Saturday, July 19, 2008


Our country is experiencing a watershed moment in its history. The cost of gasoline has finally reached a threshold of economic pain causing the American driver to begin evolving from her love affair with the SUV, pickup truck, and van into smaller gas efficient cars and hybrids.

But, there are still a huge number of these gas guzzlers on the roads, in dealers’ inventories, and parked in driveways and garages. What will become of these behemoths? You can be sure of one thing, they won’t just disappear overnight. Eventually they will be sold and, of course, that means somebody will buy them. Because of the rapidity with which gas prices rose recently, the demand for gas guzzlers evaporated virtually overnight. CarMax, the largest seller of used cars in the world, said that the value of SUV’s, pickups, and vans dropped more in the last 3 months than they would normally drop in a year.

In my opinion, the values have plummeted even more that this. CarMax judges wholesale values of vehicles based on those that are bought and sold at wholesale auctions. There are hundreds of thousands of gas guzzlers sitting on car dealers’ lots which, under normal conditions, would be going to the auctions for sale, but are not. Why? Because car dealers are in a state of denial. Imagine being a used car manager whose total compensation is a percentage of the profit he produces on his retail and wholesale profits every month. Three months ago his inventory of 100 vehicles was worth two million dollars. Suddenly it’s worth 1.6 million dollars…a loss of $400,000. But right now that’s only a “paper loss” and that used car manager, general manager, and dealer only realize the loss if they take these vehicles to the auction and sell them to the highest bidder. If they keep them on the used car lot they can “pretend they’re worth more” or “hope” that the value of gas guzzlers will rise. By not taking the true loss, their paychecks and the company’s financial statement aren’t affected.

What does all this mean for you? If you are one who actually needs an SUV, pickup, or van, [for your business, tow your boat, accomodate a large family] it’s not a good time to buy a used one from a dealer. The dealers’ cost on gas guzzlers on his lot is vastly inflated because of the dealers’ refusal to accept reality. The dealers’ retail prices of gas guzzlers are based on a markup from an inflated cost which leads to an inflated retail price. This is similar to what has happened in Florida, California, and Arizona with housing prices. Sellers are in denial about how far the value of their homes have dropped and are just sitting on unrealistically high prices, praying for a miracle. This means that home sales have virtually stopped in these states. Gas guzzlers will begin to sell at a normal pace when their prices finally come down to the market value. That is the time to buy a gas guzzler if you need one. When this time will arrive is hard to predict, but it will happen a lot faster than it’s happening with housing. I’m sure that you will have some great buying opportunities for used gas guzzlers by the end of this year. Unfortunately some of those opportunities will be the result of banks being forced to liquidate bankrupt dealers’ used car inventories.

Be very dubious of offers on the radio, TV, or the newspaper for gas guzzlers that seem “too good to be true”. There are a huge number of cheap gas offers tied to the sale of gas guzzlers. Chrysler Corp. is offering $2.99 gas for three years, but read the fine print. The mileage is limited as are the models it applies to, and the actual dollar value of the offer is less than the rebates that Chrysler is also offering. You must choose only one…the rebates or the gas card. People are better off to take the rebates and pass on the $2.99 gas card. Chrysler knows this and is using the gas card just to “get you in the door”. Dealers are advertising even greater “free or cheap gas scams”. One local dealer is offering $500 worth of free gas just for a demonstration ride. The fine print says, “while supplies last” and only one $500 in gas will be given away every 90 days”. Another local dealer is advertising gas for 99 cents per gallon. The fine print says this is just for 6 months and to accept this offer you waive all discounts and rebates. Just remember there is no such thing as a free lunch.

Another trick that dealers are using to lure you in to trade in your gas guzzler on a new vehicle is a high fake trade-in allowance for gas guzzlers. They accomplish this by marking up their new vehicles thousands of dollars over MSRP, so that they can show you a bogus high trade-in allowance for your gas guzzler. In the fine print you will find that the discount is from “Dealer List Price”, not the manufacturer’s. You may have also seen the advertised very high “minimum trade-in allowance”…$3,500 or even $5,000. If you have to sell your gas guzzler now, you are better off to seek a private buyer or sell it on Ebay.

If you must have a gas guzzler from a dealer today, it’s safer to buy a new one than a used. The reason for this is that the manufacturers have been more realistic in dropping the prices of new gas guzzlers than dealers have dropping the prices of used. Furthermore, I highly recommend that you lease a gas guzzler rather than buy one. This is because the banks and leasing companies have been slow to adjust the residual values in their leases down. This means a lower lease payment for you. Also, who knows how much further gas guzzlers will decline in value. Suppose, God forbid, we see $8.00 a gallon gas? I you own a gas guzzler, you are stuck with the lower value. If you lease it, you can walk away from it and leave the bank to take the loss.

No comments:

Post a Comment

Earl Stewart On Cars welcomes comments from everyone - supporters and critics alike. We'd like to keep the language and content "PG Rated" so please refrain from vulgarity and inappropriate language. We will delete any comment that violates these guidelines. Oh yeah - one more thing: no commercials! Other than that, comment-away!