By on August 7, 2009

Here’s one new car shoppers won’t be reading on the home page at Kelley Blue Book. Via press release, the car guide’s boffins wonder what will happen when the federal government stops handing out free money to clunker-driving new car buyers. Unless the Cash for Clunker scheme is extended indefinitely (a possibility) and/or widened to include other types of vehicles (less possible but not improbable), the bubble she gonna burst. And then, bad things. Euphoria, meet reality.

“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 severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding.”

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36 Comments on “Kelley Blue Book: Cash for Clunkers Bubble Will Burst...”


  • avatar

    I see this as different than when manufacturers pull ahead the market. the customers taking advantage of Clunkers for the most part wouldn’t have bought new anyway, and the market has anticipated this for months so the demand was built in advance rather than robbed from the future. hence the dramatic and immediate sales burst.

    while I disagree with our government meddling in the market, disrupting values, destroying viable transportation, and deepening the deficit, certainly the impact on sales has been a boon to those of us in retail.

    the more likely bubble to burst is the one being blown up by the media’s promoting that the recession appears over.

  • avatar
    threeer

    This is one of those “well, duh!” articles. I can’t imagine that anybody is thinking that the surge in auto sales will continue one day after C4C ends. While the artificial high the dealerships are on now is a real buzz, the crash will be sudden and brutal. I’d be holding off looking for a used car purchase for now until the program winds down and prices on used cars start falling again.

  • avatar
    PeteMoran

    C4C’s finish doesn’t have to be a light-switch or a pin-prick for any “bubble”. Maybe the Administration will just soften the wind down by ramping it “off” over many months, or restricting the conditions, lowering the dollar value etc…

    Me thinks people want failure here.

  • avatar
    AKM

    Well, yes. It’s gonna hurt when it’ll stop, and in the meantime, it hurts the treasury’s coffers…

  • avatar
    no_slushbox

    When cash for clunkers is over the massive discounts that should be being offered now will be back.

    I’m buying or leasing a new car soon, but not until cash for clunkers is over.

    Unless you have a really horrible “clunker” you are an idiot to buy a new car now, while the government is using your money to artificially inflate new car prices.

  • avatar
    gslippy

    Sugar highs always end badly.

  • avatar
    tced2

    This is a distortion of the car market. Orchestrated by the District of Control folks. Of course it will end with unintended consequences.

    Instead of creating “new” sales of autos, this program is creating “pull ahead” sales. When the program stops, there will be a lull of sales.

    I haven’t figured out how helping pay for my new car is a better use of the money than helping pay my mortgage. Oh wait a minute, the District of Control isn’t (directly) in the home building business (yet).

  • avatar
    The Walking Eye

    Unless you have a really horrible “clunker” you are an idiot to buy a new car now, while the government is using your money to artificially inflate new car prices.

    It depends on the brand, slightly, and the car you’re looking at. Take Subaru, VW, and Hyundai. They’ve all been doing fairly well and I haven’t seen the deep discounting in my neck of the woods. I’ve been to multiple VW dealers and they aren’t dickering at all on the TDIs. Subaru is only offering real cash on the hood for left over ’08s, and Hyundai is using gas schemes to get people in there. I think if you don’t have a clunker to trade in, you’ll still be able to get a fair deal but you may have to dig in a little more.

    Of course, I hate car shopping and only buy vehicles I get employee discounts on so I don’t have to deal w/ the asshole salesmen.

  • avatar
    spatula6554

    to threeer & gslippy

    I completely agree…anyone with half a brain could have made this statement days before C4C started. What I don’t understand is, why the manufacturers got their panties in knots because their inventory went from 81 days to 64 days…wasn’t one of their major problems having too much money tied up in their excessively large inventory?

    Why didn’t the Big 2.5 maintain their normal level of production (at that time is was completely stopped) and then sell from their inventory?!

    Instead they up their production, increase their inventory in anticipation of C4C, and when C4C ends, they are back where they started…funds tied up in sub-par vehicles sitting on dealer lots which no one will buy without the government using their own money to put a down payment on it for them.

    This program, as those intelligent enough have said before, was not thought out as well.

    Congress wanted a boost to car sales with a piece of legislation that gets environmentalists of their back. They got it…momentarily.

    One last thought…completely not tied to this article at all…

    Do you think GM purposely delayed the release of the Camaro while they slid into bankruptcy? Kept pushing off guaranteed car sales until such a time as they absolutely needed them?

  • avatar
    Ingvar

    The C4C drives up prices of both used and new cars, as everybody and his uncle wants to cash in. What will happen when the program stops?

  • avatar
    Steven Lang

    Folks, you can not replenish your new car inventory by buying used cars. If the wise souls at Kelly think that Cash for Clunkers is going to be sustained by the used car inventory at the auctions, they’re nuttier than my SIL’s fruitcake.

    As someone has already mentioned… this program was written with permanent marker. At least this will be the case until the economy recovers.

    In otherwords… wait for 2020.

  • avatar
    PeteMoran

    This program, as those intelligent enough have said before, was not thought out as well.

    C4C might yet prove to be about as effective as any government expansionary spending could possibly be.

    The dunces will be those re-reading their battered discard copies of Atlas.

    What will happen when the program stops?

    Stops?? Stops?? No chance of another alternative?

    How ’bout “winds down as economic conditions improve”?

  • avatar
    no_slushbox

    The Walking Eye:

    There are some rare cars that dealers wouldn’t haggle on even if there was no cash for clunkers (maybe the TDI), but cash for clunkers is making dealers less like to deal on the 99.9% of cars that would not be in high demand if not for C4C.

    The most reliable negotiation tactic, leaving and not coming back until the price is right, is much less likely to work now that C4C has lowered inventory levels and provided dealers with a steady stream of lay downs.

    Sidenote: Don’t think of the salesman as an asshole, it does not help to bring emotion into it. Car salesmen are proud, and won’t deal if you rub it in their face that they are one step above selling watches at the mall, that the market sucks or that a particular car is overstocked. They know. Just check out the car, be polite and walk away. They’ll call you back – as soon as cash for clunkers is over.

  • avatar
    Angainor

    As a production planner for a major automotive company I can say for a fact that this program will do 2 things:

    1. It WILL bring in auto sales that would not have happened without the program. What percentage is debatable but a significant number of these sales are new sales.
    2. It will allow dealers to reduce inventories which will allow the manufacturing plants to get back into a stable, maintainable rate of production. Even if CfC does pull some sales ahead, our plants will have to work full time with increased production to replace the inventory, instead of running 4 days/week or reduced shifts.

    Will the industry maintain a 19.6 SAAR after the program is over? Of course not. Like Threeer says above “Well duh”. But just like the 19.6 SAAR during CfC is not sustainable, the sub 10.0 SAAR we have had for the last 6 months is not sustainable either (unless everyone plans on keeping their current vehicles for a full 25 years). What’s going to happen is that sales will drop off but likely to a rate well above 10.0 which will be driven by the improving economy and the need to replace cars.

  • avatar
    Lokkii

    Thank you for the insight Angainor.

    If I’ve got this right the actual merits of C4C really don’t have anything to do with consumers.

    It’s about transfer of wealth to the car companies and dealers using consumers as an intermediatary.

  • avatar
    jkross22

    I guess there are enough consumers (if there was ever a word to describe ‘mericans, that’s it) believing they’re getting a smokin’ deal on a new car through c4c.

    Weird, as the normal level of distrust with dealers seems to have melted into the background. Now, instead of being an adversary, the car dealer is suddenly a partner in finding that perfect, taxpayer subsidized car?

    Americans love a deal, or maybe it’s just that we love the perception of a great deal.

  • avatar
    Pch101

    I don’t buy this at all. The program is simply not large enough to have a substantial impact on pricing.

    Compare the numbers of cars impacted by the program with the level of new and used car sales, and you can see that it’s quite small.

    It’s about transfer of wealth to the car companies and dealers using consumers as an intermediary.

    Not really. The primary goal is to create an economic stimulus. The government puts up $4,500, and the consumer steps up with another $15,000-25,000 worth of consumption. Of that $4,500, a good $1,000-2,000 is going straight to a state government in the form of sales taxes and registration fees.

    If the program generates a lot of sales, both directly and indirectly, that would have not occurred otherwise, then it should create a good temporary lift for GDP, which encourages economic growth elsewhere in the economy. You have to step back and look at the big picture to understand the merits. Not a perfect program, but probably better than nothing.

  • avatar
    johnthacker

    the customers taking advantage of Clunkers for the most part wouldn’t have bought new anyway,

    The numbers seem to belie this. Some of them wouldn’t, but it’s still very much an open question what percentage of people would have bought new.

  • avatar
    marc

    Good points Angainor and Pch101.

    Pulling slaes forward may be the only drawback of any stimulus plan. But if we don’t pull them forward, they may not happen at all. And a few months of this stimulus may get us through to a more natural healthy period where sales pick up on their own. If the economy collapses further before that time happens, sales may never pick up.

    Some sales have inevitably been pulled forward. But many sales are new and many more sales will occur now that pump has been primed.

    Not to mention the myraid other benefits (sales tax revenue, jobs, dealer profits, clearing inventory, fuel economy, emissions, safety, etc). Scary how well a gov’t plan can work, huh. That’s what people are really afraid of.

  • avatar
    dolo54

    Take this into account, the percentage of people who would’ve kept their Explorers without the program now, would keep their Explorers without the program in the future, even post-recovery for some time. Unfortunately this percentage is not being measured. It would be great if they took a survey of people who used the program and found out how many would’ve bought a new car anyway. Without that data, you can claim this is an artificial bubble that is robbing car sales from the future, but I think you have to admit, it’s probably more than a small percentage of sales that wouldn’t have happened for quite some time. As a jump start to the auto industry, it’s working as intended and better than expected. I think it really is keeping people employed who would be out of a job this minute. It’s hard to say if this was the best course of action, but I don’t think it’s really robbing that many sales from the future. Without a survey it’s anyone’s guess and any opinion on the matter is pure speculation.

  • avatar
    John Horner

    +1 PCH101

    This isn’t a pull ahead situation. The market has been artificially depressed for many months now as people have been delaying, or “pushing ahead”, their purchases.

    I also think that people are overlooking the spouse effect. How many wives have been bugging their husbands to get rid of the old Explorer and get something new and fuel efficient?

  • avatar
    fincar1

    “The government puts up $4,500, and the consumer steps up with another $15,000-25,000 worth of consumption. Of that $4,500, a good $1,000-2,000 is going straight to a state government in the form of sales taxes and registration fees.”

    Well then, this is a good thing. My tax money goes as handouts to car buyers who in turn give it to car dealers who pay sales taxes to my state, county, and city governments. I see.

    Paul is always in favor of government programs that rob Peter to pay him, but his county commissioners are right there behind him.

  • avatar
    gossard267

    John Horner :
    August 7th, 2009 at 1:34 pm

    +1 PCH101

    This isn’t a pull ahead situation. The market has been artificially depressed for many months now as people have been delaying, or “pushing ahead”, their purchases.

    Sales aren’t ‘artificially’ pushed ahead when the pushing is being done by very real, very serious, general economic conditions. Indeed, a large enough such ‘push’ can be a strong indicator that a severe collapse of true market distortion, caused by artificial forces(say, long periods of near-zero Fed funds rates, or implicit guarantees that the Federal government will bail out those who assume catastrophic risk), has recently occurred.

    However, when a player largely immune to general economic conditions steps into the market and adjusts sales behavior, that can rightly be called ‘artificial’.

  • avatar
    Angainor

    Sales aren’t ‘artificially’ pushed ahead when the pushing is being done by very real, very serious, general economic conditions.

    They are when people who have the means to buy a new car don’t simply because they are afraid of what might happen in the economy. You don’t think the “We gotta pass this stimulus or American society will collapse” spiel of Obama/Pelosi/Reid didn’t make some people who could have bought a car in the last six months have second thoughts. Heck, with the talking down of the economy we had during the last six months of the election last year it’s a wonder anyone is buying a new car at all.

    The fact is, a selling rate of 10 million cars/year is no more sustainable then a selling rate of 20 million cars/year. The healthy rate is somewhere in the middle. The sooner we get there the sooner the industry can have some stability which is what it’s going to need before it can ever start growing again.

  • avatar
    ZoomZoom

    So which girl (in the pic) is named “Euphoria” and which one is “Reality?”

    I say the one in the driver’s seat is Euphoria…

  • avatar
    agenthex

    Indeed, a large enough such ‘push’ can be a strong indicator that a severe collapse of true market distortion, caused by artificial forces(say, long periods of near-zero Fed funds rates, or implicit guarantees that the Federal government will bail out those who assume catastrophic risk), has recently occurred.

    However, when a player largely immune to general economic conditions steps into the market and adjusts sales behavior, that can rightly be called ‘artificial’.

    When wingnuts realize the “true” market was phased out because it never worked well by any historical account, the world will be a slightly better place.

    Even if the car sales were only pushed forward, it’s a net gain, because a stable, consistent economy is a huge benefit for growth. In fact, one of the reason behind modern economic prosperity to smooth out the peaks and valleys that disrupts growth.

  • avatar
    Rada

    When wingnuts realize the “true” market was phased out because it never worked well by any historical account, the world will be a slightly better place.

    I agree, the more government everywhere – the better. Nobody must be allowed to fail, because it negatively affects our growth. (Well, not nobody nobody, but certainly nobody we are attached to.)

  • avatar
    mpresley

    Pch101 : Not really. The primary goal is to create an economic stimulus. The government puts up $4,500, and the consumer steps up with another $15,000-25,000 worth of consumption. Of that $4,500, a good $1,000-2,000 is going straight to a state government in the form of sales taxes and registration fees.

    If the program generates a lot of sales, both directly and indirectly, that would have not occurred otherwise, then it should create a good temporary lift for GDP…

    The government spends $4500.00 to generate half as much in taxes? Does that make sense?

    The government has distorted the economy by using deficit spending (there is no real money to pay for this program) to entice citizens to go into debt. Those taking advantage of this program already had a car (likely paid for), so they are trading what they owned for future debt partially subsidized by the government.

    Given the types of people who drive clunkers, one can suspect that, in the next year, repossessions will manifest as these consumers default on their loans (there is a reason they are driving clunkers, and not new cars, in the first place). Then, the government will likely have to step in and subsidize these defaults.

    Right now, the government should be encouraging individual savings, reducing deficit spending, engaging in restrained fiscal/monetary policy, and not trying to prop up failing industry. Instead, it is subsidizing failing industry, encouraging more consumer debt, engaging in massive deficit spending (which will have to be financed by a combination of across the board taxes, borrowing–if it can, or monetization). Things are just getting dicey. Just wait until these market distortions start to play out over the next few years.

    Anyone who may be looking for a new car, but who does not have a “clunker” to trade, would be foolish to buy as long as the program is in effect. Once the program is dissolved, the market will become even more depressed, and better deals will be had. Especially in the repo market. This is the housing situation all over.

  • avatar
    PeteMoran

    @ mpresley

    Are you familiar with the economic concept of Deflation?

  • avatar
    Pch101

    The government spends $4500.00 to generate half as much in taxes? Does that make sense?

    The states would need an infusion, anyway. The point is about inducing the consumption; C4C reduces the bill to the federal tab accordingly.

    Right now, the government should be encouraging individual savings, reducing deficit spending, engaging in restrained fiscal/monetary policy, and not trying to prop up failing industry.

    Right. You want to do what Herbert Hoover did. We should all know how that worked out.

    These ideological arguments that you make would sink the country like a stone if we actually followed them. Terrible, terrible ideas in the short run, absolutely the opposite of what needs to happen.

    The economy is based upon output – consumption, investment and trade, along with government spending. Your recommendations have been used in the past and failed miserably, because they create downward spirals in all of these. You should disabuse yourself of these notions, as it is their awful track record that causes modern day policymakers to avoid them this time.

    Once there is an economic recovery well underway, then that would be the time to begin reigning in the deficit and encouraging a higher savings rate. But to do that now would be absolutely destructive to the country. Time to toss out the ideological zeitgeist, and replace it with policies that actually work.

  • avatar
    mpresley

    PeteMoran : Are you familiar with the economic concept of Deflation?

    Yes. But I don’t see how, in our current and likely future fiscal/monetary environment, anything but inflation is likely.

  • avatar
    mpresley

    Pch101 : These ideological arguments that you make would sink the country like a stone if we actually followed them. Terrible, terrible ideas in the short run, absolutely the opposite of what needs to happen.

    Not sure why you think my argument is ideological…something that implies a kind of falsehood, or lack of understanding based on political opportunism. In any case, we’ll see how this turns out in a few years.

    Once there is an economic recovery well underway…

    I sure wish I had your optimism. I’m not even sure how all this spending will be financed. It’s not clear to me that the Chinese are willing to buy T-bills as readily as in the past, and there is surely not enough income to tax in order to cover the bill. So it looks to me that the Fed will have to buy the debt, infusing made-up dollars into the system. A great combo: higher taxes for all along with inflation. This could all make us wish for the good old days of Jimmy Carter.

  • avatar
    Pch101

    Not sure why you think my argument is ideological

    Because it comes straight out of the Mellon liquidation playbook that made the last depression turn into the Great Depression.

    What you are suggesting is exactly what made things worse in the past. The track record of failure of such policies is quite clear. It just doesn’t work, and wishing that it would work doesn’t make it so.

    I’m not even sure how all this spending will be financed.

    Reagan never worried about it. He ballooned the deficit several fold, and left it to Clinton to pay off the deficit and start reducing the debt. We’ll have to do the same thing again, but later, in due time.

  • avatar
    mpresley

    Pch101 : Reagan never worried about it. He ballooned the deficit several fold, and left it to Clinton to pay off the deficit and start reducing the debt. We’ll have to do the same thing again, but later, in due time.

    What happened, deficit-wise in 1980s is a bit different from today’s situation. I’d be careful about making too many comparisons. Certainly there are similarities, but also major differences in both scale and economic philosophy. Reagan inherited about 100 billion USD of Carter deficit. Obama about a 400 billion USD Bush deficit.

    The Reagon deficit was under 150 billion in 1989, in spite of increased defense spending (the Cold War was still on, back then), and in spite of the 1982 recession (where tax revenue dropped precipitously). The Obama deficit is now somewhere around 2 Trillion dollars. Do the math. In terms of deficit spending, Obama makes Reagan look like a fiscal shrew.

    The difference between the two is also marked in terms of fiscal and monetary policy. Reagan never initiated a huge “stimulus” plan. He ushered in tax breaks, and pushed for deregulation. This is not the current administration’s plan. As far as I know, Obama is not for deregulation. He is for massive tax increases, and if he cannot convince anyone to buy our debt, then monetary policy has the potential to lead to hyper-inflation.

    I’m not sure we can hope for any kind of “recovery” in this sort of environment. But I’m no fortune-teller, and time will tell. Your statement about “having to pay it off later” is certainly correct, though.

  • avatar
    Pch101

    I’d be careful about making too many comparisons.

    The primary difference is that Reagan inherited an inflationary problem, while Obama inherited a deflationary near-depression. One should not address deflation in the same ways that one would inflation.

    tax revenue dropped precipitously

    This is false. Tax receipts increased every year under Reagan.

    Reagan never initiated a huge “stimulus” plan.

    Stimulus isn’t required when the problem is inflationary. You’re confusing one kind of economic problem with another.

    He is for massive tax increases

    Tax rates were too low under Bush 43, given the policies, and will be needed to pay off the expense of his bubble economy. Maintaining tax cuts post-recovery would only balloon the deficit that you claim to be concerned about.

    if he cannot convince anyone to buy our debt, then monetary policy has the potential to lead to hyper-inflation.

    Current treasury rates are well below historical norms. The country was paying far more to finance its debt under Reagan than it is now. That suggests that at this time, there is no problem selling off US debt.

    The pricing of treasuries isn’t anything close to being hyperinflationary. They could double and still not be anywhere close.

  • avatar
    cowbert

    +1 Pch101

    Also, the concern about the Chinese not buying T-bills is a fallacy. The Chinese are actually concerned about American deflation because American consumption is what is floating their own market at this time. They essentially have no choice /but/ to buy dollars if they want to keep dumping their products on the US. So in essence the system works hand in hand – any stimulus provides for increased (or stabilized) American consumption which stabilizes the foreign economies. The US GDP (of a single country) reflects 2nd largest economy, the first being that of the entire EU at this time; the dollar as the principle reserve currency will be extant for at least another few decades…and the trade deficit will largely exist on paper as well.

    One sees the same effect with oil producing countries. Any talk otherwise by the foreign parties are at best pitching to get a discount on the treasury rate and at worst “sabre rattling”.

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