At a time when other automakers are hemorrhaging money, Honda just posted an unexpected boost in their profits, thanks to the Civic and the Fit. This fits in with my personal observation at used car sites--that it's very hard to come by a small used car in good condition for love or money. And also with data showing that those cars, which used to be a drug on the market, are suddenly selling for a substantial premium over book.
Richard Posner wonders if this isn't a little it irrational:
I wonder, too, whether the recent decline in U.S. gasoline consumption
doesn't represent to some degree an irrational panic reaction. To take
a huge loss on the sale of your SUV in a market that is depressed
because so many other people are doing the same thing at the same time
is unlikely to be justified by the gains from the improved gas mileage
of the car you buy with the modest proceeds of the sale. Likewise,
driving a substantial distance to save a few cents a gallon on the gas
you buy is unlikely to be worthwhile. A recent article suggests that
people fixate on the price of gasoline because unlike most regularly
purchased items, such as food, gasoline is purchased separately from
other items so that its price is not buried in a bill for multiple
items.
I think the answer is "probably"; most people could probably save money by buying an SUV. SUV prices have an expectation of higher gasoline prices built into them, when the best estimate of the future price is probably the present price.
On the other hand, that panic is not necessarily a bad thing. The panic will make our economy more fuel efficient, which means that we will be less vulnerable to future oil shocks--one of the reasons that it took so long for oil prices to hit our wallets this time is that during the 1970s, the economy dramatically reduced the amount of oil it took to produce a given amount of GDP. OPEC knows this, which is why they've been resisting Hugo Chavez's lunatic calls to throttle back on the taps--the end result of this kind of panic is usually a sudden price collapse.
« Position limits on oil trading: why not? | Main | Everything you ever wanted to know about taxes but were afraid to ask » Small is beautiful25 Jul 2008 09:45 am Comments (55)
Megan has forgotten that SUVs are not stocks -- you have to pay for the actual cost of constructing them. At 15,000 miles a year for a typical driver, and 15 miles per gallon, the cost of the required 1000 gallons of oil is $4000! You can save half of that by going to a car. If you figure cars are on the road for 10 years, new SUV prices would need to drop by about $20,000 under Megan's theory. Has anyone heard that SUVs are now under $20,000 new? 
"... most people could probably save money by buying an SUV ..." This is ridiculous, most people don't need an SUV and you don't save money buying things you don't need.
Isn't the third paragraph supposed to be a quote? Sorry if I'm slow, but I don't quite follow the last paragraph. Is it rational or isn't it? It seems like there's an implied nonpecuniary externality here (e.g., if I shield myself from oil shocks, this makes you better off). Freddie, it seems like Posner is just trying to work out if people are making themselves as well off as possible. Is there some reason why we should assume his argument is purely malevolently stupid? (Partly, sure, but completely?)
Ah, yes, but if consumers acted in a consistantly rational manner then Economists might occationally be right! (and consistent in their opinions)
You don't save money just on gas either, Honda Civics have one of the lowest costs of ownership of any car. A lot of economy cars aren't just cheap on gas, but cheap to repair and insure. ... most people could probably save money by buying an SUV ... I could certainly "save" $20,000 over the MSRP on an SUV, but if I spend $30,000 on a "$50,000" SUV + extra gas/insurance/repairs to do the same job as a $20,000 economy car I haven't "saved" any money.
No, ryan, and you're right-- I shouldn't say that he's purely interested in attacking fuel efficiency. But I do think that he probably has a cultural distaste for what he sees as the ideals behind conservation (meaning more than the purely economic) and I imagine that he feels the need to justify that distaste in economic terms.
One problem here might be that book value is determined in part relative to the original selling price. Several years ago the OSP for SUVs included a very large mark-up relative to production cost (e., iirc, Ford made something like $8000 per unit on the Explorer). The OSP mark-up for a compact was much less. So maybe the used car market is simply re-equilibrating for this former distortion.
One problem here might be that book value is determined in part relative to the original selling price. Several years ago the OSP for SUVs included a very large mark-up relative to production cost (e., iirc, Ford made something like $8000 per unit on the Explorer). The OSP mark-up for a compact was much less. So maybe the used car market is simply re-equilibrating for this former distortion.
Perhaps one aspect of the equation that Posner is overlooking is that the economy is once again uncertain, and unlike the 2000 recession, housing prices have fallen while food prices have risen. Many of the people making the trade-ins may have substantial debt obligations and very limited assets to fall back upon -- especially if they were previously driving a large SUV and making the corresponding loan or lease payments. So it's possible that trading down to a small car may not seem rational in a long-term context, but does make sense in a short-term context -- the monthly payment is lower, the insurance premium is lower, the fuel costs are lower. The sum of those savings could easily add as much as $300-500 back into a monthly budget.
Posner probably has a point, though. Replacing your 20 mpg SUV with a 25 MPG large sedan is nice, but it's not saving a ton of money. Elon Musk (a billionaire from selling Paypal to eBay, and currently chairmen of electric-car firm Tesla motors) told a story in an interview from his experience in grad school in 1970s California during that oil crisis; his friends were all going broke buying used Civics - he just bought old Crown Victorias for $500, drove them for the couple of years they lasted, then got another. He saved enough on the cars to more than pay for the gas.
How about the social costs of driving around in an SUV Vs. a smaller car? A mother and her only child driving around in a Ford Explorer circa 1995 earned herself a lot less social opprobrium for her planet-hate than the same mother would today. Perhaps the apparent bargain price of used SUV's is a reflection of increased non-fuel costs. Zdeno
And those of us who need a truck or SUV anyway are saving money big-time on the upfront cost. I just replaced my old 1993 Chevy pickup (250K miles!), which was probably getting about 13 mpg if I was lucky, with a Toyota Tundra, 6-cyl, that gets about 19. Because of the panic, dealers are dumping pickups at steep discounts. Nice for me. And realistically, even at $4/gallon, my big comfy useful truck costs me less than an additional $100 per month on gas over what I'd spend in a 30mpg compact -- which would be useless for anything other than commuting. Gas just isn't the gigantic hit on the pocketbook that people think it is. Not yet.
It seems to be a fact that until recently auto manufacturers made bigger profits as a percentage of sale price on SUVs than on compact cars. Why is this stable? There are several auto manufacturers. Why weren't the excess profits on SUVs competed away? -dk
Freddie is priceless--he starts by admitting that he doesn't understand Posner's argument, then goes on to insist that Posner is wrong and that he comes by his foolish ideas because he's "angry."
Echoing the prior comment by elmo, if I were in the car market right now I'd almost certainly consider an SUV. As I commute by train (an unspeakably loathesome experience, but good in this context) from a nearby station, I drive an average of only about 800 miles per month. So I might as well take advantage of the big discounts being offered on nicely equipped SUV's. It won't make that much difference in terms of gasoline spending.
Thanks for the endorsement Alan, please click my name to visit my blog where I've prominently displayed your praise. I always appreciate the words of encouragement! Just FYI, when I said "I have no idea what this means" I was referring to a seemingly throwaway line of Megan's, not anything of Posner's.
"Why is this stable? There are several auto manufacturers. Why weren't the excess profits on SUVs competed away?" The excess profits may have been somewhat illusory as there is risk involved. All the car makers have to guess what the market will want. In the past SUVs turned out to be a good bet, today not so much.
Freddie, The problem is, you're the only one here talking about "the ideals behind conservation". The rest of us, including both Posner and Megan, were talking about the economics involved, and whether it's financially rational. I tend (based on personal experience and observation) to agree with their assessment that a ton of people have started thinking "I need to buy a car that gets better gas mileage, so I can save money! It's worth paying several thousand extra for the vehicle to do so!" and that this mindset is often taken to an irrational extreme. I'm not so sure I would go so far as to say "you can save money by buying an SUV", but I do hear a lot of people who have lost track of the actual numbers and gotten caught up in "ZOMG $5/gallon!!1!1!" Yes, the "ideals behind conservation" still exist out there, and tons of people buy Priuses so they can show their neighbors how they're a better person who really cares about the planet and wants to stop our dependence on foreign oil. But they already bought their Priuses, and would buy their next one regardless of the economics involved, so they don't make for a very interesting economic discussion.
"Why is this stable? There are several auto manufacturers. Why weren't the excess profits on SUVs competed away?" My guess is because of fuel efficiency standards. Automakers have to sell a range of cars and trucks that, on average, meet the mandated average. So, they had to make small, efficient cars even if they didn't make much money on them, in order to be allowed to sell the more profitable SUVs. James has a good point, though. In terms of risk, it's better to have a diversified portfolio of products. I'm not convinced that the automakers were doing it for that reason, however.
Good one Megan. My first point: prematurely dumping an SUV doesn't remove it from service, it simply allows a customer who normally couldn't afford one to buy it. My second point: what is about to happen is not analogous to the 1970s oil 'crisis'. Then, Detroit claimed that they couldn't produce a more efficient vehicle. The Japanese Manufacturers made smaller cars and invented the stratified charge engine, and Detroit lost huge market share. The American auto became maybe twice as efficient since it became Japanese. This time, we're going to largely go off of oil as a fuel. In 2011, when the Chevy Volt goes on the market and the plug-in Prius is available, we will begin to shift about half of our fuel consumption to the electrical grid. We don't burn oil to power the grid: coal, nuclear, and natural gas provide most of our power. Over a period of ten years, the replacement time for our fleet, we will go from 25% of world oil consumption to maybe 15%. OPEC is going to see the first real decline in demand, perhaps 10%, in the history of fossil fuel production. What this will do to prices at the margin, Megan can guess, but I wouldn't want to be in their shoes. And the whole world is going to follow suit. If I were the OPEC oil minister, I would be planning to look for another job.
My brother acknowledges that, yes, when he got his Hybrid Civic, he spent more, and is unlikely to ever recoup exactly that much in gas cost savings (though it's looking like a better deal all the time). But he had the money then, and he doesn't know for sure he'll have money later, and he preferred to give up a little extra then to have lower costs in the future. Well he knows for sure that he won't have the money in the future since he already spent it. Geoff is right that the "Prius phenomena" is primarily a social one, not an economic one.
WOW,PEOPLE OVERREACTING YADA-YADA. I hope you don't think that you're first to market with that epiphany, Megs. In a weird way, I admire how you've managed to fleece The Atlantic. It's kind of like picking a side in a battle between a seagull and a jellyfish: If both lose, I win twice.
My second point: what is about to happen is not analogous to the 1970s oil 'crisis'. Then, Detroit claimed that they couldn't produce a more efficient vehicle. The Japanese Manufacturers made smaller cars and invented the stratified charge engine, and Detroit lost huge market share. The American auto became maybe twice as efficient since it became Japanese. I don't think this will happen, or, more accurately, it will happen in a much more efficient manner. Ford, for example, has been making plenty of small cars. They make and sell them in Europe. The have announced an initiative to get them to US markets. Ironically, the foreign makers have better practices in place now to get their small cars to the US than Ford does. Ford never had to import its cars to the US before. This, though, is a much smaller step to take than was necessary in 1973.
Are small cars unavailable? I just bought a used Mazda 5 for a very reasonable price... granted, it's not nearly as small as a Fit or a Civic, but it's very small compared to other 6 passenger cars and it also gets over 25mpg.
I need to buy a car that gets better gas mileage, so I can save money! It's worth paying several thousand extra for the vehicle to do so Except that the second half of your sentence is pure bullshit. It's cheaper to be a fuel-efficient sedan than to buy a massive SUV. The Honda Civic can be had for $15,000 brand new. A Toyota Yaris can be had for $12,000 brand new. You're totally distorting the economics of the average fuel efficient car. And, again, I think because of cultural discomfort with the idea of conservation. Yes, for many people, selling a newish SUV at a loss to buy a hybrid makes little economic sense. But I've conceded that. You guys are engaging in dishonesty by acting like the only way to improve gas mileage is to buy an expensive Prius, and that just isn't the case. Most fuel efficient cars are both cheaper on gas and on sticker price.
Jamey: Stop your hate and smear attacks on Ms. McArdle.
"I think the answer is "probably"; most people could probably save money by buying an SUV. SUV prices have an expectation of higher gasoline prices built into them, when the best estimate of the future price is probably the present price." This doesn't make sense to me. It might be true for a big car, but SUVs are notoriously overkill for the needs of people who buy them. Many are loaded with luxury features that people won't value as much as the original owner did. Remember, many were purchased in conjunction with tax breaks for small trucks, subsidizing the original purchase of those luxury options. Also, they are generally poor vehicles. They are usually very bad repairwise compared to simlarly priced luxury sedans. If you want to take advantage of this phenomenon, buy a towncar or a big mercedes.
As evidence of people over-focusing on gas prices, just look at how they are flocking to hybrids beyond economic reason, to the extent their purpose is to save money by saving on gas. Hybrids cost so much they are among the most expensive vehicles to operate per mile, even after their gas savings. According to Edmunds.com, the most econonical hybrid is the Civic, ranked only 14th among all car models, followed by the Prius at 26th, and the Altima at 59th. Forget the rest. And Edmunds says the conventional engine Civic will still be a better deal than the Civic hybrid even if gas hits $6 a gallon. But, boy, people are rushing to buy hybrids to save on that gas! As to SUVs, as I've noted here before, leasing a new SUV is an easy way to "short oil". You get thousands of dollars off the acquisition cost compared to before the gas-price rise, buying you hundreds of gallons of gas ... if gas prices go up more, any decline in the value of the SUV gets dropped on the leasing company ... if gas prices go down, so the value of the SUV goes up, your purchase option at the end of the lease term gives you a chance for a nice little profit. And in the meantime, if you get into a headon with a Mini -- the owner of which paid a premium purchase price and is paying for premium gasoline -- you win!
But, boy, people are rushing to buy hybrids to save on that gas! I agree that hybrids aren't as economical as by this standard, but you have to look at the assumptions. Quite a few differences in an individuals situation could swing the costs quite a bit. Such as different loan terms, different number of miles driven and even ownership length. The civic DX is also not as nice of a car as a civic hybrid or prius. It could make sense for some people to buy a hybrid instead of another economy car.
The devil is in the details, and it would be useful to make some real world comparisons. From Edmunds: 2002 Escalade - about 15,000 2001 Prius - 10,513 So if your 2002 Escalade gets 14 mpg, it will cost you 4821 to operate for a year, assuming 15k miles driven and 4.50 a gallon for gas. The Prius gets 46, so it will cost you 1467 to operate for a year. What can we conclude from those numbers? Well, the Escalade will depreciate about 55,000 over the course of about 7 or 8 years, and the Prius will lose about 12,487. Overall it is foolish to keep the SUV, it will lose you money no matter how you calculate it. It will cost 3354 more a year in gas, and will depreciate more in terms of percent of total value, and in terms of dollars. Really, I see very scant evidence for keeping an SUV. It is an investment that loses money at a higher rate per year than a Prius both in terms of percent of purchase price and in terms of pure dollars. To argue otherwise is to make the assumption that the market for the SUV will rebound. What evidence do you have that it will happen?
Let's take a quick peek at the math of higher gas prices. Assume you drive 10,000 miles per year, which is not unreasonable. Further assume that your car gets 20 mpg. That means that you need 500 gallons per year. Say the price of gas has increased by $.50, which is about what it did. That means that you are now paying a whopping $250/annum more than you were before. It's really not as big a deal as people are making it out to be. Where it is really going to pinch is when the added fuel costs affect everything in the economy and all prices keep going up as a result--some of which we are beginning to see.
The devil is in the details, and it would be useful to make some real world comparisons. From Edmunds: ... Current Escalade - about 70,000 ... Current Prius - about 23,000 .... In what real world are a Prius and an Escalade substitutes for each other? A substitute for a Prius might be a Corrolla, for an Escalade might be an Escape hyprid, for a Civic hybrid would be a Civic conventional engine. How many people in the real world go: "Hmmm... it's a close call between this modest-sized, modest-price car that happily meets all my needs and budget, and that other one that's three times as large and costs $40,000 more?" If I go to Honda and they're sold out of Civics is my second choice going to be to go across the street and buy a GMC pickup truck?
Jim Glass, You ask "In what real world are a Prius and an Escalade substitutes for each other?" In the real world of people trading in their SUVs for more fuel efficient vehicles, as was the topic of this post (in case you missed it). "A substitute for a Prius might be a Corrolla, for an Escalade might be an Escape hyprid, for a Civic hybrid would be a Civic conventional engine." Why? An Escalade is a luxury vehicle, as is a Prius. "How many people in the real world go: "Hmmm... it's a close call between this modest-sized, modest-price car that happily meets all my needs and budget, and that other one that's three times as large and costs $40,000 more?"" Why don't you tell me, since you are essentially asserting that they don't. "If I go to Honda and they're sold out of Civics is my second choice going to be to go across the street and buy a GMC pickup truck?" This doesn't even make sense. The discussion was selling a gas guzzler, not buying one. I think perhaps you realized that when you crunch the numbers, your idea about "shorting" the market by leasing an SUV was pretty stupid. Almost all cars depreciate in value, there is no way that you can make money by leasing a car. So there is no way to benefit from leasing a car that costs more to operate. As the numbers from your source of choice demonstrate, an SUV is a terrible investment compared to a hybrid no matter how you slice it.
It would be interesting to read a post that drilled down a little more into why Honda has outperformed other car companies recently. It's not as if other car companies don't have well-regarded small cars. It's also not as if Honda wasn't making trucks either (e.g., the Ridgeline). Has Honda managed to manufacture a significantly higher percentage of small cars recently than other car companies?
Further on trading in an Escalade for a Prius: If gas averages 4.50 a gallon for the next 3 years, you save 10,062 dollars by selling your SUV now and buying a hybrid. If you keep your Escalade and sell it 3 years of depreciation down the road, do you really think the price of a used Escalade will rebound by 10k in 3 years?
DaveinHackensack writes: "It would be interesting to read a post that drilled down a little more into why Honda has outperformed other car companies recently."\ I'm sorry but you just asked one of my favorite questions. = ) Please pardon my fanboyness but... Quick, what do BMW and Honda have in common? In 1947, Mr. Honda started his company and made motorized bicycles (literally) and a motorcycle called the Type 100 Dream. 10 years later, he calls his employees together and says we're going racing. 2 years later they compete in a limited number of events and 2 years after that they win the F1 motorcycle World Championship. Honda then goes on to dominate F1 motorcycle racing in the first half of the 1960s. Then they pull out of motorcycle racing and start making cars. I don't even think they got permission to do that from the Japanese Ministry of Industry (take that centralized planning!), they just went and did it. They tackle F1 car racing in the early 80s. It takes them 4 years to win their first F1 car World Championship. They become the most dominant team the sport has ever seen and win - I think - 5 of the next 6. One season they win 15 of 16 races. In the 90s they pull out of F1 and tackle Indy Car (AKA CART). Again, after a slow start they dominate. And, then, well, admittedly I'm not sure. I stopped following the sport closely and got into other things. I do know though that the most important part of my - ahem - freaking-long post, is that they rotate their engineers through their racing program. So, yes, the engineers that designed the inline 4 in your Civic and the V-6 in your Accord learned their craft on a racing team. This makes their engineers better and they make better small cars as a result. In racing, smaller is lighter and faster and quicker and that's always better.
Further on trading in an Escalade for a Prius... An Escalade seats eight comfortably in three rows with substantial cargo space left over, it's a semi-pickup. A Prius is a hatchback into which five can squeeze, plus whatever groceries you can fit into that little hatchback area. So after you trade in the Escalade for the Prius, where are you going to put the passengers and cargo that you bought the Escalade to transport? One of the most bizarre things about SUV-bashers is how often they assume people who would be happy with a hatchback instead buy a car that has an extra row of seats, a cargo area, is 50 inches longer, weighs 4,000 pounds more, has off-road 4WD capability, and costs $40,000 more, for no reason! But if all those features suddenly now don't matter to them, still, why would they buy a very expensive Prius? The Edmunds data shows a standard Corrolla is a much better deal cost-wise. Or for that matter a standard Civic. Or for that matter a scooter. Though if those features do matter to them, then the hybrid subsitute alternative is a GMC Yukon, basically the same car but for the engine, or a Ford Escape, etc. BTW, if you really do think that with gas at $2.50 or $3 a gallon Escalade owners gladly paid $40,000 more for their SUVs (plus the cost of low gas mileage of course!) for no good reason compared to buying economical hatchbacks, thus obviously taking huge financial losses, why would they be bothered by taking financial losses on their SUVs now?
For some real data on how the market affects prices, curring pricing info from the NADA Used Car Guide... "Within NADA sub segments, we estimate that for every $1 increase in gas, large pickups decline in value by $2,200, on average ... By contrast, for intermediate compact cars, a $1 increase in fuel costs lifts resale prices by an estimated $980." So with gas rising from $3 to 4$ buying that compact car may get you better mileage -- but costs you the equivalent of about 250 gallons of gas. While if you buy a used pick-up truck, you'll use more gas per mile -- but they'll throw in 550 gallons of gas for free. That's how markets work. BTW, there is a little mistake in this: To take a huge loss on the sale of your SUV in a market that is depressed because so many other people are doing the same thing at the same time is unlikely to be justified by the gains from the improved gas mileage of the car you buy with the modest proceeds of the sale... You aren't taking a loss when you sell the SUV -- you already took it when its market value dropped. When the value of my pick-up truck is down $2,200 it's down $2,200 whether I sell it or not. And yes, the fact that the best estimate of future oil prices is the current oil price is true -- so the best estimate is that the $2,200 (no more or less) is gone for good. So the $2,200 is a sunk cost, it is done, I am stuck with it. My best strategy is to seek the best financial result going forward from there, with a Civic, leased SUV, whatever. Covering the loss on the sale of the truck is irrelevant. (Indeed, feeling a need to do so is a nice example of the "sunk cost fallacy".)
You aren't taking a loss when you sell the SUV -- you already took it when its market value dropped. When the value of my pick-up truck is down $2,200 it's down $2,200 whether I sell it or not. No. If you've already bought the SUV and you're not planning to sell it, the market value doesn't really matter. Megan's point is that, because people are irrationally overreacting to changes in oil prices, the market value of SUVs has fallen faster than their actual instrinsic value. Cars are consumption goods, not investments.
Jim Glass, Your argument is rather nonsensical. You state "So after you trade in the Escalade for the Prius, where are you going to put the passengers and cargo that you bought the Escalade to transport?" Do you have any evidence that Escalade drivers regularly use their escalade to transport large loads. Frankly, I have rarely seen an SUV used to tow trailers, full or large equipment, or carrying more than 4 people. By and large the Escalade was a luxury vehicle. Escalade drives could easily have bought a small car. So too is a Prius a luxury vehicle. You can save more money with a Honda Civic, but people pay extra for the luxury of a lower "carbon footprint". "BTW, if you really do think that with gas at $2.50 or $3 a gallon Escalade owners gladly paid $40,000 more for their SUVs (plus the cost of low gas mileage of course!) for no good reason compared to buying economical hatchbacks" Yes, obviously. Why are the truck and SUV markets tumbling right now? If they were such a necessity, then the market would be stable. They weren't any more necessary than the landyachts of the 70s. And we are seeing this in action as the large truck and SUV market collapses and automakers rush to fill the small car market. Did consumers suddenly stop needing to haul 6 passengers? No, they never needed it in the first place.
If you are planning on leasing a car to make a "profit" (laughable!) your options just got smaller: http://news.yahoo.com/s/ap/20080725/ap_on_bi_ge/chrysler_leasing No more leases from Chrysler. "You aren't taking a loss when you sell the SUV -- you already took it when its market value dropped." Wrong. You took a loss when you drove it off the lot. The instant you did that, your vehicle lost about 20% of its value in the blink of an eye. From there, every year and every mile reduces its resale value. How much value it lost from there is determined by the second hand market. Have you ever bought or sold a car before?
"No. If you've already bought the SUV and you're not planning to sell it, the market value doesn't really matter." You have a personal balance sheet. You take your loss when the assets on that balance sheet (stocks, Fannie Mae bonds, your SUV, whatever) decline in value. Not when you sell them later. When you sell them later you get cash or something else of equal value for them -- no loss in that. The issue here was: And the point is it can't possibly be justified, because you can't possibly decide whether or not "to take" a loss that has already occurred to you. The correct analysis is: "Given the $2,000 (or whatever)of value is lost and there's nothing I can do about that, going forward from now would I rather have the lower operating cost of a smaller car, or the eight seats & cargo space etc, of the SUV? Which is best from now on?" A loss already taken can't be "justified" by anything -- that's the "sunk cost fallacy", and it causes the human race all kinds of grief. E.g.: To justify already putting $X in a project I have to put in yet more ... to justify losing X many lives in a war we have to send in more troops ... to justify losing $2,000 on my SUV's value I have to buy a Civic to get it back with $2,000 of gas savings. All equally false. As to the words cut via the ellipses... in a market that is depressed because so many other people are doing the same thing at the same time is ... That's just speculation, the idea that the market for SUVs is somehow excessively "depressed". I know of no evidence at all indicating the value of SUVs should be expected to rebound up if the price of gas stays the same. The used car market generally is very efficient. Cars are consumption goods, not investments. Cars are capital goods with multi-year lives and their resale value is a matter of significant importance to most of their owners.
Jim Glass, You state "The correct analysis is: "Given the $2,000 (or whatever)of value is lost and there's nothing I can do about that, going forward from now would I rather have the lower operating cost of a smaller car, or the eight seats & cargo space etc, of the SUV? Which is best from now on?" " You still don't get it. If consumers see a declining market, they often bet that the market will continue to decline. So selling your Escalade now for 15,000 is better than in a year for 10,000. Mitigating future losses by selling now is perfectly reasonable if a market is going to decline long term. It is market speculation, but much of the market is speculative (see the current commodities market).
Jim: For most people, resale value is not a significant component of a vehicle's value. We accept that it's going to depreciate substantially between the time we buy it and the time we sell it. An extra swing of a couple of thousand dollars doesn't really matter, especially if, as Megan argues, it's just a temporary overreaction to gas prices. If you're not holding an asset for the purpose of selling it and you believe the market is mispricing an asset then the market price doesn't matter. Individuals don't mark-to-market the value of their consumption goods.
When critics contradict! freddiemac wrote: Freddy, you are having a hard time reading. The statement was... "To take a huge loss on the sale of your SUV ... is unlikely to be justified by the gains from the improved gas mileage." The motive of the selling being discussed is *not* speculation about further price declines reducing resale value. Glad to see you think it is important though. FXKLM wrote: So declining resale value doesn't matter to the average person. Tell it to Freddy. But it really doesn't matter here to me. Until you can tie it into the logic of the statement above -- "taking on loss on the sale of a SUV **justified by** the gains from improved gas mileage". I'm not going to waste the Atlantic's bandwidth going through the sunk cost fallacy again. If you're not holding an asset for the purpose of selling it and you believe the market is mispricing an asset then the market price doesn't matter. Individuals don't mark-to-market the value of their consumption goods. Almost everyone does hold their car to sell in the end -- a trade-in is a sale for full value, and people haggle and shop around for the best ones ... A few thousand dollars really is noticed by the typical American family ... There is no evidence whatsoever that cars in the used car market are mispriced. And, once again, cars are capital assets. You can look it up. There are no Kelly Blue Book published values for two-year-old bread and cheese, being consumption goods, but there are for two-year-old cars, as the capital goods they are. And Kelly makes a profit because people do care. One thing you and Freddy have in common is you both speak for the world when the world speaks for itself and says something different.
Freddie, you are working with logic of a quality such as I haven't seen since days long gone bye on usenet. It *is* entertaining. Jim Glass, Your argument is rather nonsensical. You state "So after you trade in the Escalade for the Prius, where are you going to put the passengers and cargo that you bought the Escalade to transport?" Do you have any evidence that Escalade drivers regularly use their escalade to transport large loads. Frankly, I have rarely seen an SUV used to tow trailers... OK, so your first point is that people who would be happy with hatchbacks actually *do* spend $40,000 more to buy SUVs for no real reason. Other than that they like to "ride high", maybe. Would you ever do such a thing? Throw away $40k out of pocket for no real reason? Of course not! I bet not, right? Which makes this simply ye olde usenet "People I disapprove of are stupider and/or morally inferior compared to me" argument. Wow, haven't seen that for a while! "BTW, if you really do think that with gas at $2.50 or $3 a gallon Escalade owners gladly paid $40,000 more for their SUVs (plus the cost of low gas mileage of course!) for no good reason compared to buying economical hatchbacks" Yes, obviously. Why are the truck and SUV markets tumbling right now? And your second point is that *obviously* these same people, who one or two years ago thought nothing of throwing away $40k for no reason on purchase price, now are so intimidated by paying an extra $500 or $1,000 per year for gas that they are dumping the cars en masse. But how did they suddenly become so concerned over a few bucks? Last year, throw away $40k for nuthin'. This year, Yikes! Gas is up 50 cents since last year, dump the car! ;-) Let's try again: Why are the truck and SUV markets tumbling right now? Hmmm.... Maybe it's because truck and SUV buyers aren't stupider than anyone else -- not even you. In which case when they purchase a truck or SUV they value the real benefits of it to them against its cost to them when deciding what to buy. It's a close balance, so when their vehicle costs change they change the vehicles they own. That would explain exactly what we see in the market! And frankly it seems a lot more likely than "Don't care about $40 grand of purchase price wasted, but watch every penny of gas!" Now, as to you personally not seeing many SUVs carrying stuff that wouldn't fit into a hatchback, that's sort of usenet-level impressive too. "If mine eyes don't see it, it don't exist. Even if I never looked!" Hey, I don't have a SUV because I live in Manhattan and don't need 4WD. But I do drive a van that seats seven with cargo area too, and gets about the same mileage as many SUVs -- so call me an "Honorary SUV owner". If I lived in the country I'd likely own one. Am I stupider than you? Well, I do have a wife and three kids, plus there's relatives and everybody's friends. But maybe you think if I was smart like you I'd be driving a Prius? Because you've never looked in my van window to see the steamer trunks piled up in the back while I'm driving six people across New England on trips to and from the kids' summer camps? Geeze, how could I be wasting gas like this with a "seats seven vehicle" when nobody in the US actually has any real use for such a thing? And if I trade it in to save gas I'm sure I'll have no problem fitting in all the trunks & people >5 into a Prius because, after all, you've never seen them! Hey ... I live in Manhattan, I don't need to waste any gas at all! Why don't I just send the kids to camp on the subway? Even better than a Prius!
Chavez's lunatic calls to throttle back on the taps Chavez is schizo -- just the kind of enemy we should be happy to have! At the same time he wants to "throttle back on the taps" he's trying to embarass the US by giving us free oil. Last week "Live Free or Die" New Hampshire became the last state to give in and accept -- after a long hold-out. I don't know what took them so long. I mean, when an enemy of mine wants to attack me by giving me his money and his assets for free, my attitude is, "Bring it on! ... Is that all you've got, sucker? ... Bring it on!!" May we always have such mortal enemies. And this is end of me in this thread.
Jim, Yours is a brand of stupid that usually comes from ignorance. You present a lack of evidence for baseless assertions, and simple math and a link of your choice has proven you to be an ignorant moron who stupidly thinks he can make a "profit" from leasing a car. Probably the stupidest thing I've read all week! That's strike one. "OK, so your first point is that people who would be happy with hatchbacks actually *do* spend $40,000 more to buy SUVs for no real reason. Other than that they like to "ride high", maybe." No. I didn't say that people would be "happy" with "hatchbacks", did I? This is a strawman argument, typical of conservative hack trolls in the internets. As I stated previously, the Prius is a status symbol, one that is increasing more valuable to consumers than an Escalade. If consumers were really concerned about pure dollars they'd buy Chevy Aveos. Strike two. "Would you ever do such a thing? Throw away $40k out of pocket for no real reason?" No, but I also didn't claim that people did so for "no real reason". Again you are making strawman arguments, either out of sheer stupidity or intellectual dishonesty. I'm guessing a combination of both. Strike three. "In which case when they purchase a truck or SUV they value the real benefits of it to them against its cost to them when deciding what to buy. It's a close balance, so when their vehicle costs change they change the vehicles they own." Or in other words, they didn't buy an SUV for towing or passenger capacity? So you concede my point? Thanks! The worst is that you have children. Hopefully that van of yours falls off a bridge. Society as a whole would be much better. Do the world a favor and get rid of them (and yourself).
One of the ways the American automotive market has been distorted is the CAFE (Corporate Average Fuel Economy) system. Especially for the American "Big Three", this has meant that small cars aren't produced for profit; they're produced to "earn" the right to produce big, gas-guzzling cars without financial punishment from the government. Thus, American-built small cars have historically sucked, and it has acted to reinforce the bias of the American market that big, gas-guzzling cars is all that people aspire to buying.
Jim: Arguing that the market is mispricing SUVs by overreacting to moves in oil prices is the whole point of Megan's post, which makes sense premium that people are willing to pay for more fuel efficient vehicles is more than what they'll save by switching to the fuel efficient vehicles. If you don't agree with that, obviously you're not going to agree with the rest of this analysis either. Did you really not recognize until just now that this whole post is an argument that the current market price of SUVs is distorted? It's likely that any such mispricing will be temporary so people who don't sell their SUVs now will probably never experience any kind of loss as a result of the temporary overreaction to oil prices. Even if the current overreaction continues, if they don't sell the SUV for several years, the present value of the reduction in sale price is quite a bit lower than the $2,200 you keep citing. Plus, the reduction in value as a result of oil prices is likely to be lower on cheaper older car. Even if the average price of SUVs go down by $2,200, a car that would otherwise be worth $3,000 isn't going sell for $800. It may be irrational, but the market isn't going to work that way. I recognize that cars are capital goods. I never said otherwise. I said that it was a consumption good rather than an investment. That's why the value of a car to the owner isn't necessarily the same as the market value.
For the documentary record... I wrote an opinion piece for the Atlanta Journal Constitution that appeared last Sunday about all the things wrong with the hybrid car tax credit. (Well, all of them wouldn't fit in 1,000 words, but a bunch of them did.) It's not available online, but having just received contractual clearance, here's a version. And this really is the end of me in this thread.
Crusader: I will when she stops being such a dimwit.
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SUV prices have an expectation of higher gasoline prices built into them, when the best estimate of the future price is probably the present price.
I have no idea what that means.
Look, I think anytime we discuss these things, we have to bear in mind that there are always going to be people, like Posner, who are just generally opposed to conservation and will find reasons to argue against better fuel efficiency. I suspect the reason is general anger at the idea that we have to, that this is America, dammit, and we burn a lot of goddamn oil because its a part of our National Greatness. Or something. In simple economic terms, yes, it may be a bad deal for people to sell their SUVs at a loss now to get a more fuel efficient car. But if it's time for a new car anyway, I think many people are happy to get a Civic and save on gas.
Also people ignore the difference between higher initial cost and lower operating cost and lower initial cost and higher operating cost. My brother acknowledges that, yes, when he got his Hybrid Civic, he spent more, and is unlikely to ever recoup exactly that much in gas cost savings (though it's looking like a better deal all the time). But he had the money then, and he doesn't know for sure he'll have money later, and he preferred to give up a little extra then to have lower costs in the future. I think it's a mistake to assume that, since you saved X dollars by not getting a hybrid now, you'll have that same X dollars to spend on high gas bills in the future. That's not how people spend and save money, in practice.
Posted by Freddie | July 25, 2008 10:35 AM