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Car buyers' thirst for options pushing prices higher

DETROIT — Vehicles are fetching record average prices of $30,748, up 6.9 percent from about a year ago, but don't blame the automakers. This is not a case of price gouging. Consumers are choosing more expensive trim levels and options for their new vehicles as a rebounding industry is producing more closely to market demand.

After decades of training customers to wait for the biggest rebate, or cut-rate lease, buyers are coming to terms with a seller's market.

Post-recession, there are fewer dealers in the U.S. Most have less inventory on the lot.

Then factor in more available credit for consumers who are finally ready to replace their aging vehicles with more fuel-efficient ones and prices that have found their natural equilibrium.

Average prices will increase in the next few months, level off, and then see small increases again next year, said Jesse Toprak, vice president of industry trends at online research firm TrueCar.com.

In 2005-06, Detroit automakers routinely offered discounts of 15 to 20 percent.

"Now it's 5 percent," Toprak said, with production more in line with demand.

The average incentive in March was $2,440, down $43 from a year ago, according to TrueCar. And it fell $36 from February as the trend to keep rebates in check continues.

The consolation is vehicles are holding their residual value better and used car prices have never been higher.

"Consumers are being weaned off incentives, but not voluntarily," said analyst Joe Phillippi of AutoTrends Consulting in Andover, N.J. "Nobody wants to pay retail (sticker price), but now they are being forced to pay close to it."

Consumers are not balking. U.S. auto sales in March ran at a 14.4 million annual sales rate, up from 13.1 million in March 2011.

"Sales do not seem to be artificially inflated," Barclays Capital analyst Brian Johnson said in a report analyzing the sales data. "Strong sales were not supported by incentives."

In contrast to the surplus of assembly capacity that drove General Motors and Chrysler to seek government support, now most automakers are letting a gradual steady sales recovery determine how much they boost production plans.

The industry took out brands and closed plants so capacity has come down overall, which has kept supplies tight, said Phillippi.

A perfect example: General Motors' decision to shut down production of the Chevrolet Volt for a month rather than adding more incentives to sell down growing inventory, Phillippi said. "GM had the discipline to take down production."

The upside of these actions: GM's vehicles sold in March at an average price of $33,289, 3.4 percent higher than a year earlier, according to TrueCar data. The hot-selling Chevrolet Equinox is selling for an average price of $27,437, up 6.5 percent from a year earlier.

At Ford, the new Focus is selling for $3,100 more than the outgoing model, Mark Fields, Ford president of the Americas, told investors this month in New York. TrueCar puts the difference at $3,137 — a 19.5 percent increase.

Toyota is getting 9.5 percent more, on average, for its redesigned Camry.

"Automakers have finally found their sweet spot . . . keeping incentives to a minimum," Toprak said.

Big winners include Chrysler (average selling price up 6.4 percent in March to $29,842), GM (up 3.4 percent to $33,289), Hyundai and Kia (up a whopping 9.4 percent to $21,717), and Nissan (up 7.4 percent to $28,322).

A wave of compelling, redesigned vehicles hitting the market helps, Toprak said. Higher gas prices have customers buying loaded versions of smaller vehicles.

In the past, small cars carried heavy incentives. Now compacts come with deals worth $1,000 or less while subcompacts are offered with only $700 off, he said.

Toprak sees little danger of automakers going back to their old ways.

"They learned valuable lessons and the new structure of companies should prevent it. They are more flexible organizations and the emphasis is on profit, not market share."

Car buyers' thirst for options pushing prices higher 05/17/12 [Last modified: Thursday, May 17, 2012 4:30am]
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