collect bids.
Gillis also offered this advice:
- Shop carefully. You can find some deals and incentives, especially on the less popular vehicles. Everybody is looking for SUVs, but if a sedan meets your needs, you can find some good prices.
- Widen your search process. If buying from a dealer 70 miles away will save you money, consider it. You can still take your car to your local dealer for service and warranty work.
- Skip the upgrades. Unfortunately, most manufacturers don’t let you pick and choose your options; you have to buy them in packages. Skipping the fancy packages on a particular model can save you up to 20 percent.
- Skip the extras. Dealer add-ons are budget busters. Floor mats, cargo containers, and fabric treatments can always be purchased later and for much less.
- Decline the extended warranty. Today’s new car warranties are very good and extended service contracts (they’re not really warranties) are not only expensive, but if they actually paid off for most people, they wouldn’t be the big profit centers that they are. Instead, plunk those service contract dollars in a special savings account to draw on if you need after-warranty repairs.
- Beware of dealers using longer loans (72 or 84 months) to reduce your monthly payments. While those smaller payments may sound attractive, you will pay significantly more in overall interest costs, and you’ll probably be “upside down” for the first year or two. If there’s an accident and the car is totaled, or you have to get rid of it, you will have to make up the difference between your insurance payment (or proceed from the sale) and the balance on your loan. Keep the loan to four years or less.
- Shop around for financing. Your interest charges are one of the most expensive aspects of car ownership. Knocking a point of the interest rate by shopping around will save you hundreds and lower your monthly payments. Check with your credit union or bank to see what they are offering, so you’ll know if the dealer’s offer is a good one. Warning: Very few people qualify for the heavily advertised 0% interest rates, so don’t get your hopes up.
- Consider selling your used car yourself. The used car market is hot, and you can usually sell your vehicle for more than the dealer will pay you on a trade-in. Those extra dollars can help make up for the higher prices you’ll see in the new car showroom.
Tip: When I bought my new car last year, I had my old car appraised by CarMax before I went to sign the paperwork. The price the dealer offered me was $1,000 less than the CarMax price. They agreed to meet the CarMax offer. That saved me the hassle of selling the car myself, and lowered the final price which saved me money on the sales tax.
If You Need a New Car Right Now Car, Get Moving
While the decision to buy a car is never something that should be rushed, if you need a new set of wheels and there’s a model you really want, you may want to get moving—especially as we enter peak buying season.
“For anyone who wants to buy a car in the next six months, do it sooner rather than later, because the inventory is only going to get worse, not better,” Edmunds’ Caldwell advised.
In this wacky market, it’s more important than ever to force dealers to compete in order to get the best price.
For more than 25 years, Checkbook has offered its CarBargains service to consumers who want experts to collect pricing for them. CarBargains has helped more than 100,000 car buyers and guarantees it will obtain the best possible price.
To speak with our professional shoppers, visit our CarBargains page or call 800-475-7283.
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Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.