The SUV Market Has Collapsed

By Nick Bunkley The New York Times

Retaken from cnbc.com

The market for sport utility vehicles is starting to look a lot like the housing market, spreading pain to consumers, automakers and dealers. Even the vocabulary is sadly familiar.Bloated inventories? Days spent on the market? Well, in July, General Motors dealers had a 174-day supply of the Yukon XL/Suburban on hand, on average, up from a 92-day supply a year earlier.

Inventory of the Chevrolet C/K Suburban nearly doubled over the same period, to 116 days from 63 days.

Just like hapless homeowners, countless car owners are now “underwater,” driving vehicles that are worth less than the balance on their car loans.

And just like desperate homeowners, the sellers of SUVs are having to painfully cut asking prices.

For instance, Michael Kohan, a recent graduate of Hofstra University’s law school, decided that hundreds of dollars a month filling up his 2006 Land Rover LR3 would be better spent paying down his student loans.

He calculated that his vehicle — loaded with luxuries like a navigation system, xenon lights, parking assist sensors, heated leather seats and three sunroofs — should be worth at least $31,000, according to the Kelley Blue Book.

AP

But with a V-8 engine that gets only about 14 miles per gallon, Mr. Kohan, 24, decided to list his LR3 on eBay and Craigslist for $18,000. And yet, he told a reporter this week, “As low as I set the price, you’re the first person to call.” Dealers are going through the same pain, only multiplied.

They normally spend this time of year raking in some of their biggest profits and breathlessly promoting Detroit’s newest models. Instead, they almost cannot give SUVs away. “There’s never been discounts this big before on them, but people are still shying away,” said Kevin Fortman, a sales manager at Wolf Chevrolet in Naperville, Ill.

Mr. Fortman said his dealership had dozens more sport utility vehicles left from the 2008 model year than it needed, even as factories began rolling out newer versions. “We’re not going to order any ’09s for a while,” he said.

Automakers are offering discounts of $10,000 or more on some SUVs just to get rid of them, so dealers have space to stock more of the fuel-efficient cars consumers are clamoring for.

On average, new sport utility vehicles sold for 20 percent below sticker price in July, according to Edmunds.com, a Web site that gives car-buying advice to consumers.

That, in turn, has decimated prices for used SUVs. Ultimately, car companies are the ones that will pay, because they will have the new SUVs on their hands as well as the used and leased ones.

The sudden collapse of the SUV market has cost Detroit dearly.

As part of its $8.7 billion second-quarter loss, Ford took a charge of $2.1 billion to cover the rapidly declining value of used sport utility vehicles coming off lease.

G.M. also took a big hit on its quarterly earnings. GMAC Financial Services, which is jointly owned by G.M. and Cerberus Capital Management, reported a $2.5 billion loss in the second quarter, which included a $716 million impairment charge from lower SUV residual values.

G.M., which lost $15.5 billion in the quarter, was also forced to contribute about $1.5 billion in lease support payments to GMAC. Chrysler, which is privately owned by Cerberus and does not report financial results, stunned the industry by pulling out of leasing altogether on Aug. 1 because of the falling values of its used vehicles.

In their heyday, sport utility vehicles brought hefty profits to automakers.

But today those companies are slashing output and closing plants amid plummeting demand — only they cannot act fast enough to prevent a logjam of the vehicles already produced and in the pipeline. Sales of SUVs are down 32 percent so far this year, and were off 43 percent for July.

Ford logged just 5,404 sales last month of its Explorer, the best-selling sport utility vehicle in history, and is on pace to sell fewer than 100,000 Explorers this year for the first time since introducing the model nearly two decades ago.

The Expedition, the Explorer’s bigger sibling, has suffered even more.

Bob Creech, who sells semi tractors in Moorestown, N.J., found a buyer for his meticulously maintained 2004 Eddie Bauer Edition Expedition this week only after he knocked a few hundred dollars off the asking price.

The vehicle, which he bought five years ago for about $44,000 and drove for 106,000 miles, sold for $8,600. “I took a little bit of a beating,” Mr. Creech, 52, said. “I really enjoyed driving it, I liked the ride of it and the visibility, but it just wasn’t practical.”

Last month, Automotive Lease Guide, the company whose estimates of vehicle value, after several years of depreciation, are used to calculate lease payments, made unprecedented downward adjustments to many sport utility vehicles’ residual values.

The company now says a Ford Expedition will retain 32 percent of its value after three years and that a Chevrolet Suburban will be worth just 30 percent of its original price. A few years ago, such vehicles were estimated to keep about half their value after three years.

“These big trucks and SUVs are really dinosaurs at this point,” said John Blair, chief executive of Automotive Lease Guide.

“Consumers like SUVs. They haven’t fallen out of love with the things that made them popular, but it’s just become an issue of economics. When you look at paying several hundred dollars a month more in fuel, that becomes a big deal for most households.”

High gas prices have hurt SUVs more than pickup trucks because a large proportion of the people who have been driving SUVs were more attracted to their style than their capabilities, whereas pickups are popular among contractors and other workers who haul supplies.

Many commuters and couples without young children have abandoned SUVs for vehicles that are less costly to drive. Additionally, many shoppers interested in buying SUVs already own an SUV, and end up walking away from dealerships after learning how little their current vehicles are worth.

“Everybody thinks you’re lying to them,” said Mr. Fortman, the Chevrolet sales manager in Illinois. “Nobody wants to take that big of a hit.” Because the SUVs decline is largely owing to high gas prices, experts say the only way that the segment could rebound significantly is for gas prices to decline.

Edmunds.com said the number of visitors researching SUVs has increased slightly in recent weeks as gas prices have retreated. Given how much the automakers and dealers are willing to knock off an SUVs price, this is not a bad time to buy one, said Jesse Toprak, the director of industry analysis at Edmunds.

Yet so many consumers are eager to avoid weekly $100 fill-ups that they are more focused on saving money at the gas pump than at the dealership. “It’s a very psychological decision,” Mr. Toprak said. “You pay for the car just once, but you go to the pump every week, so that almost seems more important to you. Every time you go to the pump, you just want to feel good about it.”

And so thousands of Americans have been exchanging their sport utility vehicles for fuel-efficient cars, despite low trade-in values for the larger vehicles and a scarcity of small cars that has allowed dealers to charge sticker price or more for them.

“When you trade in a large SUV for a compact car, you’re selling low and buying high,” Mr. Toprak said. “For a lot of people that’s not really logical, but they’re not really running the numbers.”

Copyright © 2008 The New York Times

3 Comments

Filed under Automotives

3 responses to “The SUV Market Has Collapsed

  1. Car

    Only a matter of time before people started to realise how inefficient those big gas guzzlers are.

  2. usuajg0

    SUV drivers in my state, Kansas, have annoyed me for years because they drive so arrogantly. They speed, change lanes without signalling, and love to pull up so close behind you that all you can see if their grill in your rear view mirror. They like to “sit up higher” than everyone else because it makes them feel superior. They drive like nothing could possibly go wrong.

    I can’t believe so many jumped on the SUV bandwagon in the first place. If you had told a group of 30 something women 20 years ago that they would soon be driving monster trucks that you would need a ladder to climb into they would never have believed it. I remember when low-slung sports cars were in vogue. Gosh I’m old.

    Also, I remember when people were rushing to dealerships to trade in the V8 cars in the mid to late seventies for a Volkswagon Rabbit or one of those “new Toyotas.” Honda even had a little tiny car back then that was almost laughable it was so small. I think it had a motorcycle engine in it. I also remember the gas crunch of the mid 70’s when gas doubled in price from 33 cents to 66 cents a gallon and Time magazine’s headline said “We’re out of oil.”

    Somehow, over time, we forgot all about the energy crisis and started building V8’s again and then came the SUV’s. Once the trend was entrenched then somehow you had to have an SUV if your kids played soccer. How else would you be able to transport all the equipment and kids? Obviously there was no way to move people and equipment around before the “invention” of the SUV.

    Boo-hoo, some idiot thought it was a good idea to spend $40k on a tanker and now it’s not worth much. We’d better bail ’em out. Maybe I should have bought a $500k house and a couple of $40k boat anchors a few years back so I could be part of the arrogant, self-serving, idiotic, immature in crowd and then get bailed out by the government. At the same time I could complain about how the big brother government is intruding on my privacy.

  3. i hate car loans because sometimes that interest rate is not very fair;;*

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