Image: Chevrolet Aveo
Chevrolet
Small fuel-efficient cars like the Chevrolet Aveo are the only vehicles not experiencing a drop in sales.
updated 6/24/2008 2:05:22 PM ET 2008-06-24T18:05:22

Now is a great time to buy a new vehicle.

Slow sales are forcing manufacturers to offer generous deals in an effort to increase business — making new cars and trucks more affordable than they have been in over six years.

“It’s a buyer’s market,” says Dana Johnson, the chief economist at Comerica Bank in Dallas.

In the first quarter consumers paid an average of $28,389 for a new vehicle, including finance charges, Johnson says.

Based on the median family income of $61,580, the price equates to roughly 23.9 weeks of work, he said. Just one quarter earlier, a new vehicle would have required an extra four days of wages. And a new vehicle bought in the first quarter of last year would have required more than an extra week of wages.

Comerica compiled the data for its auto affordability index, which measures the cost of buying a new vehicle every quarter. (See the “slide show” link below for a list of the top 10 least expensive vehicles to own.)

It is not often that you hear about prices going down, but Johnson said the lower cost for a new vehicle is the result of an imbalance in supply and demand.

Many consumers have curtailed spending because of high gas prices and the weak economy, he says.

The decline in business has been particularly painful for the auto sector. Sales of “light vehicles” — the non-commercial cars and trucks that consumers buy — declined 15 percent in the first quarter compared to the same period last year, according to Autodata Corp.

The trend continued through April and May. Overall sales for April declined 6.9 percent from the year earlier, and for May, 8.4 percent, the data indicates.

So manufacturers are working hard to entice increasingly reticent consumers to buy new cars, and prices are falling as a result. The cost of a new vehicle has not been so low since 2001, according to the Comerica index. The index uses data from the U.S. Department of Commerce’s Bureau of Economic Analysis to assess the health of the auto and lending industries in terms of consumers’ monthly income.

Industry analysts agree that those willing to buy can get a good deal because of the current lack of demand. “If you’re a consumer, it’s a great time to buy a car,” says Erich Merkle, director of forecasting for IRN Inc., a research firm in Grand Rapids, Mich.

Although sales of virtually every type of car and truck are declining, one group of cars is bucking the trend: Sales of small cars jumped 22.7 percent in May compared to the same month last year. These vehicles are the most fuel efficient available and are an obvious choice for drivers looking to downsize and get better mileage.

Because demand for small, fuel-efficient cars is strong right now, it might be difficult to find a good deal on one. Automotive News, a Detroit-based trade publication that covers the auto industry, reports that some dealers are able to charge full price or higher on small cars like the Honda Civic and Toyota Matrix. And they’re selling these models at such a brisk pace that they anticipate running out of monthly supplies.

Consumers can expect prices to jump again, when sales volume picks up, both Johnson and Merkle say.

The last time the price of new vehicles dropped also resulted from flagging sales. In the months after the World Trade Center attacks on Sept. 11, 2001, auto sales drastically declined and manufacturers began offering rebates and reduced financing, Johnson says. The deals prompted a healthy sales spike, and prices soon climbed again, he says.

For the two decades prior to 2001, the cost of a new vehicle had remained elevated, according to the Comerica index. Prices hit a peak in the fourth quarter of 1994, when it took 30.9 weeks of family income to get new wheels. That’s 23 percent more work days than it would have required to buy a new vehicle in the first quarter this year.

The higher cost of new vehicles in 1994 came as automakers regained financial stability following a recession in 1991-92. Their recovery prompted them to steadily boost prices.

But 2001 changed the landscape for manufacturers. As they competed for fewer shoppers, the incentive wars began, Merkle said.

General Motors was one of the first companies to begin offering attractive incentives on new vehicles that year. The company’s “Keep America Rolling” promotion offered 0-percent financing and a $3,000 rebate to lure apprehensive buyers.

Other automakers followed suit and some cash incentives reached as high as $8,000. That precedent has fueled competition between car manufacturers ever since, with manufacturers vying to offer the best financing rates — in some cases 0 percent — and the highest cash rebates available.

“More and more carmakers are carving out a slice here in the U.S., and they have to juice up the incentives to keep up with the competition — especially since 9/11,” Merkle says.

It all works to the consumer’s advantage. Automakers’ increasing competition, combined with high gas prices and growing environmental concerns, will spur higher-quality cars with better fuel efficiency and lower prices, Merkle says.

“The competition is a very good thing,” he says. “Places that don’t have as much competition have lousy cars — even some that you have to lift the hood and pull a cord to get going.”

© 2008 ForbesAutos.com

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