In the discussion following yesterday’s Cash for Clunkers article, John Rodes made an excellent point:
"It IS obvious that different "factors" are "present" and the most obvious is price. Simply stated, the typical trade-in with 65,883 miles is worth MORE than the $3500 – 4500 rebate range. A decent four- or five-year-old car with 65k mi is probably worth a minimum of $5,000 unless it’s a low-end, beat-up piece of junk.
Think about it. That’s the POINT of the CARS program: you can trade in a clunker that isn’t worth $4,500 and get $4,500 for it." – J. Rodes, esq.
He’s right, you can trade in a vehicle that isn’t worth $4,500 and get a $4,500 voucher toward the car you purchase. The question is, who tells you whether the car is worth $4500 or not? The dealership.
I used to be a car salesman. A very very bad carsalesman. Two cars sold in as many months. But, I learned a bit about how car dealerships work.
Normally someone who wants a new car will take their car to the dealership, the dealer will inspect it, look up the Kelly Blue Book value, and then try to give you slightly less for it by giving a bunch of (usually) bogus reasons. These reasons can include, "The KBB value is too high because the auto auctions are flooded with these types of cars," "You’ve got a scratch on your door, and we’ll have to paint it," or, "We don’t sell your brand here, so we’ll have to take it to another dealership, but you won’t make as much at the other dealership because flying monkeys are coming out of my butt."
That type of logic still exists with the CARS program, but there’s an added twist: The program has encouraged people to get rid of their cars and has already gotten the idea in their head that their car is probably a "clunker."
But if we look at the list of top 10 clunkers, and then look at Kelly Blue Book’s Cash for Clunkers calculator there are some interesting results:
|
Clunker |
KBB Price ‘04 |
KBB Price ‘03 |
KBB Price ‘00 |
|
1. Ford Explorer 4WD |
6000 |
4975 |
2450 |
|
2. Ford F150 Pickup 2WD |
5850 |
3225 |
2600 |
|
3. Jeep Grand Cherokee 4WD |
5575 |
5125 |
3525 |
|
4. Jeep Cherokee 4WD |
6975* |
6550* |
2850 |
|
5. Dodge Caravan/Grand Caravan 2WD |
5275 |
4575 |
2925 |
|
6. Ford Explorer 2WD |
7675 |
3950 |
1775 |
|
7. Chevrolet Blazer 4WD |
4625 |
4325 |
2950 |
|
8. Ford F150 Pickup 4WD |
7000 |
3550 |
3925 |
|
9. Chevrolet C1500 Pickup 2WD |
5075 |
4625 |
3900 |
|
10. Ford Windstar FWD Van** |
2650 |
3800 |
1275 |
|
# Qualify as Clunkers |
1 |
5 |
10 |
|
Average Price |
5670 |
4470 |
2817.50 |
* Cherokee was discontinued in ’02, so the Liberty is used instead.
** Windstar replaced by Freestar in ‘04
We only need to go back to 2003 for half of the top 10 clunkers to qualify using only the KBB trade-in values.
In fact, a 2004 Ford Freestar is already a "clunker". Now, admittedly, it’s a real piece of crap, but hardly a clunker.
The problem is in the misleading term "clunker". The use of this word implies that these cars are really beat up, have very high mileage, etc. But for a car to qualify it has to be less than 25 years old, is driveable, and has had insurance for the past year. Barring Texas and Illinois, the states with the highest number of trade-ins all have yearly safety inspections, so if a car meets the requirements it also means they have passed their safety inspection within the past year.
But the situation is further complicated by the dealers. Let’s say they get an ’04 Ford Explorer–the Explorer being the number one "clunker". KBB values it at $6000, and resale is normally about $8000. If they sold it that same day for that price they’d make about $1200 on the vehicle.
However, they really want to sell their ’09 Chevy Suksabunch at $28.6k, which will net about $5500. They’ve got a customer who has been encouraged to buy the Suksabunch because they know they can get $4500 knocked off the price so they’ve got a hot lead.
They also have no idea if anyone is going to buy the used Explorer. The longer the car sits on the lot, the lower their margin goes. It works out to around $1000 per car per month to have it sit on the lot. In this market they doubt they can sell an ’04 Explorer in less than 30 days for the $8000 price.
Therefore, it makes more economic sense to the dealer to take the clunker voucher for the Explorer and make the sale on the Suksabunch. It’s a smart gamble: Although they could potentially make more if they treat it as a trade-in, the odds are against them.
Now, take it back only one year prior to that and half of the cars on the list are considered clunkers. I’d say that probably all ten of them will be treated as clunkers by the dealerships.
Here’s another point about destroying these cars–a point which is even more relevant when we realize that these "clunkers" aren’t quite as "clunkery" as we might be lead to believe: Why not send these cars to Africa or third-world nations where they can be used as family cars, converted to work vehicles, etc.? Even at 15.3 mpg, these vehicles are significantly less polluting and more fuel efficient than what’s being driven there (Hindustan Ambassador anyone?).
This is goes back to my fundamental point: This is a program that encourages wastefulness. There is no good reason to scrap an ’04 Ford Freestar when there are people who can use the vehicle.
3 responses to “Cash for Clunkers – Who Sets the Price?”
Uh huh.
You’re grasping a straws, Mike. Let’s rewind and get back to the point.
You started off using, as your “typical clunker”, a car that had 80k miles on it and was just over five years old. No one has suggested that the CARS program won’t include some five-year old cars.
My point was, and remains, this: What you held out as a typical or average case to support your general economic conclusions was not in the least typical. At best, you are cherry picking by using an example that is on the extreme margin of the actual distribution.
That chart of yours confirms my objection, namely, that with the exception of the Windstar, the mean or median value for all of trade-ins listed for ’04 is well above the clunker range.
As for whether or not people get suckered by car salespeople, what can I say? Some do; some don’t.
Theme for a new movie:
Re: Uh huh.
This is what happens when we’re both at our parents’ houses and bored….
Anyway, if you object to these being typical cars, what would you suggest is more typical?
We already know what the top 10 are, so my guess is that you’re saying the conditions are more likely to be these 10 cars with 130,000 miles and are 8-9 years old. If so, that coincides with the chart above in that all 10 of those cars are “clunkers”.
Even if that’s the case, I still see this as being wasteful. Those cars shouldn’t just be destroyed–there’s someone that can use them.
I think you might be looking at this from the advantage of, well, having grown up in an affluent suburb where most people buy new cars. But there are plenty of folks who can neither afford a new car, nor can they afford a five year old car.
We know that these vehicles are still useful based on the requirements: They had to have been insured, and they have to be driveable. That inherently means they’re still useful.
Don’t take this to mean I’m opposed to the intentions of getting people into more fuel efficient vehicles, either. I’ve been opposed to SUVs for years and had complained about the general trend toward SUVs and trucks as well as the steady decline in fuel economy since at least the early ’90s.
As a car guy, and especially as a Land Cruiser collector, I know that SUVs and trucks serve a limited number of functions (though serve them very well), and they were not at all fit for the general public. Also, as a car guy, I appreciate efficiency in design–hence my love for Fiats.
But even with my dislike for Explorers and Blazers–and my burning hatred for the Windstar–and my preference for cars like the Honda Fit, I can’t accept that destroying useful vehicles is a good idea.
Hmm, this gives me an idea.
Going Forward.
All the cars that my family have are limping along with over 100kM with one pain in the ass after another. I have never bought a new car in my life. I used to have an ’85 Mercury Cougar which was reliable and designed simply enough so that and I could perform many of the repair tasks myself. That thing got so craptastic that people were laughing at me for continuing to drive it. I didn’t make it anywhere near close to 250kM though, LOL. Imagine what kind of bad money I would have had to throw down for that to come to pass. HAHA.
In my perfect idea of reality, they would have built these cars to last and we wouldn’t have to grab our ankles and bend to the mercy of the industry service shops to overcome the design flaws of these cars.
Honestly, It would have been nice if your ecomomic argument had worked out. I’m afraid that I just won’t be shedding any tears at the destruction of these 8-9-10 year old cars with 130kM as you might.
You most certainly did bring a much higer level of discourse to this subject than we are seeing in the MSM. I saw a segment on CNN about this today and the best that they could come up with was some old lady who simply said, “Well, I don’t have a clunker!” You know the typical “I’ve got mine so screw everyone else. We don’t need this” argument. Real helpful! Thanks CNN.
I am disgusted by the prospect that there are people who would accept widespread poverty in Michigan at the drop of a hat. Americans have been turning their backs of this festering problem for years. It’s been 20 years since Michael Moore’s Roger and Me was produced. Watch here!
Even if there were a viable economic argument against this program, I think that the moral argument in favor of saving our manufacturing industry is very potent, and must be voiced to those who care about the American jobs infrastructure. If people were made to see what is really at stake, the people would understand the perils of allowing industry to collapse.
Going forward, it is in the public and national security interests to continue to manufacture things of value in this country again, despite the typically misguided rhetoric of the confused myopic contrarians of the political right.
Hopefully, this can also be achieved in such a way which preserves the people’s right to assemble and organize freely as well. America is supposed to be a free country, despite what Republicans want.