Cash for Clunkers to Cause Used Car Bubble?

Many people around the United States are excited about the Cash for Clunkers program. With Cash for Clunkers, consumers can trade in their older gas guzzling vehicles and receive money from the federal government towards the purchase of a new fuel efficient car. The program is so popular that the federal government recently added $2 billion to the fund.

However, Kelley Blue Book recently announced that there may be long-term drawbacks with the Cash for Clunkers program. Alec Gutierrez of Kelley Blue Book believes that auto dealerships may become overconfident.

Said Gutierrez: “Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery. As a result, dealers are going to auction to restock inventory, driving up used-car values. However, the effect of a supply reduction of this magnitude could have an immense impact on these values in the short-term, exacerbating the already-limited supply at auction.”

Kelley Blue Book estimates that approximately 750,000 cars could be removed from the marketplace due to Cash for Clunkers. Due to that, supply will lower and demand will raise for used cars, which could cause a used car bubble.

“If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down,” predicts Gutierrez. “Ultimately, there will be the possibility of a contraction in auto sales as soon as the Cash for Clunkers program runs out of funding.”

Cash for Clunkers to cause used car bubble? (Image: Flickr)