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.
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