LAWRENCEVILLE, N.J. – The 2019 Honda Civic that kicked off a used-car auction earlier this month would have been nothing special before the pandemic. But as automotive dealer Brad Wimmer watched, the online bidding quickly became, to quote him, “bananas.”
As a new car, the Civic would have had a sticker price of around $21,000. But within seconds at the wholesale auction, the two-year-old model, with 4,000 miles, sold for $27,200.
Soon after, a Nissan Rogue fetched what it would have cost new in 2018. A three-year old Toyota Camry with large dents and scratches on its hood sold for $14,200, nearly twice what it would have brought just a few years ago. And a 2015 Kia Sorento sold for $12,600, a staggering amount for a six-year-old car with 83,000 miles.
For Wimmer, owner of the dealer AutoLenders, such sky-high prices have become the norm at the weekly auction, where dealerships nationwide buy and sell used cars.
The unraveling of the used-car market is the most tangible result of a problem that has plagued the global economy for the past year: a dire shortage of computer chips that has hobbled auto manufacturing.
The lack of new cars hitting the market has caused a shortage of used cars, too, raising prices and crimping sales. The crisis has created a political headache for the Biden administration, fueling inflation and knocking more than two percentage points from GDP growth in the third quarter. It’s also hurting consumers, who face long waits for new cars and can’t fall back on the used-car market as a low-price alternative.
“It’s going to be really, really tough for consumers to buy a vehicle in 2022 . . . you’re going to have to pay a very high sticker price,” Wimmer said as he watched the auction, which used to attract more than 1,000 car dealers to Manheim, Pa., every week but since the pandemic mostly operates online.
Demand for chips, also known as semiconductors, is soaring as more electronic products require the components to function. The pandemic accelerated demand as consumers gobbled up new computers and household goods. But chip supply is limited by a lack of semiconductor factories and by the months-long process needed to make the components.
That’s forced automakers worldwide to slash production because they can’t get enough chips to power all the newest technology in their cars. The global auto industry will produce nearly 4 million fewer vehicles than planned this year because of the shortages, according to the consulting firm AlixPartners. By July, only 1.2 million new cars were on U.S. dealers’ lots, down from 3.5 million before the pandemic, according to data provider Cox Automotive.
With far fewer new cars hitting the market, consumer prices for used cars have soared by more than 24% in the United States over the past year, while new-car prices are up nearly 9 percent, according to the Labor Department.
Those jumps have also fueled eye-popping prices for rental cars, and helped push U.S. inflation to a 13-year high of 5.4%.
Poorer households are especially likely to feel the burden of pricier used cars, said Michael Hicks, an economics professor at Ball State University in Muncie, Ind. They often own older cars more apt to break down, but will struggle to replace them at current prices, he said.
If high prices continue, they could also become a drag on employment. “If this is still a story in October 2022, there could be a number of people finding it difficult to get to work because they can’t find the automobiles they need,” Hicks said.
The pricing frenzy has made for a “grueling” car search, Elvalynne Pala said while collecting a 2018 Honda CRV from the AutoLenders dealership where Wimmer watched the auction.
“If you don’t get the car immediately, somebody’s buying it right out from under you,” said Pala, a resident of nearby Bucks County, Pa. “I almost had the problem with this car. And it just seems like people are buying without even seeing the vehicles.”
She spent about $27,000 on her SUV, which has 23,000 miles on it. That was a few thousand dollars over her budget, but the best deal she could find after weeks of looking on CarMax and CarGurus, she said.
Another customer arriving to peruse models, Gunjan Mukheja, said she began searching last month, after her car was totaled in an accident.
“I entered this car market like, oh my God, this is worse than the house market,” she said. “It is crazy, so crazy.”
One of the main factors inflating prices: Rental-car companies for the first time have become major buyers of used cars at auction, instead of big sellers. That’s because they can’t get enough new vehicles and are desperate to fill their fleets, industry executives say.
Normally, Hertz and other rental companies buy new cars directly from manufacturers, receiving discounts because they buy in bulk. But automakers lately have pushed rental companies to the back of the line and prioritized deliveries to dealerships that have customers waiting, said Grace Huang, president of Manheim, the company that runs the weekly used-car auction.
Nearly every decent used car at the Oct. 15 auction attracted a flurry of bids from big rental-car companies and national retailers such as Carvana, which had deep enough pockets to outbid local dealerships every time.
“Hertz, Carvana, Avis, Hertz,” Wimmer said as he watched the offers flood in for a 2019 Acura RDX. The car, which would have fetched $37,500 when it was new, finally sold to Enterprise for $40,200.
A two-year-old minivan prompted feverish competition before Hertz won it for $39,200, a few thousand dollars over its original sticker price.
While that cost may seem high, “they’re going to rent that for $700 a day in Orlando,” said Wimmer’s colleague, Greg Markus. (Actual Hertz price for a seven-seat minivan in Orlando, Fla. with early November pickup: about $416 per day or $1,769 per week, according to the company website.)
Hertz and Avis didn’t respond to requests for comment. Enterprise said it “will continue to work through all channels” to meet demand for rental cars. “Auction is one of our sources, however this is a limited resource given our requirements on age and mileage,” the company said in an emailed statement.
The chip and related auto shortage has fueled higher rental prices and caused some travelers to cancel their trips. Amy Weisenburger, a finance professional near Buffalo, N.Y., was planning an August vacation in Alaska with her husband to celebrate their anniversary. They booked flights and sketched out an itinerary but gave up after searching in vain for a car.
When her husband checked various sites, the cheapest deal he could find would have cost $3,000 for nine days. A few days later, Amy checked several pickup locations in Alaska but found no inventory at all.
As a last resort she tried Turo.com, a kind of Airbnb for cars that allows consumers to rent other people’s wheels. All she found were pricey offers for a Honda Civic or an older BMW, which she worried would have trouble navigating rougher roads. “I was like, ‘I’m not driving a BMW to Denali,’” she said.
With new cars in scarce supply, many consumers are buying their leased cars instead of returning them when the lease runs out. That’s cut off a big source of supply for the used-car market, according to Huang, the Manheim president.
The supply constraints have left local dealerships desperate for any vehicles, new or used.
A few doors down from AutoLenders, another dealership, Route 1 Chrysler Dodge Jeep Ram of Lawrenceville, has about half its normal inventory in stock, said Chris Mazzeo, manager for used cars. With new vehicles scarce, the dealership is trying to obtain more used cars, but is having to pay about 20% more than it did before the coronavirus pandemic.
Route 1 has taken out ads offering to buy consumers’ used cars, even if they aren’t looking to buy a new vehicle, Mazzeo said. Other dealerships in the area are doing the same.
Some customers are aware of the semiconductor shortage, but many aren’t, he said.
“The person that buys a car every 10 years is walking in thinking – and rightfully so – hey, let me negotiate a new car,” he said. When they see the prices, some think “that this is a game we’re playing. We’re just trying to stay in business.”