Growing demand, fewer incentives boost prices for fuel-efficient cars

The economy car, for years viewed by many Americans as the unwanted misfit of U.S. showrooms, is fast becoming a jewel that doesn't come cheap.

Growing consumer demand for fuel-efficient cars, tight supplies, and automakers' cutbacks in recent months on incentives such as cash rebates and financing deals have increased prices for compact cars, and industry analysts say it's not clear when the trend might ease.

Want a small Honda? Toyota? Ford? Don't expect dealers to do you any favors. And don't expect a vast selection, either.

The high cost of gasoline has fueled consumer appetites for smaller cars just as manufacturers - for reasons that include, but are not limited to, troubles in tsunami-battered Japan - have been sending fewer new cars to dealerships.

Those factors contributed to lower-than-expected sales of new vehicles last month, according to data released Wednesday by the automakers. Gas prices, which hit a high in May just as incentives were vanishing on smaller models, contributed to an 8.4 percent drop from April in the number of new vehicles sold.

"With the supply shortages, obviously they backed off of incentives," said Jessica Caldwell, senior analyst for car-buyer website Edmunds.com. "And that is something that's going to continue for the next few months . . . contributing to net price increases."

General Motors, Ford, and Chrysler, in that order, sold more vehicles in the United States last month than anyone else, including Honda and Toyota, Caldwell said.

That's partly because production problems related to the earthquake and tsunami in Japan have limited the number of vehicles being churned out by Japanese factories.

GM and Ford also were aided by their introduction over the last year or so of appealing fuel-efficient models such as the Chevrolet Cruze and Ford Fiesta. Those companies are now competing in small-car categories that Japanese and South Korean automakers had dominated for years.

Why, then, are prices up?

One reason is car buyers themselves. Their fuel-efficiency mind-set came through in a Consumer Reports National Research Center survey this spring of people in households with at least one car.

In that survey, conducted between April 28 and May 2, more than half the people said they would be willing to pay extra for a more fuel-efficient vehicle. Nearly twice as many said they would buy a more fuel-efficient vehicle than those who planned to buy a vehicle with similar fuel economy to the one they now have.

Another reason is production-related.

In the case of supply-challenged Japanese automakers, production problems have cut inventory. To keep cars from flying off dealers' lots, manufacturers reduced or eliminated incentives.

"Honda took a lot of the brunt in terms of having a low supply," Caldwell said. "A lot of their incentive programs were dropped, prices were high."

Not counting incentives, Caldwell said, the price of a Honda Civic or Toyota Corolla could be "upward of $1,000" more than it was before February's earthquake.

Overall, incentives offered on compact cars - a category that includes the Corolla, Civic, Cruze, Ford Focus, and Hyundai Elantra - are less available than they've been in years. Even though incentives are generally more plentiful for larger vehicles, overall they have reached their lowest levels since 2005, according to Edmunds.com.

In May 2010, incentives on compact cars averaged about $2,400. By April, they had fallen to $1,378. Last month, they slipped to $1,059, Caldwell said.

In Ford's case, lean inventories are largely the result of a decision over the last few years to reduce production to avoid inventory gluts at dealerships and firm up prices.

"Year over year, we're seeing transaction prices up about 20 percent" for compact cars, said Thomas King, senior director at J.D. Power & Associates.

One reason: Models have been introduced or updated with costlier accessories, such as the redesigned Civic launched this year.

"That's not to say that the same vehicle you bought a year ago costs 20 percent more," King said. "That's not actually true. What we're seeing is that some of those vehicles are being sold with fewer incentives, so they cost more to buy. In addition, people are buying smaller vehicles with higher level of content."

Industry analysts believe demand and prices will remain higher, at least until domestic and Japanese automakers boost production enough to send more vehicles to the dealerships.