Cash For Clunkers To Cause Used Car Bubble?

August 6, 2009
The law of supply and demand is a fairly simple concept - before you exit screaming with memories of high school economics flashing before your eyes, read on for just a minute - but the problem with simple concepts is they are often applied to highly complex situations. Take the impact of the new cash for clunkers, or Car Allowance Rebate System (CARS), scheme on the overall value of used cars, for instance.

That's a problem that's worthy of a room-clearing wail, but that intractability hasn't stopped Kelley Blue Book from issuing its prediction. Basing their argument on the fact that about 250,000 clunkers have already been traded in for new cars and that with another $2 billion in funding expected, up to 500,000 more used cars could be taken out of the market, Kelley sees the value of used cars in general rising steeply, if only for a brief time.

The 750,000 used cars that could be pulled off the road thanks to the CARS scheme would represent a 4.7% reduction in overall supply of used cars in the U.S., according to Kelley's numbers, and it doesn't take a high school diploma to see that that's a pretty big figure. How that figure affects the price of used cars is not quite so clear, however.

"Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery," explains 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."

The problem, Guiterrez says, is that the money will eventually run out and there will be a bunch of dealers left with an overstock of unwanted new and used cars, leaving the market to crash back down again.

If this seems like a bit of a narrow view of the matter, it is - Kelley's figures are based on a study of 517 'in-market' new-car shoppers that visited Kelley's site during a single week in July.

But the scenario postulated by Kelley has the unfortunate weakness of being based on several contingent future behaviors - of buyers, dealers, and manufacturers - all aligning to yield a perfect storm.

For our money, a used car is as good a value now as it was a month ago, or will be a month from now, though those that already own qualifying clunkers can still get themselves a solid deal, provided the Senate makes its move to approve more money for the CARS program, as it's expected to later today.

[Kelley Blue Book]

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