Cash For Clunkers, the potential downsides and unintended consequences
In the flurry to give Cash For Clunkers – sorry, C.A.R.S. – a very quick $2 billion extension last week, some of the more critical voices of the program were drowned out. At the very least, their effort was in vail. It may be too late to stop the bill from becoming law, but it's worth it to think through some of the possible unintended side effects of paying people to junk their cars. First up, the damage to the used car market. The August Kelley Blue Book Market Report predicts "a likely bubble in used-car values, which could deflate as the Cash for Clunkers program comes to a close." This means that with the overall reduction in used car availability, up to 750,000 when all is said and done, Kelley Blue Book expects the price of used cars to go up in a serious way once C.A.R.S. ends later this fall. Ironically, this will then lead to deep discounts, says KBB's senior analyst of vehicle valuation Alec Gutierrez:
Another negative effect of C.A.R.S. is that the money used to fund C4C is coming from a program in the stimulus bill that was used to guarantee the Department of Energy's loans. Sam Jaffe, senior research analyst of renewable and distributed energy strategies for Energy Insights, writes over at Green Tech Media that this is exactly "the wrong place to pinch from." Jaffe says that this program is, "in effect, the single most effective method of stimulating economic activity with the least cost to the government." Instead of spending $2 billion on C.A.R.S. to get $2 billion of stimulus, leaving the money in the loan guarantee program would result in "at least $20 billion worth of economic activity, all of which will have to take place on U.S. soil," he says.If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down. Ultimately, there will be the possibility of a severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding.
More C.A.R.S. skeptics can be found in the Automotive Aftermarket Industry Association (AAIA) which has been fighting Cash For Clunkers for months. The AAIA recently released a statement saying that simple vehicle maintenance "would save consumers $30 billion in gasoline a year vs. spending $3 billion in taxpayer dollars to buy new cars." Read their full statement after the jump then, for a laugh, check out the skeptics that The Onion found.
[Source: Kelley Blue Book, Green Tech Media, AAIA, The Onion]
Photo by dno1967. Licensed under Creative Commons license 2.0.
PRESS RELEASE:
Cash for Clunkers to Cause Used-Car-Value Bubble
August Kelley Blue Book Market Report Offers Forecast of Used-Car Industry After Cash for Clunkers
IRVINE, Calif., Aug. 7 /PRNewswire/ -- Kelley Blue Book, www.kbb.com, the leading provider of new car and used car information, today reveals possible effects of the Cash for Clunkers program on the used-car industry as reported in the company's August 2009 Blue Book Market Report. As dealers and consumers continue to take advantage of this program, Kelley Blue Book analysts forecast a likely bubble in used-car values, which could deflate as the Cash for Clunkers program comes to a close.
With $1 billion spent and more than 250,000 new vehicles sold, the success of the Cash for Clunkers program cannot be argued. With more than 250,000 vehicles leaving the used-vehicle supply, this equates to a 0.8 percent reduction in the overall supply of used vehicles (based upon sales of 16 million used vehicles in 2008). When the Senate signs off on an additional $2 billion funding for the Cash for Clunkers program later today, it could equate to an additional 500,000 used cars being removed from the overall used-vehicle supply, which is a 2 percent overall reduction in supply this year alone. With a total of 750,000 vehicles being removed from the marketplace, dealers are stocking up on used inventory in anticipation of low supply and high demand. This scenario is driving used-car prices up significantly in the short term, causing a bubble in values that will seriously impact used-vehicle values when the Cash for Clunkers program ends.
"Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery," said Alec Gutierrez, senior analyst of vehicle valuation for Kelley Blue Book. "As a result, dealers are going to auction to restock inventory, driving up used-car values. However, the effect of a supply reduction of this magnitude could have an immense impact on these values in the short-term, exacerbating the already-limited supply at auction. If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down. Ultimately, there will be the possibility of a contraction in auto sales as soon as the Cash for Clunkers program runs out of funding."
According to a Kelley Blue Book Market Intelligence study on the Cash for Clunkers program, 1-in-10 new-vehicle shoppers said they are likely to purchase sooner as a result of the government-sponsored program. In addition, 45 percent of consumers likely to participate in the program own a sedan, followed by SUV and crossover owners at 25 percent. Among that group, 37 percent plan to trade in their clunker for a sedan and 28 percent plan to buy an SUV or crossover. The top brands being considered among study participants are Toyota, Ford, Honda and Chevrolet.
This Kelley Blue Book Market Intelligence study was fielded to 517 in-market new-car shoppers on Kelley Blue Book's kbb.com from July 10-17, 2009.
Kelley Blue Book's vehicle valuation department is keeping a close eye on values as the program continues and an influx of additional funds is added to the program by the federal government. For additional information, please visit www.kbb.com/media for the latest Blue Book Market Report. If you would like to subscribe to the monthly Blue Book Market Report, please email pr@kbb.com.
About Kelley Blue Book (www.kbb.com)
Since 1926, Kelley Blue Book, The Trusted Resource , has provided vehicle buyers and sellers with the new and used vehicle information they need to accomplish their goals with confidence. The company's top-rated Web site, www.kbb.com, provides the most up-to-date pricing and values, including the New Car Blue Book Value, which reveals what people actually are paying for new cars. The company also reports vehicle pricing and values via products and services, including software products and the famous Blue Book Official Guide. According to the C.A. Walker Research Solutions, Inc. - 2008 Spring Automotive Web Site Usefulness Study, kbb.com is the most useful automotive information Web site among new and used vehicle shoppers, and half of online vehicle shoppers visit kbb.com. Kbb.com is a leading provider of new car prices, car reviews and news, used car blue book values, auto classifieds and car dealer locations. No other medium reaches more in-market vehicle shoppers than kbb.com.
"Cash for Clunkers" Deal is Peanuts Compared to Good Ol' Vehicle Maintenance
BETHESDA, Md., Aug. 7 /PRNewswire-USNewswire/ -- Routine vehicle maintenance for an entire year costs a consumer less than a single monthly new car payment and would be significantly more successful in reducing gasoline use and pollution than the "Cash for Clunkers" program, according to the Automotive Aftermarket Industry Association (AAIA). Vehicle maintenance would save consumers $30 billion in gasoline a year vs. spending $3 billion in taxpayer dollars to buy new cars.
While the "Cash for Clunkers" program is estimated to save 72 million gallons of gasoline each year, simple vehicle maintenance would save more than 12 billion gallons of gasoline a year (equivalent to all of the gasoline used in Illinois, Michigan and Connecticut in one year). Additionally, vehicle maintenance does not require a dime of taxpayer money and doesn't require destroying perfectly good used vehicles that could be sold or donated to people who cannot afford a new car, reports AAIA.
"Understandably the 'Cash for Clunkers' program is wildly popular among new car dealers, car makers and those consumers who have the ability to buy a new vehicle. However, the majority of Americans cannot afford a new car payment today, but they probably can afford to trade up to a newer used vehicle or make their current vehicle more fuel-efficient," said Kathleen Schmatz, AAIA president and CEO.
"Doesn't it make more sense to give a tax credit or other incentive to the majority of Americans to improve the fuel efficiency, safety and dependability of their current vehicle, rather than taking their tax dollars to help a small minority of consumers and pump up new car dealer profits?" said Schmatz.
AAIA opposes the "Cash for Clunkers" program for the following reasons:
- The program destroys many vehicles that are not even close to being defined as "clunkers" with years of remaining life and use.
- Destroyed vehicles are removed from the market forever, depriving consumers who seek to purchase a used vehicle or charities in need of donated vehicles.
- It hurts the aftermarket companies that manufacture, distribute, sell and install vehicle parts on used vehicles, and those who rebuild/remanufacture vehicle parts.
- Resources and energy use is multiplied when a vehicle is destroyed and a new one is built to replace it.
- The majority of vehicles being traded in are domestic, and the majority of new vehicles being sold are foreign.
- The program entices consumers to purchase a new car that they might not be able to afford and certainly to go further in debt, reminiscent to the sub-prime home mortgage debacle.
- The program is regressive since only those at higher income levels who can afford to purchase a new car will qualify for the $4,500 voucher, while destroying used cars that could be purchased by lower income families, most in need of assistance in obtaining transportation.
About AAIA
AAIA is a Bethesda, Md.-based association whose more than 23,000 member and affiliates manufacture, distribute and sell motor vehicle parts, accessories, service, tool, equipment, materials and supplies. Through its membership, AAIA represents more than 100,000 repair shops, parts stores and distribution outlets.
Reader Comments (Page 1 of 1)
mike 7:40PM (8/08/2009)
But what if it all ends on a Friday and lots of poeple have taken a three day weekend and then prices go oddly neutral for several days and that causes people to stay home and then use more electricity and then those prices spike?
Oh my god..... CARS will certainly kill electric vehicle sales in their infancy!?
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rob 7:40PM (8/08/2009)
Everybody keeps making this thing out as being huge. With the $2 billion additional, there are somewhere around 650,000 old cars affected. Last year, which by all accounts was a poor sales year, 10.2 MILLION cars were sold. The 650,000 is a drop in the bucket. Compare it to 5 years ago, when 17.6 Million were sold you can see that there is a pretty good size stock of old cars out there.
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polo 8:00PM (8/09/2009)
Following their brain-dead logic used car prices should have quadrupled since only 10.5million cars were sold last year..compared to 17.5million the year before. Thats 7million new cars that weren't sold and those people are going to turn to the used car market, jacking up prices as they fight it out with other buyers.
wincros 8:17PM (8/08/2009)
That is the most confused understanding of supply and demand I think I have ever seen. 650,000 used cars(supply) out of the market - yes. 650,000 potential buyers(demand) out of the market because they now have new cars - yes. Looks like zero change to me. It is only a bubble when demand outstrips supply.
The other aspect is that the clunkers would have little or no value in the used market. Who wants a 15 year old, oil burning, 8 mpg truck? No bubble there.
I really doubt that Kelly does not understand supply and demand. They just don't want you to understand it. If Kelly reports a bubble based on their spurious prediction you will know they are part of the cabal that has said that it is trying to destroy the current administration.
The aftermarket stance is pathetic and short sighted. Any car that is not worth more than $4500 on the used market is a beater. Those cars are owned by people who do not have the money for after market parts and their old cars would be driven till they stop with the least amount of expenditure humanly possible. Ownership pride in a new car is likely to result in more sales of waxes and other appearance products than the occasional single sparkplug to replace the one that is misfiring in the clunker.
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nardvark 8:46AM (8/10/2009)
Um, my used car is worth less than $4500, but it's not a beater. It's a 2002 with 85,000 miles. I keep it waxed, so the paint is in good shape, and I maintain it, so if not for the accumulation of door dings and the dated styling, it could pass for a 3 year old car.
nick danger 8:31PM (8/08/2009)
Too bad the "effort was in vail". If only they had driven just a little further, they could have made it to Denver.
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Ian 9:13PM (8/08/2009)
Yes, a lot of low end high mileage cars worth under $4.5K dissappear from the used car market. Thus disadvantaging the poorer used car buyer.
At the other end the buyers of new cars with c4c money disappear from the low mileage 1-3 year used car market. Thus those prices fall. Advantaging the penny pinching crowd (me).
Also the progrtam robs Peter to pay Paul. In that a latendt "newish" car buyer for 2010 moves fwd into 2009. Net effect no change over an 18 month period in car sales.
The big losed? The Gvt and the Tax payer. Especially is the c4c money went to buy a true "foreign" made car.
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nixon 10:38PM (8/08/2009)
What people seem to forget is that MILLIONS of car buyers who normally would have bought a new car in the last year DID NOT buy cars.
But they still drove their cars. Meaning there has already been a pent up demand for new cars that is an order of magnitude larger than the few hundred thousand of vehicles sold under the CARS program.
So what is really happening is that the CARS program is just nudging the market back towards what it should have been without the crash in the economy.
And the amount of stimulus to the economy is WAY more than just the 3 billion the Gov't is spending. Because there is no such thing as a $3,500 or $4,500 dollar car, car buyers are laying down many more times the amount the Gov't is laying down.
A VW TDI buyer paying $22,500 of their own money, is multiplying the gov't stimulus by 500% straight off the bat. Then add in the stimulus to the junkyard that makes money parting out everything except the engine, the tax revenue for the state in sales tax, car buyers who don't qualify for the program but buy anyways, etc, and the gov't is getting MUCH MUCH more stimulus effect then building a road.
Build 3 billion in roads, you get 3 billion in stimulus. Spend 3 billion on CARS, and you get many many more billions of stimulus then just the 3 billion.
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lne937s 11:27PM (8/08/2009)
"spending $2 billion on C.A.R.S. to get $2 billion of stimulus"
Only if they are buying $3500-4500 new cars (if you can find a new car at that price that qualifies for the program, let me know) ... I think it is safer to assume that they will buy cars at 5 times or more that much ($17,500-22,500), or more than $10 Billion of stimulus for $2 billlion in spending. And the stimulus happens almost immediately, during the economic crisis, rather than some time in the future. This additional $2B is much more effective at stimulating spending than the equivalent 3 days of the tax cuts that went into effect last April (much of which was saved, rather than spent).
I agree that we should heavily invest in energy R&D for long-term prosperity, but the ROI is years down the road. We need to stimulate the economy now.
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David Martin 5:48AM (8/09/2009)
wincros said:
'Any car that is not worth more than $4500 on the used market is a beater. Those cars are owned by people who do not have the money for after market parts and their old cars would be driven till they stop with the least amount of expenditure humanly possible.'
This statement makes no sense in the context of Cash for Clunkers.
Most who drive old cars do so because they can't afford a new car, but they are not going to benefit from the program.
By definition only those who have one, perhaps as a second or third vehicle, can benefit as they are the only ones who can go out and buy a new car, even with the discount.
This is a perk for the well off, and does nothing for Americans in desperate trouble and loosing their jobs and houses - they won't be buying any new cars.
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Arslan 8:20AM (8/09/2009)
You can't improve the mileage by 10 mpg doing the maintenance.
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KM 10:34AM (8/09/2009)
In the land of fuzzy economics, I too wear an economist hat.
Here's my make-believe scenario.
The $4,500 encourages buyers of slightly used late model not-new cars to step up to a brand new car.
CARS creates a lack of demand for slightly used off-lease and late model cars (1-3 years old, let's say), which decreases their value/price.
Therefore their prices go down and guys who woulda bought something cheap and crappy (3-6 yrs old) step up to something less crappy and slightly better - the off-lease late model.
And it works its way down the system, just like that. So in the end everyone is better off than they woulda otherwise been, even Mr. Beater-driver.
Fun with fuzzy math or realistic scenario? Hmmmm....
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Storms24 12:26PM (8/09/2009)
One thing I've been curious about: Since most clunkers are probably paid off already, doesn't this program actually encourage more people to go into debt? Instead of a paid-for asset, these folks now will have a monthly car payment and a (likely) higher insurance premium - especially since they likely only carried the bare minimum on their clunker.
Another unintended consequence: since all of these vehicles must be crushed (not salvaged or resold), wouldn't it be reasonable to see the scrap metal market prices fall as well? And what of the environmental impact?
I don't pretend to know the answers to these questions - but with an estimated 250,000 new car sales under this program, I gotta think these things will have an impact.
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mike 4:47PM (8/09/2009)
I think the debt argument is reasonable but not timely.
Right now... we need people to spend.
Even though historically and in the future we need people to save more and have less debt.
Think of it like an out of shape person having a heart attack.
More time on the couch is not what they needed previously or what they need long term but it is essential to their viability that they do just that for the immediate future until they are rehabilitated enough to gradually work back into the more responsible mannerisms that will help ensure long term health.
That's my take....
polo 7:25PM (8/09/2009)
"One thing I've been curious about: Since most clunkers are probably paid off already, doesn't this program actually encourage more people to go into debt? Instead of a paid-for asset, these folks now will have a monthly car payment and a (likely) higher insurance premium - especially since they likely only carried the bare minimum on their clunker"
Almost all lenders now require high credit ratings and income data for you to qualify for a new car. In case you didn't know, consumer spending continues to be driven by borrowing and financing. If they can afford AND qualify for a new car I think they can bear the burden of higher insurance. Not exactly sure what you were getting at but there is no negatives in regards to this.
polo 7:48PM (8/09/2009)
That idiotic analysis is what happens when editors let people with ulterior political motives write what they want..and don't call them on it.
Even if a million cars were took off the roads the effects on the used car market would be negligible. First off there are 257MILLION cars on the road. To suggest there would be a sudden jump in used car prices because .3% of 257million cars were taken off the road is stupid. Then you look at what cars are most likely to qualify: older, low-mpg SUVs and caravans...these are vehicles with already severely depressed resale values due to the fact NOBODY WANTS A LOW MPG CLUNKER in this environment were gas can unpredictably jump to $3. In other words, these are cars people won't even notice or can't sell if they wanted to.
This article uses some very fuzzy math. It assumes every car brought in under the C4C program would otherwise be resold within a year....how do they reach this conclusion?? Did they survey the people who handed their cars in? How do they know these people wouldn't have kept their clunker because they otherwise wouldn't or couldn't pay retail for a new car? They use a completely unsubstantiated variable as the entire premise for their argument. Then the writer assumes dealers can't differentiate foot traffic resulting from the cash4clunkers program from regular buyers and will flood their dealerships with used cars? Does anybody else think this sounds like completely implausible?
Dealers go by interest and sales...if there is an increase in sales due to a very temporary government rebate...why would dealers stuck up on inventory they'd have to sell when the rebate program ended? They wouldn't. In fact if you read the news the opposite is happening - dealers are keeping their inventories low because they are unsure how long the program will go on. I could keep going on but you get the point.
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Marion 9:06AM (8/10/2009)
To be fair, we were in a used car 'bubble' *before* the CARS deal. Consumers weren't willing to buy a vehicle that lost over a tenth of it's value right off the lot, and so dealers weren't willing to 'deal' on their used stock, because those cars were moving a lot faster. Dealers that could buy a newish lease vehicle and sell it same-day and make good profit. Frankly, I would think most of them are happier selling new cars.
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Byron Thomas 12:24AM (8/11/2009)
Cash for clunkers, should have been about $1000ea for CLUNKIEST OF CLUNKERS....and funded with a $1gal gas tax. It does no good for the Gov't to pay people (a lot) to buy all new cars....if we don't have less cars on the road too with the tax revenue to reinforce it. THAT IS HOW YOU PAY FOR ANY KIND OF CLUNKERS PROGRAM...sort of what I wrote about here back in October.
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Byron Thomas 4:41PM (8/10/2009)
You see, one big purpose of a C4C plan is just to have less cars on the road. So, $1000 for the crappy cars (you must own it a year, have insurance, and registration at time of C4C) gets those really bad cars off the road and SPEND THAT $1000 ON ANYTHING YOU WANT! Maybe a Bike, to further reduce global warming! I thought sort-of that was the point of Cap and Trade too.
But, the world and Detroit could use the jobs too. OK, you win.
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