Can you really save money by trading in your Tundra?

[StatCoder]

There are pretty regular posts, now, from people who have traded or are thinking of trading in their trucks in order to save money. This article from the Wall Street Journal points out some of the harsh realities of the truck/SUV market:

• Trucks and SUV's are worth $2K to $3K less than they were worth last year. And last year was no great time to sell a truck.
• 40% of trucks traded-in in May were worth less than what was owed.
• Even trucks that are two or three years into a five year loan are still upside-down.
• An truck often costs about $1,700 more per year to drive than an economy car. If you're going to lose about $4K on the transaction(the difference between the actual value of what you traded in and the actual value of what you bought instead) , it will take you at least couple of years to begin saving money. Any cash you might gain on the transaction is a result of downgrading your vehicle.

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Collapse in Demand
For Large SUVs Leaves
Owners in a Bind

Tumbling Values on Trade-ins, Used Vehicles
Means Many Loans Are 'Underwater'
June 2, 2008
Most people who buy a new car or truck don't think they are making a risky bet on the commodity futures market. But they are. Just ask someone who's trying to unload a large sport-utility vehicle purchased in the last two or three years.
The market for large, second-hand SUVs is going through its own version of the mortgage market's meltdown -- and for some of the same reasons. GM's Hummer H2s and Chevy Tahoes and Toyota's Sequoias were adjuncts to a lifestyle built on cheap energy. Because gas was cheap, living farther from work in order to buy a larger home in a former corn field (or desert) was a reasonable economic decision. Shuttling 100 miles a day from school to work to mall to Costco was a trivial expense -- $10 or so when gas was $1.50 a gallon. You could spend more supplying all your passengers with 20-ounce bottles of Coca-Cola.

Gasoline at $4 a gallon has burst the super-sized American lifestyle. The proof: The fizz has gone out of sales of those 20-ounce sodas, in part because after the shock of filling up at the pump, people aren't in a mood to buy anything else at the quickie mart.
More seriously, lots of big homes far from town suddenly aren't worth what's owed on them, and the SUVs that ferried people around the sprawl are also "underwater" on their loans.
About 36% of the people who tried to trade in a large SUV in May owed more on the truck than it was worth, according to data from the Power Information Network. That's up from just under 33% a year ago. (It's worse for large pickups. Recent PIN data suggests 40% of large pickups traded during May fetched less than the loan balance.)
A three-year-old large SUV today is worth about $2,000 to $3,000 less at trade-in than a three-year-old large SUV would have been in 2007, before gas prices began to soar, according to Marc Cannon of AutoNation Inc., the largest U.S. auto retailer. A three-year-old Chevy Tahoe that might have fetched $19,700 in September 2007, he says. Today, a three-year-old Tahoe might be worth $16,400 at trade-in.
In other words, folks who bought a big SUV in 2005 are discovering that they were making a bet that oil prices would remain stable. They were wagering $30,000 to $40,000, not the billions certain U.S. auto makers stand to lose from making a similar wager. But the pain of losing that bet is still real. There hasn't been such a significant collapse in demand for a class of vehicles since the oil embargoes and inflation of the 1970s slaughtered muscle cars.
Associated Press Unsold 2008 Super Duty pickup trucks sit at a Ford dealership in the south Denver suburb of Littleton, Colo., last month.
For the past several weeks, I have passed an increasingly common sign of the times: a Hummer H2 parked at the front of the owner's driveway with a "For Sale" sign in the window. I don't know the seller's motives, but it's doubtful they'll get what they want for the truck, given that Hummer dealers have a glut of unsold new vehicles that will probably leave their lots at fire-sale prices.
Within the past few days, a number of experts in the used-car market have recommended that owners of large SUVs should probably just hang on to their rigs rather than sell into the current collapse.
"If you've got one two- to three-years-old and you're working on a five-year loan, you will be upside down," says Jack Nerad of Kelley Blue Book/KBB.Com. "That's exacerbated by the fact the dealer doesn't want that vehicle right now. It's going to be an ugly scene."
Mr. Nerad's reasoning is that right now could be a trough for large SUV demand. Winter usually brings an uptick in demand for four-wheel-drive vehicles, which would make late model used SUVs more desirable for people who want them.
It's true, as Mr. Nerad points out, that the incremental expense of driving a large SUV for another year -- as opposed to buying a Ford Focus -- is almost certainly less than the financial hit a consumer will take trading in a big SUV right now.
A Toyota Sequoia costs about $1,700 more to drive for a year than a Ford Focus, based on the government's mileage calculations and average gasoline prices of $3.79 per gallon. Even adjusting the calculation to $4 a gallon, you'd likely lose less in a year by keeping the big rig.
This is a perennial debate in financial markets: When do you close out a losing hand? No one would or should pay attention to what a journalist has to say about that. (If we knew….)
The bind of what large SUV owners should do with their rides illustrates the bigger problem confronting the U.S. car business. Vehicle strategies -- the mix of small and large, cars and trucks -- take years to develop. Consumers, likewise, buy vehicles they intend to keep for several years -- as evidenced by the fact that so many people choose to take five- or six-year car loans. The economic environment that makes a vehicle choice look rational can change far more quickly.
What remains to be seen is how consumers will choose to cope with the fallout.
Some big SUV owners may decide that their big truck is worth keeping, provided it is used for tasks only a big truck can do -- such as hauling a trailer. A big SUV that is driven only about 8,000 miles a year costs no more to fuel than a Ford Focus driven 15,000 miles a year. Daily commuting in a big SUV never really made a lot of sense. But now, high gas prices make it economical to get the right tool for that job.
The collapse of the SUV market presents a huge challenge for auto makers. The financial problem is well documented. But this goes beyond red ink. Auto makers will have to reorient their marketing. To sell SUVs, car makers convinced consumers that they needed one vehicle capable of performing every conceivable task from climbing a cliff to negotiating left turns across traffic to get to Nordstroms.
Now, auto makers will have to tell consumers they need a number of vehicles designed for specialized tasks – the SUV for the family vacation, the Mini or the Honda Fit for the slog to work, the luxury sedan for the night out with business associates.
It will be a tough sell. But they may find that many customers are already ahead of them.
• Send comments about Eyes on the Road to joseph.white@wsj.com.