Tuesday, November 11, 2008

New Auto Affordability Close to All-Time High

The chart above is Comerica Bank's Auto Affordability Index back to 1979, showing the "weeks of family income to purchase an average-price new vehicle."

The purchase of an average-priced new vehicle took 24.1 weeks of median family income in third quarter 2008, according to the Auto Affordability Index compiled by Comerica Bank. The latest reading is up 1.0 week from the second quarter and down 1.1 weeks compared to a year ago. Including finance charges, the total cost of buying an average-priced light vehicle was $28,929 in the third quarter, up about $1,200 from the second quarter. Family income barely increased in the latest quarter.

"The surprise to me was that the average amount of money spent on a new car increased about 5% to $25,200 last quarter, excluding financing costs, said Dana Johnson, Chief Economist at Comerica Bank. "In all likelihood, many moderate income buyers pulled out of the market due to the limited availability of financing, thereby temporarily inflating the average amount of money spent on a new car. A sharp drop in loan to value ratios, to the lowest level in three years, was another indication that tight auto financing conditions were a restraint for many potential buyers."

Bottom Line: Compared to the 1980s and 1990s, new vehicles are about 17% more affordable today and can be purchased with about 5 fewer weeks of income; and compared to the peak in 1995, new cars are almost 26% more affordable and can be purchased with almost 8 fewer weeks of income.

Maybe that highlights one of the issues in the auto industry: relative to income, new vehicles have gotten more and more affordable (and inflation-adjusted new car prices have fallen by $2,500 between 1998 and 2006, see chart below), suggesting an increasingly competitive industry. In an increasingly competitive industry, the inefficiencies of the Big Three and the UAW have become increasingly exposed, and the inefficiencies have become greater and greater liabilities?


12 Comments:

At 11/11/2008 8:47 AM, Blogger Mike Beversluis said...

Not to mention the dramatic improvement in quality and features over that time.

 
At 11/11/2008 10:27 AM, Blogger Bruce Hall said...

From the Comerica study:

"The surprise to me was that the average amount of money spent on a new car increased about 5 percent to $25,200 last quarter, excluding financing costs," said Dana Johnson, Chief Economist at Comerica Bank. "In all likelihood, many moderate income buyers pulled out of the market due to the limited availability of financing, thereby temporarily inflating the average amount of money spent on a new car. A sharp drop in loan to value ratios, to the lowest level in three years, was another indication that tight auto financing conditions were a restraint for many potential buyers."

We need to be careful about drawing conclusions. If the study merely takes the mix of vehicles being sold as the basis of affordability, then it doesn't say much of anything. For example, if small vehicles increase from 20% to 30% of the mix, then "affordability" increases. Hardly a stunning conclusion.

Being forced into a lower standard of living hardly makes for good news.

 
At 11/11/2008 2:46 PM, Anonymous poor boomer said...

It would take me 138 weeks to buy the average new car. That's not what I call affordable.

 
At 11/11/2008 3:03 PM, Anonymous Anonymous said...

I remember hearing a story about cowboys & their relationships with their horses. The speaker suggested that it was a love-hate relationship & that the cowboys considered them a bit of a nuisance. Their importance wasn't so much about a personal connection as it was about access to freedom. A cowboy that owned his own horse had his own transportation - and a new horse general cost a cowboy about 6 months' income.
I thought, isn't that interesting. You could say the same thing about my car - and we still choose to pay about 6 months' income. Is there something about personal transportation that makes it worth about 6 months' income, and we tend to adjust the quality of that transportation until it reaches that cost, whether it's a horse, a car, or a jet pack?

 
At 11/11/2008 4:23 PM, Blogger 1 said...

"It would take me 138 weeks to buy the average new car. That's not what I call affordable"...

Then you need job skills that are in demand...

I saw one of these new, weird looking Smart cars yesterday struggling (we all were) to get up a hill due to a traffic tie up... So I had a chance to look it over quite a bit...

The lady just bought it not an hour earlier and she still had the 'new car giddiness' about it...

Its an odd looking vehicle...

They go for $11,900...

I think a car like this has some really good potential for urban transportation...

One caveat though, I think these cars aren't for anyone over six foot tall...

 
At 11/11/2008 7:16 PM, Blogger Plamen said...

To Bruce Hall: Good point, however (and I am not sure about this) if our denominator is inflation-adjusted, that probably takes care of the mix problem, does it not? The CPI has a hedonic adjustment built into it; I am not sure about other inflation measures. Any thoughts?

 
At 11/11/2008 8:44 PM, Anonymous poor boomer said...

1 said:

Then you need job skills that are in demand...


Ah, but I have no money and cannot get financial aid, so going to school is not an option.

And would a boomer with entry-level job skills (e.g. no related experience) be employable today? (e.g. how employable would I be if I work up tomorrow morning with an accounting degree, when twentysomething applicants are readily available?)

 
At 11/11/2008 10:23 PM, Anonymous Anonymous said...

poor boomer: If you make 10,000 a year, you are probably not in demand for an average new car anyway. So what? Get a used one for a fraction of that. I could certainly buy a new car but am fine with a used one myself.

Save money and the time that you waste complaining here and do something useful. Maybe you'll even find a job!

 
At 11/12/2008 3:00 AM, Anonymous poor boomer said...

anonymous -

I can't even afford a used car. I live on $900 per month, of which rent (for a room in a house with nine people) plus medical expenses plus a student loan garnishment take 87 percent of my income.

I have a zillion resumes and apps out there, and if employers don't want to hire me, nobody's gonna stop them.

 
At 11/12/2008 3:47 AM, Blogger 1 said...

poor boomer says: "And would a boomer with entry-level job skills (e.g. no related experience) be employable today?"...

Well from people I know and their experiences plus my own experiences I can offer you an anecdotal, "yes" as an answer...

I'm 57 and started working as a chemist in late '72, moved to the airline business in '76 (due to the oncoming automated methods I could see on the near horizon) and then did a dose of IT work (after going through song and dance of acquiring some certificates) and now I do a bit of both kinds of work, airlining and occassional IT work for mom & pop sized shops...

What I found quite interesting at least here in the St. Louis, Mo area is that there is quite a bit of work (more than I want to do) for people who can do some hardware and some software work for small sized companies...

Considering the taxes you may have paid earlier on in your work career you should look into state financed job skills improvement programs... Missouri has them, I'm making the assumption where you live probably has something similer...

 
At 11/12/2008 8:57 AM, Blogger maidintheus said...

Anonymous tells poor boomer to stop complaining and flogs boomer for lack of job skillz.

Well, yes and no. I agree that Anonymous is a cute name. Yes, Boomer can quit complaining.

No, Boomer shouldn't waste his time compiling skillz. It appears there's a trend for Boomer to be able to get a more equitable match with wages from Anonymous via skillz. Anonymous will do the patriotic thing and split his resources with you, so will his frinze.

I think Anonymous would agree that you wait until you bank some of these resources, Boomer, then make a choice on vehicle purchase. All things being equal, you'll be driving the same type of car as Anonymous and you'll both be in the same boat.

 
At 11/12/2008 10:45 AM, Blogger Barry Ritholtz said...

You are looking at trailing income at a time when job security is limited, layoffs are just ramping up, and credit availability is extremely constrained.

You have to ask why are car prices so low, and then contextualize it.

Consider the directional motion of key factors. Think movies, not snapshots.

 

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