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Sunday, September 06, 2009

Excellent Article: The Frum "Cash for Clunkers" Mentality

Great article! Wish I wrote it. :) And from the Yated no less. I will file this under GOOD Financial Advice.


The Frum “Cash for Clunkers’ Mentality
by Avrohom Birnbaum

I have an admission to make. It’s going to be difficult to get it out of my mouth, or out of my keyboard and on to the screen, but I am going to gather the strength, steel myself, overcome the difficulty and make the admission. Okay, here goes: I drive a 1998 Ford Windstar! There. I did it! I got it out. It’s now public knowledge. I feel better already.

Yes, I am one of those guys who usually drives around town in what is classified as a bonafide old clunker!It even fits the criteria of “clunker” as set forth by our beloved commander-in-chief, President Barack Obama. Why, then, am I so hesitant about publicizing my admission? Is it because my car is missing most of its hubcaps? Is it perhaps because it has several unsightly dents and even has paint peeling in a couple of spots?

Maybe it’s because I am one of the only people driving that model car without Pennsylvania license plates and am a legal upstanding citizen of this great republic. Either way, over the past few weeks, a number of goodhearted souls have told me that they feel happy for me that I will now be able to trade in my clunker and receive some $4,500 from Mr. Obama towards a spanking brand new car. After all, my 1998 Windstar fits all of the government mandated criteria - it is a gas guzzling old car that I have owned for approximately 9 years, thus making me a textbook case of one who is eligible for the program. “Wouldn’t it be nice to trade in the old bus for a new Honda Accord, Toyota Camry, or perhaps even a Honda Odyssey?” a good friend proposed. The philosophical, one-word answer that I gave him was, “No.” I may get a $4,500 discount on the new car, but after all is said and done, the new car, with taxes, will cost me more than $20,000. That’s a lot of money that I am not willing to pay, or better said, put on credit, when I have multiple tuitions to pay and myriad other expenses that are part and parcel of sustaining a family. My trusty old clunker will just have to do for as long as the One Above grants it life. And, when its day comes, I suspect that it will be exchanged for another clunker that will once again fit Obama’s criteria.

My friend countered with what seemed to be an irrefutable argument. “You can buy the new car and then sell it after two years. You will get back virtually the entire balance of your loan and you will have had the use of a beautiful, brand new car for two years, for nothing. Zippo! Zilcho! Free!”

The refutation of his logic targets the crux of what is so troubling about the Cash for Clunkers program, and the many similar justifications that so many people make for buying things that are really out of their range. Firstly, after two years of enjoying the car, it is very unlikely that one will sell it. If one does sell it, one will be hard-pressed to step back into an old clunker after experiencing the taam of driving a brand new, mechanic-free, headache-free car. Taking advantage of the program will effectively place one in a status bracket and accustom him to a comfort level that he cannot afford.

That is the truly troublesome issue with the Cash for Clunkers program. It encourages the population to spend beyond their means and go into unsustainable credit debt. Was that not one of catalysts for the economic crisis in the first place?Indeed, one need not avail himself of the Cash for Clunkers program to see how - way before Obama cooked up the program - this mentality had already seeped into many areas of our own lives.

Recently, I was conversing with a frum electrician employed by many in the frum communities in both New Jersey and New York. He told me that in the 13 years since he began working, he has discerned a fundamental metamorphosis. “The standard of home in which I worked 13 years ago, which was limited to only the considerably wealthy, is today the home of the simple, poor or lower middle class income family.”

I asked him, “How could it be? How could a person with minimal income buy the kind of house that only the wealthy possessed a decade or a decade and a half ago?”

He replied, “Most of them have elaborate cheshbonos that ‘made it impossible for them not to buy the home’! It sort of goes like this,” he explained. “They get their hands on or borrow a certain sum that serves as a down payment. Then they design the house to have a rental; the industrious ones even find a design that allows for two rentals. Then they plan on living in the basement for at least five years while renting out the upstairs. If they do all of that, their monthly portion of the bill is just several hundred dollars more than they would be paying if they had to rent. Therefore, it would be a crime not to buy and own your own large home, no?!”

This is the classic example of how the Cash for Clunkers syndrome infiltrated our thinking long before the president proposed it. Everyone is a brilliant oiber chochom, concocting elaborate schemes to justify the excess. If everything works according to the scheme, one would be a fool not to buy the large house. Never mind the fact that so many of these people are young couples, barely after marriage, who are undertaking massive mortgages and massive debt that could destroy them if all the cheshbonos don’t work out as planned. Let’s say the rental market falls drastically. Let’s say the property taxes skyrocket. There are so many scenarios that can doom a person if he does not have a realistic cushion. Even if he is not doomed and somehow comes up with the payments, he will be in a constant state of angst about how he will come up with the astronomic monthly sum to cover the payment and thus forfeit some of his most precious assets: menuchas hanefesh, time for learning, shalom bayis, time with the children, and the list goes on... All because he thought he was smarter than everyone and the “opportunity” was too good not to take advantage of.

Perhaps we, as a community, should stop to ask ourselves whether we have been guilty of the same fundamental mistake and premise that is wrong with the Obama Cash for Clunkers program. Are we being oiber chachomim when it comes to our lifestyles? Are many of us behaving like “Obama on steroids”? Not only with the houses that we must have, and the cars that we must buy…or lease, but also with the clothes we buy, the recreation we “require,” and the general lifestyles that we live? Sometimes, driving the 1998 Windstar can ultimately afford one a greater comfort level than the brand new car. Sometimes, living for the first decade of marriage in a rented apartment or a small starter house while not giving a couple room to spread out surely affords them the room to breathe. Are the new car and the new house really worth it? What is the price - both spiritual and material - that they are truly costing? Perhaps it is time to analyze these questions in a moment of brutal, unadulterated emes. Think about it.

24 comments:

Anonymous said...

I drive a 1994 full-size van; when we purchased it used 7 years ago it had been used very little. We didn't try to trade it in during the "cash for clunkers" promotion because we prefer to buy used vehicles for cash. Because my vehicle is so old it doesn't have many features that are common in newer vehicles, but it works fine & has automatic transmission & A/C.

People have commented about how old the vehicle is, but not generally in a rude way. Once I was giving a little girl on my street a ride home. I stopped the vehicle to let her out & unrolled the window manually to adjust my mirror (no power windows, doors, or mirrors). The girl was amazed & asked, "Wow...how can you open the window when your van is off?".

alpidarkomama said...

Clunkers unite! Used vehicles for cash is our motto too. I think we're going to have to upgrade our 1997 Odyssey pretty soon... But that's okay... the insurance already paid us for the car when it got hit by a tree branch last winter. We had our own private Cash for Clunkers program! :) LOVED this article. Thanks for sharing. And I too have seen way too many people living in way too much house with way too much stuff. Startlingly few people live within their means.

tesyaa said...

A little off topic, but sometimes I'll pay a little more for an item in ShopRite, rather than go to the kosher store to save 40 cents. I reason that a trip to the kosher store will ultimately cost me more in impulse purchases or other non-necessary items.

Shoshana said...

This was a great article. Thanks for posting something that shows a Yid with some good sense.

Critically Observant Jew said...

I drive a 16 yr old car and my wife drives a 9 yr old car. All of our friends were telling us to use Cash for Clunkers, but we had to explain to them that unlike their Murranos and MDXs, our cars are so fuel efficient (25 mpg and above) that they don't qualify :-)

SephardiLady said...

Critically Observant-I don't know how many times I had to explain to the in-laws that 1) our vehicles don't qualify for the clunkers program and 2) a $4500 rebate on a *new* care still doesn't make the car efficient for us to drive.

The real crime of the program is taking affordable used cars out of the market. The frum community also makes life more unaffordable when they subsidize certain things for certain people.

rosie said...

I don't see buying a house and renting out part of it as extravagant.

Yael said...

Rosie,

You might find it extravagant (even financially troublesome) if you cannot find a renter to rent said space in your home and you rely on them to pay the mortgage. This happened to a friend of ours and it was a very stressful time for them.

SephardiLady said...

I completely agree with the author. If your cash flow will NOT cover your home without having a renter, you should not buy that home.

Landlords need large cash cushions and they need to be able to stick in when their investment goes south. That means $$$$ in the bank, a sizable emergency fund, and the ability to weather a huge hit.

Renters come and go. The mortgage payment is there to stay. Most young couples don't have the means (and know how) necessary to become landlords. Buy a home you can afford with one income.

Anonymous said...

Critically Observant: We were in that same situation -- old cars, but very fuel efficient (avg of 30 mph). We've driven fuel efficient cars long before it was the in thing to do and have never owned an SUV. Not being able to partipate in KFC made be feel like I was being penalized for behaving.

Nonetheless, although I am very frugal when it comes to cars,I do think it makes sense to get more of these old fuel hogs off the road even if it might mean spending a little more or turning in a car a little sooner than planned. How does one measure in dollars all the illness that is caused or made worse by auto emissions. Auto exhaust and the particulates they spew in the air are a serious cause/contributor to heart and lung disease and are very dangerous to people who have heart or lung disease from other causes. Also, how do you measure in dollars and cents the funding for terror and oppression that our insatiable appetite for gas causes/contributes to. Even if we are not buying from Iran or other dictatorships and countries that support terrorism or the suppression of basic civil rights, because oil is largely fungible, every gallon we consume helps keep up the price.

The bottom line is, more than just the immediate price tag for a new or newer car needs to be considered when deciding when to replace your car and with what. Sometimes being too frugal and looking at only the immediate bottom line makes one lose track of other important issues like clean air and stopping the flow of cash to unfriendly foreign countries. I appreciate that for some families with more than three young children, you cant fit four baby or child seats in the back of a honda civic or a prius and for a certain period, a minivan might be something of a necessity. But, please try to compensate and make sure the other famiy car is fuel efficient and use the minivan only when necessary.

Anonymous said...

For me the ultimate conceit is the notion that so many men feel it is not necessary for them to earn a living or even prepare to learn a trade or skill. Amazingly, it is highly desirable to live off others. I don't think anyone living off others could even understand the gist of this article. Money not earned has almost no meaning.

Offwinger said...

We too have a car that did not qualify for Cash for Clunkers, since it gets great mpg.

The problem is that this 15 year old car has finally reached the critical point of not being worth repairing. The amount of cash to get a car that requires significant maintenance/repair every 1-2 years is just not worth the risk anymore.

If I had $5 for every person who suggested Cash for Clunkers to me, I'd have enough money to buy a car!!!

The double-whammy, though, is not just that the responsible car owner, who chose an efficient vehicle, did not qualify. Oh no. It is far worse. Tracking prices for cars, it was curious to me that the price of certain cars shot up by about $2000 once the program took effect. Dealers were not willing to negotiate or offer the same discounts, manufacturers removed incentives, etc. And the buyers trading in under Cash for Clunkers were told that if they didn't buy FAST, the money would run out, all while dealer inventories were shrinking. So buyers had very limited leverage to walk.

To the best of my knowledge, it seems that the $3500 or $4500 subsidy was split roughly in half - half went to the car buyer, half went to the dealer. The prudent car buyer who always drove a fuel efficient vehicle was now facing a short-term price hike. The good news is that at least it's over, and the market should go back to "normal" as soon as inventories are stabilized.

Ahavah Gayle said...

"Perhaps it is time to analyze these questions in a moment of brutal, unadulterated emes."

Past time, actually.

A very good article.

Anonymous said...

Ya know, driving an old car with "bad" fuel economy is actually saving gas! Are you aware of how much gas/energy/resources go into manufacturing, selling, and transporting a new car? You'd have to drive it for years to make it worth that massive energy outlay. And who says the car will last that long? - as is the main premise of the article.

ProfK said...

I agree with the article for the most part BUT...there's more to owning a used car than just the price paid for the car. Some of those clunkers really do not get good mileage. Some of them are at the old and cranky stage where they seem to be visiting the mechanic an awful lot. Some of those cars, because of their age, can only be repaired with certain parts that are not available at every service station. You may be at the mercy of a mechanic who has what you need, knows it, and charges accordingly. And yes, some of those cars may be "running fine" but are on the border (or have crossed it) of safety issues. My '99 Corolla was in that toss up area between being euthanized or committing suicide. It killed itself last month. And yes, I bought a newer old car for cash as a replacement.

Re the multi-dwelling house, you aren't taking into consideration the prices of homes in certain areas as opposed to others. The benefit of having a tenant depends on what you paid for the house to begin with. If you're over extending yourself on the mortgage for the 2-family because you assume the tenant will offset your mortgage payments you could be in trouble. If, however, the amount you can cover on a mortgage will buy you a 2-family then it's a good idea. Our neighborhood when we first bought here was mostly two family homes. The prices were less than small single family homes were going for in Brooklyn and other parts of the city. Yes, the tenant's rent helped to pay down the mortgage faster and/or cover repairs and maintenance on the house. And when the time came that we could comfortably handle any house expenses on our own, we turned our 2-family into a single family--didn't have to move at all. Re young couples don't know how to be landlords--no one knows how to be a landlord until they are one. You ask for advice from those who are already landlords and then learn on the job.

SephardiLady said...

Of course you can learn on the job how to be a landlord, but you need a lot of cash because stuff happens. That's the point.

SephardiLady said...

Also, every car is hit or miss. My Corrolla is much older and only recently hit the major repair zone. Our newer car hit the bigger repairs much younger. It is American.

rosie said...

My son the landlord lives in an area where rentals are in demand. Some investments are risky such as going into business and buying real estate.
My son lives quite modestly because the living space that he has after renting out most of the house is small.
Our clunker qualified, was on it's last legs, and we needed a reliable car. It is a Toyota rav4.

jdub said...

Agreed. My 99 corolla (just had 80,000 miles on it) is running strong. I expect i can get another 5-10 years out of it, BS"D. My wife's 2002 Odessey will probably have to be replaced first, since she's got many more miles on it. But that's a ways away.

Critically Observant Jew said...

jdub, my 93 saturn has 210k miles on it and my wife's 97 corolla has 180k. Both have original engines and transmissions. Keep your eye on the oil level and hopefully, your car will last you a long while :-)

SephardiLady said...

jdub-That car may surprise you. Mine is 20.

Avi said...

I can keep up with some of you: we've got an 11 year old Mercury that has needed a few pricey repairs (but still cheaper than buying new) and a 5 year old Toyota minivan (no major repairs, though basic maintenance is pricier than the Mercury). However, I don't like bragging about my frugality because I don't WANT to drive older cars. I want something new with all the safety features and creature comforts. If I replace the old semi-reliable Mercury with a new one, the new ones are supposedly more reliable than most of the import brands. The bottom line is that I'm prioritizing four tuitions over newer cars, but I really love cars and I desperately want a nice shiny new one with a bigger engine, AWD, and new car smell. I hate being grown up and responsible. By the time I can afford a cool car, I'll be way too old to appreciate it. Probably past that point already. Sad.

mlevin said...

There is a lot of difference between buying a car and buying a house. Cars depreciate in value as soon as you buy it. Houses, on the other hand always go up in price. There are a few exceptions like Detroit, but in the long run the price of your house will go up.

Also, rents go up on regular basis, but if you take a fixed mortgage your payments stay the same. Thus, everytime the young couple gets a raise, their mortage payments become relatively smaller and smaller.

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