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SUV Glut Has Parallels To Housing Slump

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The New York Times

Published: August 17, 2008

DETROIT - 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?

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 Chevrolet's C/K Suburban nearly doubled over the same period, up to 116 days from 63 days.

Just like hapless homeowners, countless car owners are now "under water," 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 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 Kelley Blue Book.

But with a V-8 engine that gets only about 14 miles per gallon, 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 hyping Detroit's newest models. Instead, they almost cannot give SUVs away.

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 who will pay because they will have on their hands both the new SUVs and 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.

GM also took a big hit on its quarterly earnings. GMAC Financial Services, which is jointly owned by GM and Cerberus Capital Management, reported $2.5 billion loss in the second quarter, which included a $716 million impairment charge from lower SUV residual values. GM, which lost $15.5 billion in the quarter, was also forced to contribute about $1.5 billion in lease support payments to GMAC.

In their heyday, sport utility vehicles brought hefty profits to automakers, but today those companies are slashing output and shuttering plants amid plummeting demand - only they cannot do it 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 the month of July.

"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."

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