Empty lots, long waitlists, high prices: Twin Cities car market is at an extreme moment

Jim Palusky wasn't planning on shopping for a car this fall, but then he got an offer he couldn't refuse.

Walser Toyota in Bloomington said it would buy his 2019 Tacoma pickup for just $1,500 less than he paid for it, even though he'd driven it more than 30,000 miles in a year and a half.

"I couldn't believe it was for real," said Palusky, a retiree from Maple Lake who makes frequent trips to Duluth. "Everybody I talked to said I was crazy not to trade up."

While other segments of the economy are still trying to recover from the pandemic, the auto market is reaching new heights. With manufacturers unable to ship enough new vehicles due to parts shortages, prices for new and used vehicles are skyrocketing. Some customers making trades are even getting more than they originally paid.

Walser Toyota is one of those dealerships scrambling for inventory. It usually stocks 600 new cars, but it had none on display during the Thanksgiving-Black Friday weekend. As this weekend began, its waitlist for new cars had 484 names.

To keep its lot filled, managers are contacting recent customers with generous offers for their vehicles. Showroom space for new cars is now occupied by used cars and extra tables for cutting deals.

Palusky sold his 2019 pickup for $32,500 to the dealership on the Saturday after Thanksgiving. Normally, the truck's value would have depreciated 30% in its first year. Instead, Palusky's price is time: The 2022 Tacoma Sport he bought as a replacement won't arrive until next month.

"It's unprecedented," said Scott Lambert, president of the Minnesota Automobile Dealers Association (MADA). "I've been doing this for 30 years and I've never seen the market look like this ever."

Although used car prices typically drop in the fall, they were up an average of 37% through October compared with the previous year, according to J.D. Power Valuation Services, a leading market watcher.

Rising prices for used cars and trucks are a key factor in inflation this year. Consumer prices overall were up 6.2% in October compared with a year ago, with used cars and trucks up 26%, government data show. November's numbers will be released Friday.

Meanwhile, dealer profits have soared. According to the National Automobile Dealers Association, the average U.S. dealership recorded net pretax profit of $3 million through September. That is well above the record profit of $2.1 million reached by the typical dealer for all of 2020.

The problem, according to market analysts, is that the auto industry was unprepared for a spike in demand during the pandemic that was partly fueled by the government's multibillion-dollar relief program. Instead of ramping up production, auto makers idled factories and reduced orders for the computer chips needed to operate today's sophisticated vehicles.

As a result, inventories are reaching lows unseen since World War II, when manufacturers diverted production at many factories for military vehicles. The market isn't expected to return to normal until 2023.

"Demand went through the roof because people had all of this money they couldn't spend on concerts and dinners out and airplane trips," said Jamie Butters, executive editor of Automotive News, a leading trade publication. "People started buying the nicest vehicles they could afford. If you could go anywhere, you wanted to drive."

In Minnesota, where dealers used to keep at least 60 or 70 new vehicles on the lot, it's rare to find anyone with more than a handful of new vehicles now, according to Lambert. Most buyers are pre-ordering the vehicles, which can take months to arrive.

For buyers, the market can be cruel. Most dealers have cut way back on rebates and other incentives and instead are sticking customers with so-called additional dealer markups, which can add tens of thousands of dollars to the purchase price and has led to complaints of gouging.

Pete Swenson, senior vice president of Walser Automotive Group, said the biggest markup he's seen involved a Seattle dealership, which was seeking $96,000 for a new RAV4 — $45,000 above the manufacturer's suggested retail price.

Swenson said dealers have been more reasonable in the Twin Cities, where the biggest markup he has seen recently was $5,000 for a new Ram pickup at a competing dealership.

"I'm sure you could make $15,000 extra on some cars if we wanted to, but I don't think that is a great thing to do," said Andrew Walser, CEO of Walser Automotive. "It gives dealers a bad name. ... And it eliminates that person as a customer in the future."

Walser was the only major auto dealer in the Twin Cities willing to discuss the current market. Other leading dealers declined to comment or make anyone available for interviews.

"I know dealers are getting top dollar for vehicles right now ... but I don't think the word 'gouging' is a fair word here, honestly," MADA's Lambert said. "I think there are some basic laws of supply and demand going on, and the market is responding to that."

Across the country, dealers were charging an average of $800 above the sticker price for new cars in October, vs. $2,300 below the manufacturer's suggested retail price (MSRP) in 2019, according to Kelley Blue Book, another leading market analyst. Butters said average transaction prices haven't topped MSRP in decades.

Many customers are experiencing sticker shock.

Angel Phillip said she almost burst into tears when she first visited Walser Toyota in November, two days after someone totaled her RAV4 in a parking lot accident. Phillip wanted to spend about $17,000 to replace her SUV, and she didn't want a vehicle with more than 20,000 miles.

She quickly found out she had to adjust her expectations. She wound up spending an extra $3,000 for a vehicle with more than 40,000 miles on it. "It was very disappointing," she said.

Deirdre Mulvey spent $16,000 last week for a 2013 Honda Pilot with 120,000 miles on it. Mulvey said a similar Pilot cost her $5,500 less a couple years ago. "You can't find that kind of deal right now," Mulvey said. "Be prepared to spend more."

Though it's a lousy time to buy a car, it's a spectacular time to sell one. Adam Burnside was offered $14,000 for his 2014 Kia Soul last week by Carvana, an online used-car retailer. That's more than twice what he paid for the car in 2020 and a healthy premium above the $9,400 Carvana offered him earlier this year.

"It's absolutely unbelievable," Burnside said. "I am not 100% sure it makes sense to do it, but I am probably going to sell it."

Carvana is paying more than local dealers on many vehicles, according to market experts, but the company also has drawn hundreds of complaints to the Better Business Bureau.

"They do not have a good reputation," said Lambert at MADA. "Their vehicles can be over-priced and they have a history of leaving problems with their customers."

A spokesperson for the Minnesota Department of Public Safety said the agency is still evaluating MADA's complaint.

A Carvana spokesperson said the company is "committed to serving its Minnesota customers a great car-buying experience and consistently reviews regulations and communicates with public officials to ensure compliant operations in all of our markets."

Joseph Juntune said he decided against taking the $17,546 he was offered for his 2017 Toyota Corolla by Carvana last week for a vehicle that cost him $14,100 in 2020. He said he compared Carvana's prices to local dealers in Virginia, Minn., and the online retailer was 5 to 10% higher on comparable models.

"We don't want to have to buy a car in this market," Juntune said.