Car sales surge, but are consumers getting a bad deal?

Cars lined up for sale at a Ford dealer in Lakewood, Colo. U.S. auto sales were on a pace to show a gain as high as 17 percent in August as the indust...
Cars lined up for sale at a Ford dealer in Lakewood, Colo. U.S. auto sales were on a pace to show a gain as high as 17 percent in August as the industry raced toward its strongest month since just before the start of the 2007-2009 recession. RICK WILKING

Coming out of the worst automotive downturn in decades, U.S. new car sales have rebounded at a rapid pace: August’s numbers are the best the industry has seen in at least six years, leading some analysts to predict sales could approach record levels before the end of the decade.

Demand is running so hot that manufacturers are struggling to keep showrooms stocked. Manufacturers from Ford, Hyundai and Land Rover are taking steps to avert short-term shortages of some of their most popular models. Ford dealers ended the month with an estimated nine days supply of the Fusion sedan, for example, where a 60-day inventory is considered normal.

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But the sales surge leaves plenty of questions, including whether it can be sustained. For shoppers, the real question is whether this is actually the best time to be buying.

Several factors seem to be drawing buyers back to showrooms, said Bob Carter, senior vice president of automotive operations for Toyota Motor Sales, USA. But consumer confidence stands out, Carter said after a speech to the Detroit Automotive Press Association. “People are feeling good,” he said, and are increasingly willing to open up their pocketbooks.

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Carter and other industry insiders are confident the U.S. automotive market is on track to keep growing, if not at the double-digit pace of recent months. They point to several factors that include the growing job market and the nascent housing industry rebound. That’s been a particularly strong motivator for pickup sales.

“Many trades people are driving around in 15- or 20-year-old pickups and vans and need something to get them to the job site,” says Joe Phillippi, chief analyst with AutoTrends Consulting. But he adds that this so-called “pent-up demand” isn’t limited to just those who need a work truck.

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Indeed, a recent report by R.L. Polk, a provider of automotive information, indicated that Americans are holding onto their vehicles longer than at any time over the last half century. The average vehicle on the road today is 11.4 years old, up from 11.2 in mid-2012, and just 9.7 years a decade ago.

The good news is that today’s vehicles are more reliable than ever, but sooner or later, says Phillippi, owners have to balance the cost of repairs – and higher fuel costs on less efficient, older models, against today’s newer, even more reliable and efficient vehicles.

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For much of the last decade, vehicle prices held relatively flat, creeping up at a pace well below inflation. But booming sales give manufacturers the opportunity to both raise sticker prices and reduce incentives. According to the data tracking service, the Average Transaction Price, or ATP – which balances incentives and options against list prices – rose to a record $31,252, a 3.2 percent jump from August 2012.

Don’t expect that increase to mitigate anytime soon, said TrueCar senior analyst Jesse Toprak. “We see no indication there’ll be a downward turn in the foreseeable future,” he said. “Transactions will rise as long as manufacturers can pull it off.”

Shoppers might consider that vehicles in short supply will likely yield the lowest incentives and permit for the least amount of showroom bargaining while dealers will be more likely to do whatever it takes to move models with a serious backlog.

Another factor helping spur car sales is the return of cheap and easy money. During the depths of the Great Recession lenders reined in cash to the point where even those with the best credit records were more than occasionally turned down. Today, loans are plentiful, even for so-called sub-prime buyers and rates have been particularly low over the last year – but they’re beginning to creep back up which could raise vehicle costs even more in the months ahead.

Ironically, suggests Toyota’s Carter, that may also be spurring sales, since buyers want to get the best loan rates “while they can.” Whether higher interest rates will turn off potential shoppers remains to be seen.

Automakers are putting a lot of emphasis on leasing again. During the recession some makers, including General Motors, had to drop leases entirely. But they now account for about 25 percent of all new vehicle purchases, and 60 percent or more in the luxury segment. Credit both those low interest rates and high residuals – the trade-in values that lenders work into the equation when calculating a lease’s monthly payment.

Read more: US Auto Sales Boom Likely to Continue 

Significantly, whether leasing or buying, car buyers have been stretching out their loans ever-longer, according to a new report by credit tracking firm Experian Automotive. There are credit unions in California offering terms of up to nine years, Carter said, who cautioned this may help lower monthly costs in the short-run but leave buyers “upside-down” when they trade in, owing the bank more money than the vehicle is worth. Long loans, he warns, seldom make sense, and usually only for buyers planning to keep a car “until the wheels fall off.”

If there’s a plus side to getting rid of the old clunker now, analysts suggest, it may be simply knowing costs will continue going up. But they also suggest that when buyers compare the huge increases in both fuel economy and reliability of the products coming off the assembly line today, buyers are likely to experience sharp reductions in ongoing ownership costs, particularly in fuel and maintenance. And so, despite rising vehicle prices and lengthening loan terms, now may not be so bad a time to buy a new vehicle, after all.

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