• Buyers are paying more for new cars as average transaction prices rise. Ford cited an average transaction price of $43,600 in April.
  • This is the result of low inventory and high demand for new vehicles causing automakers to reduce incentives.
  • Price-conscious shoppers may want to find segments where supply is higher.

    The combination of strong demand for new cars and tight inventories is creating a perfect storm of high vehicle prices. Many buyers in 2021 are paying more for new vehicles compared with last year as incentive spending drops and average transaction prices (ATP) rise, and this trend could increase as the global microchip shortage continues to affect production for many models.

    According to Cox Automotive, new-vehicle inventory was down 25 percent compared with this time last year at the start of April and could soon be down by as much as 40 percent. At the same time, nearly all automakers are reporting strong sales numbers through the first few months of 2021. With fewer vehicles on dealer lots but strong consumer appetites for new cars, automakers are rolling out fewer incentives; in other words, you won't find much cash on the hood. Cox Automotive said that incentive spending fell by nearly 16 percent during the first quarter. Measured as a percentage of average transaction prices, incentives dipped below 10 percent for the first time since 2016.

    General Motors said that its transaction prices rose by an average of $3500 per vehicle in the first quarter of 2021. Ford claimed that its high average transaction price of $43,600 in April 2021 was driven by a greater mix of more expensive SUV and truck models, which now comprise 94 percent of its sales since the company dropped most of its passenger-car models. It used the example of the Bronco Sport compact SUV to show how this switch has benefitted the company, as the Bronco Sport's average transaction price (ATP) of $31,800 in April was considerably higher than the out-of-production Fusion mid-size sedan's $22,600 ATP.

    While this shift may boost automakers' bottom lines, it's not so good for value-minded consumers. With used-car prices also on the rise, price-sensitive shoppers in need of a vehicle are facing a tough market. "It’s getting more difficult for shoppers to find excellent deals," noted Charlie Chesbrough, Cox Automotive senior economist. "If price is the ultimate driver, shoppers might be wise to focus on segments of the market where inventory is healthier." Cox's data indicates that compact and mid-size cars and subcompact SUVs may have better supply, which means there could be better deals to be had.

    How long will these higher prices last? We don't know, but surely not forever. Reuters reported that many auto executives, including GM CEO Mary Barra, believe that the chip shortage will worsen in the second quarter of 2021, which could further impact inventories and drive prices even higher. The bottleneck is expected to improve in the second half of the year, at which point the supply and demand could start to balance out. If you can hold off on your new-vehicle purchase for a few more months, your wallet might thank you.

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