There is an additional factor. Sellers who might be interested in downsizing, say, who have low mortgages see that if they sell and buy another house they’d have to pay a much higher interest rate, which takes a lot of houses off the market. Low inventory means higher prices for the buyers who can afford the higher interest. It won’t prevent a drop, but it certainly moderates a price drop.
Which, for the record, are simply a sort of insurance policy, so they need the same sort of premiums vs. payout analysis that people should consider when purchasing any insurance policy.
For electronics, they’re especially questionable. The general rule is that they’re either going to crap out immediately on the very first power-up, or they’re going to run for a long time, because nothing actually wears out. You’re essentially paying for the peace of mind that if your TV (or whatever) fails spontaneously, you’ve got the replacement cost covered or so you hope.
For something like a car, it’s all in how much expected maintenance there is, versus how much you’re going to pay in. They’re like $500-2000 a year, which is far more than most vehicles incur in actual fix-it costs over the course of a year. And I bet that they go up right at about the time someone will need stuff replaced that has a finite lifespan (brakes, shocks, etc…).
All in all, it sounds like the kind of thing that maybe people who can’t save should possibly consider- they might be able to fold another 50-60 dollars into their monthly spending, but can’t manage to keep $500 for a rainy day (new TV, alternator, etc…) in the savings account. Otherwise, it’s money down the toilet IMO.
The problem with extended warranties is asymmetrical information. The manufacturer has all the data about failure rates, cost of repairs, etc for each model for each year. You don’t. So they can sell you a warranty that has a super high profit ratio, and you have no way of knowing.
If you look at an extended warranty for a car, sometimes there is an inexplicable list of exemptions. The transmission is covered, but not the clutch linkage. The chassis is covered, but not the differential. Or whatever. What you are seeing is the company, which knows which stuff costs the most and is most likely to break, excluding it from your warranty.
Many people don’t realize that extended warranties are almost never as extensive as the original factory warranty, and sometimes only cover the stuff that’s least likely to break on you. Caveat Emptor.
The other issue with extended warranties is that they only kick in when the manufacturer warranty runs out, which could be 5-10 years. But you are paying for them up front so they get to use your money interest free for that period. It didn’t matter a lot when interest rates were low, But at 7%, money doubles in ten years. So you’re essentially paying double for the warranty if the car’s basic drivetrain warranty is ten years.
Put your money you would have spent on an extended warranty in a GIC or other term investment for the term of the manufacturer’s warranty, then when the warranty expires you’ll have thousands of dollars more in an account to use for repairs. And if you don’t need the repairs, you lose nothing.
I used to report on processor reliability data for my company, and things do wear out, but it usually takes so long that it is either past any reasonable warranty time or the product is so obsolete that buying a new and better one is a better choice than getting it fixed.
The things that wear out first, actually, are mechanical parts like fans, power supplies and hard disks.
There is a bathtub curve, but I never saw any parts failing on the far end of it, probably because the system had been junked long before they would fail.
I wonder if people who buy warranties for electronics are old enough to remember times when things like TVs were a lot less reliable. I remember when every drug store had a tube tester.
And that’s assuming that they actually pay out. The extended warranties don’t cover many of the things you’d think they should.
I have to admit that I’ve replaced a few fans in my day, but replacing a heat sink fan, case fan, or power supply fan is NOT worth an extended warranty. Nor is having a drive crap out on you; they’re trivial to replace especially in today’s SSD/SATA world. Even when it was molex power & unkeyed IDE cables, it wasn’t so hard that it would be worth carrying an extended warranty for.
Usually the biggest loss is the data on the drive, not the drive itself anyway, and those warranties more than likely don’t cover data recovery type stuff.
I never buy an extended warranty on cars.
Unfortunately, my mother-in-law did, and when she stopped driving and sold her car to us a few years back, we were able to transfer the warranty into our names.
The dealership sold us the warranty (actually an “extended service plan”) for $3000. I have no idea how much they paid for it, but I’m certain it was nowhere near that. There was a long list of excusions from coverage, though the alternator was not one of them (and that ended up dying). I took it to my usual mechanic (not the dealer) and had them handle things with the warranty issuer. The service manager said they were much nicer to deal with than most warranty issuers, and when I said “So, almost as bad as a root canal, but not quite?” he nodded.
The service plan ended up paying for about half the cost, as the quoted rate for labor was less than what my repair shop charges, and of course the parts were not covered. Only another $2600 worth of repars, and that extended warranty will have paid for itself!
Did I mention I will never buy another extended warranty for as long as I live?
Definitely not worth it. Less reliable over an installed base doesn’t mean unreliable per person. Replacing a disk is easy, and I have a data backup service which I used for the first time the other day. Not because of a hardware failure, but to restore work on a file which mysteriously vanished. And I think semiconductor disks are going to be a lot more reliable.
And my view is a bit skewed because I tended to see only things that failed, which made me think reliability was worse than the numbers showed.
That reminded me of this terrible article from a usually pretty-good site:
Hard drives do not typically fail in under three years. But of the ones that did fail, it happened in under three years on average. The failure rate was only 1.4% over a ~10-year period, so the drives were actually extremely reliable on average.
Not directly relevant to the OP, but How to Lie with Statistics is probably useful reading for people with poor financial literacy.
That’s a great point. I can’t tell you how many articles I’ve seen claiming that hard drives only last a few years.
I have not seen many failed hard drives at all in the past twenty years. I have stacks of old hard drives I removed from machines over the years to put in bigger ones, and they all worked fine at the time despite being many years old when I removed them. My main computer has two hard drives in it that are at least ten years old, and work fine. I do back up everything on them, though.
That’s true for me as well. But in the 2002 and before era, they seemingly pooped out on a much more regular basis it seems like. Am I imagining that, or were they really less reliable back then?
Which is similar to something that is about financial literacy, those ads for auto insurance which say that people who switched to their insurance saved an average of $X. Of course - those who didn’t switch got higher quotes or quotes of the same amount, so the statement is of a biased sample.
I did go to talk to a AAA car insurance person once, to get the gift, and he told me that with my driving record no one would ever beat my current insurance rate because my company knew me and everyone else would be guessing.
I’ve had two in a row fail me and yeah I’d say they lasted three years each. Fortunately I keep everything in a cloud and a third party backup service so I’ve never lost anything. Just unlucky I guess.