Cash for Clunkers – Who Sets the Price?

 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:

*  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.