Cash for Clunkers and the impact on the used car market
As part of the government’s attempts to stimulate the economy, a new program called “Cash for Clunkers” by some has been started. The idea, originally used in Europe is that older gas inefficient cars will be taken off the road (forever!) and car makers will have the purchase of their new cars increased. Although the impact for used car makers and people in the market for new cars is clear, I think it’s interesting to think about what it means for the used car market as a whole.
First, let’s look at some of the finer print.
1) The car you are buying cannot be over $45,000. Based on the motivation of the program I’m not sure why this limit is here, but it’s presumably so the rich do not benefit from this program.
2) Your car cannot be over 25 years old. Presumably this is so people don’t pull their old fixer upper out of the lawn to take advantage.
3) Your car must get less then 18 mpg combined. This means the trade-in program will primarily take in trucks and SUVs.
Looking at this list, I think the current impact on the used car market is that SUVs between 1990-2002 will increase in value near and long term. First, because their value is artificially increased by the government voucher program currently (and speculation on low long such a program might continue). Further, these cars, when traded in have to be scrapped, meaning they will disappear from the earth forever. It’s entirely possible at some point in the future, the late 90s Explorers that were so ubiquitous will indeed be rare, as no such program has been introduced previously. This quite common cars could become collectors items.
The other major impact is that the value of “new” used cars should fall. Many people don’t want to buy brand new cars, but instead but Certified Pre-Owners cars that are only a year or two old. Usually the difference between these and brand new cars is about $3-4k. Given the voucher program does not apply to these, presumably most people in the market for such a car would instead buy new. Dealers often make more money from these used cars, but also often sell new cars, where the inventory is costly, so it’s unclear what impact this will have for your local dealer economy.
It should be interesting to see how long this government subsidy lasts, but I suggest you pick up an older SUV now while you can… Used Cars On-Line of course has tens of thousands of them…