The Homa Files

Summary: Hybrid vehicles offer many advantages: environmental friendliness, HOV lane access, better gas mileage.  But, based strictly on economic value to the customer (EVC), it’s tough to justify buying one – especially since dealers are discounting conventional models during the current auto sales slowdown, and selling hybrids near (or above) sticker prices   I know, I shopped, I bought.  Here’s my story, replete with numbers.

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OK, after 9 years and 143,500 miles — it was time to trade in my 1999 Lexus RX300 SUV.  And, with gas prices north of $4 per gallon, it made sense to consider a hybrid. 

Buying a hybrid would certainly be the “right” thing to do – more green, less gas,  But, being an economically rational guy (think “cheap”), my decision quickly centered on the economics: would the price premium being charged for hybrids, in effect, pay for itself?

Two decisions simplified my buying process.

First, I still wanted an SUV.  Sorry, but with 2 big dogs and occasional Home Depot trips,  I do enough hauling to justify it psychologically.

Second, Lexus was my brand choice since the RX300 served me well  for almost a decade, and since Lexus has a competitive  advantage in hybrids — thanks to its accumulated experience with Prius.

Specifically, I narrowed my choice set to the Lexus RX350 (updated version of my current car) and its cousin — the Lexus RX400h – a functionally comparable hybrid version.

Before leaving the house, I pulled  price and tech data  from the usual car sites: Yahoo-Autos, Edmunds, Kelly Blue Book, and CarMax … and crunched some numbers.

First, I wanted to know how much I’d save on gas if I bought the hybrid. 

The RX350 is government rated at 17 MPG in city driving and 22 MPG on the highway; the 400h is rated at 26 MPG city and 24 highway.  I was a bit surprised that the only significant difference is on city driving – slow speeds and lots of starts & stops; highway driving is essentially a push.

I drive about 12,000 miles annually (right at the national average).  I don’t keep track of my split between city & highway mileage.  In fact, I’m not exactly sure what defines the distinction, e.g. is driving down Route 7 in northern Virginia at 45 MPH city or highway?  Without belaboring the distinction,  I simply assumed that my miles are split roughly 50 / 50 between city and highway.

Given my driving pattern and  these MPG ratings, I would expect an RX400h to burn 480 gallons of gas each year (6,000 miles at 26 MPG, and 6,000 miles at 24 MPG).  An RX350 would burn 622 gallons each year (6,000 miles at 17 MPG, and 6,000 miles at 22 MPG).  

So, the hybrid would use about 142 fewer gallons of gas annually.  At the current $4 per gallon, that’s an annual savings of about $566 

Next step: compare the gas savings to the price difference in the cars.

The base price of a RX400h is $42,980; the RX350 is $39,100.  So, assuming a comparable set of equally priced options, the “hybrid premium” between the cars is $3,880. 

I checked for available tax incentives that might be available, and was surprised to find that the tax credits  provided by the Energy Policy Act of 2005 had expired for all but a few low volume makes & models.   More on that in a subsequent post.  

So, it looked like I’d be staring at a $3,880 purchase price difference (over $4,000 counting sales taxes) that would take me almost 7 years to breakeven ($3,880 divided by $566 equals 6.85 years).

Note: To be technically “pure”,  the future gas savings I should be discounted back to a present value.  Using a 5% discount rate, the breakeven is pushed out to a little more than 8 years.

Since holding a car for 7 years is the national average, and since I’ve owned my current car for 9 years, it seemed that the hybrid would be a contender.

Reality set in when I got to the local dealer. No surprise, the lot was full of RX 350s , but there were only a couple of RX400h hybrids.  The salesman volunteered that he “had room” to discount the RX350s, but that the hybrids were going “pretty close” to list price.

Sure enough.  After a couple of hours of haggling, The dealer’s “hard” offer was $48,970 for a loaded RX400h hybrid (about 2% off the sticker price), and  $41,500 for a comparably featured RX350 (about 10% off the sticker price).

Bottom line: The real hybrid price premium turned out to be $7,500 – an 18% price spread between the RX350 and the RX400h.

So, my nominal “pay back” period was pushed out to 13 years ($7,500 divided by $566 per year in gas savings equals 13.25 years); the NPV breakeven was pushed out to over 20 years.  Said differently, gas prices would have to double to $8 per gallon (starting today), to get the payback down to average ownership life of about 7 years.

My conclusion: the RX350 had a compelling economic advantage over the RX400h — its hybrid cousin.  While I admit to some guilt , I concluded that $7,500 is a lot of money and 13 years is a long time. Guess which car I drove off the lot … 

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Some observations:

1. The experience reaffirmed my view that anybody who thinks they’re pulling anything over a car dealer is fooling themselves.  Man, do they know how to bob & weave with the numbers, and there is no end to the “adders” they try to throw in.  Aggressive negotiating seems to only minimize the “damage”.  What happens to the average guy off the street?

2. I expected even more of a fuel advantage from the hybrid – and didn’t expect the difference to be almost entirely attributable to city driving.

3. I wonder how many folks will just compare list price differentials and understate the hybrid purchase price premium.  They may make the “right” decision – in part, by drawing wrong conclusions re: the economics.

4. The Prius might make sense for anybody who puts on a lot of mileage diving alone (few passengers, no gargantuan pets, no lumber),.  With a price tag in the low $20s, a sizable “installed base” (no notoriety, familiar to mechanics), and gas mileage over 45 MPG —  it makes both economic and environmental sense.  But, even with a Prius, you’re still paying about a dime a mile for gas …

5. I expect auto companies to keep inching hybrid’s sticker prices up and for dealers to “get healthy” selling them at or above sticker prices.  I wouldn’t be ahocked to start seeing “market area adjustments” added on the sticker prices.

6. I was surprised that hybrid tax credits were a thing of the past.  Most of them were phased out in 2007.   More on that topic in a later post.

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This entry was posted on July 16, 2008 at 8:02 am and is filed under Autos - Travel, Economics, Oil & Energy, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.