Economy 101: The post-Clunker rise in car prices

AP News
Posted: Nov 18, 2009 5:37 PM

The government's Cash for Clunkers program offered a lot of Americans great deals on new cars. Now, those falling prices have shifted into reverse.

Prices for new and used cars rose sharply in October, partially reflecting a whiplash from the government trade-in program that winnowed inventories at dealership lots. The price spike also has to do with car companies delivering more expensive 2010 models to the showroom.

The Labor Department reported Wednesday that consumer prices for new cars rose 1.6 percent, the largest monthly increase since May 1981. Used cars also saw a price hike of 3.4 percent in October _ their largest increase since September 1980.

All of this came against the backdrop of a sluggish economy _ consumer prices are lower than a year ago and the higher car prices accounted for 90 percent of the overall 0.3 percent consumer price gains last month.

Economists and analysts said the steeper prices reflected a combination of factors in the new and used car market. Here's a look at what happened and what to expect in the months ahead.

Q: Why did new car prices spike when everything else was flat?

A: Cash for Clunkers, the summertime government program that gave consumers up to $4,500 to trade in a clunker for a more fuel-efficient vehicle, helped many new car dealers reduce their inventories in July and August. And most car companies have cut production because of the tough economy so many consumers had less to choose from when they surveyed dealerships in October.

The tighter inventories came as the new 2010 model year vehicles arrived en masse and many dealerships and manufacturers were less inclined to offer incentives.

"The Cash for Clunkers program may have wiped out the '09 models that have been sitting there but the brand-new 2010 models come and they can command a higher price for those," said Dr. James Brock, an economist at Miami University in Oxford, Ohio.

Q: How was the used car market affected?

A: Clunkers reduced the inventory of used cars because the government required the traded-in cars and trucks to be scrapped.

"A lot of (the used cars) were taken off the road in the Cash for Clunkers program so a lot of those trade-ins were scrapped instead of being available," said David Wyss, chief economist for Standard and Poor's in New York. "On top of that you had a pretty healthy demand for used cars because people aren't buying new ones."

Tom Webb, chief economist at Manheim Consulting, which produces an index of the used car market, said the lower new car sales in 2009 have reduced the number of vehicles traded-in to dealerships, reducing inventories and allowing used car dealers to charge a higher price.

Car companies have also cut their sales to rental companies, leading to fewer trade-ins of used cars from fleets.

Q: What does this say about the overall economy?

A: Hard to tell. Analysts noted that auto sales stabilized in October and showed improvements compared with the dramatic decline during the fall of 2008. If projected for an entire year, October sales rose to 10.5 million units compared with 9.2 million in September, a positive development but well below the annual sales of 15 million cars and trucks or more in the late 1990s and early 2000s.

The Cash for Clunkers program, meanwhile, galvanized auto showrooms during the summer but has led to reduced inventories, making it difficult to gauge the market until carmakers replenish car lots in the coming months.

"It's distorted the data both for new and used cars," Wyss said.

Q: Should I wait for prices to cool down? Or should I buy now?

A: Jesse Toprak, vice president for industry trends and insight with Truecar, a Santa Monica, Calif., company that tracks car buying habits, said he expects car prices to remain high for the rest of the year because dwindling vehicle inventories will keep dealer incentives down. Sport utility vehicles and pickup trucks, which tend to be more expensive, also take up a larger share of the market in November and December as consumers in cold weather states plan for the snow, mud and ice of winter.

But Toprak said consumers can still find a deal, especially if they're willing to buy an '09. His company found that "Black Friday," the hot shopping day after Thanksgiving, was the best day of the year to buy a car. Most consumers are shopping for sweaters instead of cars, average car incentives tend to be higher than normal that day and many dealers facing end-of-the-month sales quotas are more willing to bargain.

"It creates a perfect storm for car buying that day," Toprak said.