When Buying
A Gas Guzzler
Makes Sense

The gasoline-price-induced collapse of the sport-utility-vehicle market presents a quandary for consumers. With gas at $4 a gallon, SUVs no longer make affordable commuter vehicles. But at the same time, they’ve never been cheaper.

Manufacturers are offering between $2,000 and $5,000 in discounts on once strong-selling models like the Ford Explorer and Chevrolet Suburban, and dealers say there’s plenty of negotiating room after that. Discounting is even heavier on used vehicles, with some selling at roughly one-third the price they would have fetched new four years ago.

The bottom line is that, for people who don’t drive much, today’s deeply discounted SUVs may actually make financial sense.

“It is the ultimate buyer’s market,” says John Casesa, managing partner at Casesa Shapiro Group LLC, a New York advisory firm that owns some dealerships.

For nearly two decades, the car industry rolled out one SUV after another, each seemingly more hulking than the one before. Consumers had little interest in high-mileage small cars, and auto makers made huge profits by selling SUVs.

Associated Press

An enticement for a free year of gasoline with the purchase of a vehicle hangs over a row of unsold 2008 Explorers in April at a Ford dealership in Denver in late April.

High gas prices have upended this world. After declining in both 2006 and 2007, sales of midsize and large SUVs have dropped another 23.7% and 31.8%, respectively, so far this year, according to research firm Autodata Corp. New SUVs are stacking up in dealer lots, and demand for used SUVs is so slack that dealers are willing just to break even to get them off their lots.

Now, as it did following the energy crises of the 1970s, the auto industry is trying to remake itself. Sales of small cars are soaring, and car makers both domestic and foreign are rushing to get more of them into showrooms.

But Detroit’s Big Three in particular are struggling to adjust fast enough to new market realities. General Motors Corp. said this week it would shutter some plants making SUVs and pickup trucks, and is mulling selling its Hummer brand, a poster child for gas guzzling. Ford Motor Co. recently abandoned its goal of restoring profitability in 2009 and said it would further cut production of SUVs and pickups, which have also suffered amid high energy prices and the economic slowdown.

Until auto makers can catch up, SUVs represent a big buying opportunity for certain drivers who don’t mind driving a vehicle viewed by many as politically incorrect.

The biggest SUVs, such as a Jeep Commander or Hummer, get only about 14 or 15 miles per gallon on average, depending on the model, according to government figures. Most don’t fare much better than 20 mpg on the highway. But for people who mainly use their vehicles to tool around the neighborhood, low mileage may not be a deal buster. Even with $4 gas, a Chevrolet Tahoe SUV driven 8,000 miles a year costs only about $2,000 to fill up, according to government figures, while a Honda Civic compact driven 16,000 miles costs about $2,200.

Some drivers simply need the size or power that make SUVs such gas hogs. A Chevrolet Suburban seats up to nine people with plenty of room for luggage. Many SUVs have rear-wheel drive, which, along with their heavy frames, makes them better for towing boats or recreational vehicles. Others have four-wheel drive, good for off-roading and driving in snow.

Today’s SUV deals, which include cash-back offers and special financing terms, have gotten fatter over the past several months as sales have continued to slide. In April, auto makers offered an average of $5,786 in discounts on midsize SUVs, according to the most recent data from Autodata, up from $4,909 a year earlier. On large SUVs, manufacturers offered an average of $4,829, up from $3,070.

Among the better deals are Ford’s flagship SUVs, the Expedition and the Explorer. An Expedition with four-wheel drive has a sticker price of about $35,000, but in many areas, consumers can drive one off the lot for around $30,000 after discounts and negotiations. The all-wheel-drive Explorer with V-8 engine, meanwhile, lists for about $31,000, but can be had these days for under $25,000.

GM, meanwhile, is offering $2,000 back or low financing rates on many of its SUVs. Chrysler LLC and Toyota Motor Corp. are offering discounts on SUVs, too. Great lease deals on SUVs are less common, though some can be found if you look. Leasing an SUV could be a winner if resale values continue to decline sharply, because you get to hand the vehicle back to the manufacturer at the end of the lease.

Peter Tse, the 46-year-old director of international sales for the Grand Hyatt hotel in New York, chose to lease when he got rid of his Mercedes ML350 SUV. He originally considered trading it in for a more-efficient car. But with a daughter heading to college this fall, he decided to lease a new BMW X5 instead, craving the extra packing space — even though the X5 takes premium fuel and doesn’t do better than about 18 mpg in combined city and highway driving. Still, it’s a bit better than the roughly 15 mpg on his 2003 Mercedes.

Mr. Tse’s new BMW is a so-called crossover, or SUV built on a car frame, as opposed to a truck frame. Sales of these vehicles have been rising but are starting to plateau. “We needed a car for the family,” says Mr. Tse, who lives on Long Island and is paying a little more than $600 a month for 36 months. “We decided we had to have the space regardless of the gas mileage.”

Some manufacturers are dangling more-unconventional offers. Chrysler is offering customers a promotion that locks in gas prices at $2.99 a gallon for three years, usually instead of its financing and cash-back offers. (Some vehicles offer the gas program and $3,000 in cash rebates.) Consumers use a special card linked to their credit card to take advantage, for up to 12,000 miles a year. In general, this deal makes sense only if gas prices stay high for several years. Still, people who crave an SUV but worry gas prices could shoot above $5 could take this promotion to sleep better at night.

Deals are even better for used vehicles. Average auction prices for used full-size SUVs in April plunged 17.5% from a year earlier to about $12,500, according to Manheim Consulting, which runs dealer auctions of used vehicles nationwide. In many cases, price tags on used SUVs are running as much as $6,000 below year-earlier amounts, dealers say.

The median age of Manheim’s auctioned SUVs is about four years old, with about 80,000 miles on them. Some dealers say wholesale auction prices are lower than they’ve ever seen. When buying a used SUV from a dealer, “you should probably not be paying much above the wholesale value,” says Tom Webb, Manheim’s chief economist. He adds that dealers are “anxious” to sell before the vehicles depreciate further.

The plummeting resale values have put many consumers underwater on SUV loans they signed a few years back, meaning they owe more than their vehicle is worth. Even so, recent energy price shocks have sent commuting SUV owners to trade in their vehicle for whatever they can get, dealers say. That’s adding to the glut of SUVs and further depressing prices.

Big discounts are less prevalent among foreign-brand SUVs. Some, such as the 2008 Toyota Sequoia and 2008 Honda Pilot, carry cut-rate financing or cash-back offers, but not all. Similarly, deals on luxury SUVs are easier to find among domestic brands than foreign ones. On the used market, wholesale luxury SUV prices overall are off 10% from a year ago.

Write to Mike Spector at mike.spector