Wednesday, November 19, 2008

The Car Dealer's Answer..

I ran into a Navy Lieutenant today whose family runs a string of car dealerships in northern Virginia. As soon as he mentioned this, I asked him something I'd been dying to ask for a few weeks and now finally had the chance:

"When gas prices were shooting through the roof, and analysts were predicting that crude would fly through the $200 marker, there were constant reports of people dumping their SUVs for anything they could, and stories about how dealers couldn't get rid of them....so now that gasoline has fallen by more than a dollar and a half per gallon, and analysts are making equally wild and irresponsible prognostications about how low the price of a barrel will soon go, are people now clamoring to buy SUVs?"

I could tell from his immediate reaction that a) he knew exactly where I was going with the question before I even finished asking, and b) it wasn't the first time he'd heard it.

"Absolutely," he replied. "We're selling SUVs at just as fast a rate as we ever have. In fact, if you look at some of the markdowns and the deals that have carried over, we've had some of our most brisk SUV sales ever in the past couple weeks."

Wow. I bought my car in 2004 (a 2001 model) and plan to hang onto it for several more years...literally, until it won't *go* any more. Can I be the only one who thinks that way?

What are all these new SUV owners going to do the next time gas spikes up to $4/gallon?

5 comments:

Matt said...

I don't know if this is blurky or not BUT...it's still hard for me to believe that oil dropping 50% a barrel is a bad thing. I get what it portends about the economy and deflation, but gas was so expensive in LA myself and everyone I know was cutting back driving, which, despite what some of my "greener" friends said, is not a good thing at all.

The New Englander said...

Matt,

Oil dropping in price definitely seems good -- more people driving should mean more economic activity overall...people staying in seems like less shopping, less going to the movies, less convenience store purchases, less...everything.

It just seems strange to me that anyone would base their car purchase decision on something that could change so fast -- according to the car-dealer guy, sales of heavier cars/trucks -- a major, long-term purchase -- vary a lot based on the price of gas at that specific time..

-gp

Nick said...

Gents,

(First off, I love the phrase "string of car dealerships"--it's like a school of fish or a pride of lions. Plus, "string" is so linear..it evokes our notion of the road).

To the points;
the popular narrative said that rising oil prices were bad, and now (parts of) the popular narrative are grumbling that falling prices will be bad. The lesson--the popular narrative is irrational and negative.

Speaking of things that don't make sense, people's buying habits are inherently irrational. Economic activity is human behavior after all.

Even the shrewdest and most fiscally-savvy consumer suffers some emotional influence at the point of purchase. I've never bought a car, but I imagine this holds true, perhaps even more so for big ticket items like cars and real estate.

My dad was recently telling me about buying a house. He had spent months analyzing and researching real estate. He had filled notebooks with scribbles, charts, and tallies. Any yet when he walked into the house that he later bought and still lives in 20 years later, he found himself just picturing what his family's life would look like, there.


He had an emotional response to the space that trumped all of his rational finger-on-the-pulse calculations.

SUV buying habits are irrational, sure, but I sorta get it. Even when we know better, we're sometimes just naturally irrational.

Paul said...

Guys,

Good points all. An interesting note: last time I heard, the Ford F150 is still on track to be the best-selling automobile for the 30th-or-so year in a row. Considering the volatility in fuel prices, this certainly seems surprising. But, as Nick pointed out, the emotional influence at the point of purchase is hard to quantify but most likely present (say, in truck-loving Texas where pick-ups are a symbol of pride for many). At the same time, demand for the utility of pick-ups in a sprawling country like the U.S.--amongst businesses and individuals, alike--will likely keep their sales up for years to come. Still, the utility of SUVs comes into serious question when gas is $4/gallon, and I can only think of a continued keeping-up-with-the-Joneses kind of effect (emotional, "irrational") when I see, say, a guy idling in his Escalade on the corner of a city block with tinted windows and 22-inchers or the mom hoisting her kids up into a Suburban (I mean, they need the legroom!). Those activities just wouldn't be as cool in a Prius or station wagon.

I guess buying an $8 pint of Guinness at a bar vs. buying an $8 6-pack of Guinness at a gas station falls into a similar vein of thinking. Seems irrational until you think of all the other emotional and other variables that would lead you to drop that much dough at a bar rather than enjoy it at home.

On Matt's point, I certainly understand the potential drain on economic activity engendered by high gas prices and less driving, but we also have to remember the potential benefits of having less cars on the road -- less traffic, lower commuting times, less wasted fuel, fewer accidents, fewer auto fatalities, less wear and tear on infrastructure, less harmful pollution, more use of/money spent on mass transit systems that seem to always be starving for funds, fewer missed appointments/flights due to traffic, greater use of HOV lanes as people carpool more, etc. -- that all can add up to greater productivity, an important aspect of the overall economy. Plus, the shear awareness of some of the wasteful and inefficient driving that many of us do is certainly a benefit that has been brought on by high gas prices. This is not to mention the R&D that has come from the spike in fuel prices -- developing Diesel technology, improving on and building wind and solar power stations/sources, creating more efficient engine designs and use of lightweight materials in planes/trains/automobiles, creating state-of-the-art fuel efficient jet engines and implementing them into the new planes that are sold to the industry, etc. I can see all of these things as benefitting the economy, even though on a personal level I might not be driving to the mall as much anymore.

The New Englander said...

Gents,

Great points, and thanks much for writing..I've said it many times before (and will again!) but I think the comments section is the best part of the blog, and I love the give-and-take.

As for the *feeling* you get from a major purchase, I think it's absolutely true. I know that with both my two major purchases (car and home) it was just as Nick said his father felt -- all other reasons aside, it was the image of your future life with/in these things that tipped the scales in their favor.

As for the rationality of SUVs or F-150s, or any large auto, I guess there's not much you can do when sales of a VERY durable good fluctuate based on something that could look completely different tomorrow...seems like a good time to be selling SUVs (today, maybe not tomorrow, and certainly not three months ago).

And of course I'll jump back to what I always say about the media's fascination/obsession with gas prices -- I have no idea how much the *average* person buys a week, but when I lived in Virginia I used to buy approximately 10 gallons/wk and now it's about twice that. When you really start to do the math and look at your budget items, a one-dollar change in gas prices isn't going to send everything haywire in either direction.

As someone I work with just told me, "I'll believe we're really in dire straits when people start cancelling cable."

Neither of us agreed to hold our breath waiting.

-gp