Is ‘cash for clunkers’ good deal for buyers?

MarketWatch

CHICAGO — The “cash-for-clunkers” program has been so successful at spurring owners of older models to trade in for new cars that many of them may be unwittingly costing themselves money, auto analysts say.

Because many of the consumers who are tempted by the government’s offer of up to $4,500 on a clunker trade-in don’t actually qualify for the program, their presence in the market may be helping to inflate prices that will only tumble once the cash-for-clunkers program ends.

“Oftentimes, people buy cars and don’t know the difference between a good deal and a bad deal,” said Jeremy Anwyl, chief executive of Edmunds.com. “It’s perception versus reality. If the consumer believes the perception is strong enough, it overwhelms the reality.”

Last week, President Barack Obama signed into law the bill that ups the ante on the Car Allowance Rebate System by $2 billion, an amount the government thinks can keep the program rolling until Labor Day.

The first $1 billion leg of the program rang up more than 220,000 auto sales and some $920 million in rebates in less than two weeks. Eventually, the program is anticipated to take anywhere from 500,000 to 750,000 clunkers off the road.

It’s also had a dramatic impact on auto sales, with many consumers who don’t qualify for the program rushing out to buy new and even used cars just because they think the time is ripe for good deals, Anwyl said.

Alec Gutierrez, senior market analyst at Kelley Blue Book, believes the cash-for-clunkers program is creating a bubble that will burst when the dollars are all spent.

Here’s his scenario: Dealers stock up on inventory and raise car prices — what Anwyl said dealers are “supposed to do, optimize their margins” — to keep pace with demand now.

“When cash for clunkers leaves the system, all of a sudden the demand is gone, and dealers start slashing prices,” Gutierrez said. “It drives the values right back down, and the net effect is we end up where we started, at best.”

That means those who do not qualify with a so-called clunker car may be better off waiting to trade in until later this year when they can get a better deal.

Plus, because the clunkers that do qualify and get turned in end up in the scrap yard instead of the used-car lot, that is putting a considerable dent in the market for cars priced at $4,000 and below, squeezing out a significant segment of car buyers, what the industry refers to as “buy here, pay here,” or subprime.

“A lot of these vehicles that are now deemed clunkers would’ve gone to dealers who specialize in the deep subprime market,” said Tom Webb, chief economist at auction house Manheim.