What does cash for clunkers mean for dealers?

How will the potential “Cash for clunkers” programs affect used car pricing? My gut says late model (and program) vehicle pricing will suffer, but I am not sure my gut is reliable anymore. What are your thoughts?

Chris,

Thanks for the thoughtful question. In this business, just when you think you’ve seen it all, you get a curveball like this one. You really have to pause and take note of the fact that there’s not a single person in the American automobile industry that can answer this question with any experience whatsoever. The best that all of us can do is to speculate and perhaps study the recent results in Germany.

I think that you’re right that late model nearly new, used cars will take a hit in demand and value. This should result from the program stimulating new car sales. Simply stated, as new vehicles become more attractive, principles of economic elasticity kick in and their like new, used counterparts will decline in sales volume and value. It really doesn’t take an economist however, to reach this conclusion. The real question is how much and across which vehicle segments?

To answer these questions we need more information such as how large the cash for clunkers incentive will be and what types of new vehicles will qualify? In other words, does the cash for clunkers program apply to only domestic vehicles or imports as well (ignoring the question of what is a domestic or import car)? Will the program only apply to purchases of vehicles that get certain fuel economy? I don’t think that we can fairly predict which late model used vehicles will be affected and to what extent until these questions are answered.

I also believe that the really low end vehicles, i.e. the true clunkers, will be another affected segment. If the incentive is great enough, we could expect these cars to largely disappear from the market. What’s going to happen to dealerships that depend on the availability of $5,000 to $10,000 older vehicles? Just imagine that you are in the buy-here pay-here business, where will you get inventory?

I can even imagine a secondary market developing for these vehicles. One where somebody who is not in a position to buy a new car might sell their clunker to someone else who is in the market, for a price that is artificially inflated by a portion of the coupon value of the government’s program. It almost seems like there could be some sort of an arbitrage opportunity if you knew the program parameters and timed it correctly.

Maybe it’d be worthwhile creating a database of individuals who own eligible vehicles. Once the program hits, you could contact those owners and offer to pay them a premium for their old used car and turn around and sell their old used car to a new car intender and thereby make a spread.

I would be really interested in hearing from anyone else that has greater knowledge about the proposed program, German experience or other relevant insight.