Tuesday, August 18, 2009

New Cars More Affordable Than Ever in US History?

DALLAS/August 17, 2009The purchase of an average-priced new vehicle took 22.1 weeks of median family income in the second quarter 2009, according to Comerica Bank’s Auto Affordability Index (see chart above). This reading is up 0.3 of a week, thereby representing a slight deterioration in affordability compared to the prior quarter. Median family income was essentially unchanged in the second quarter. The total cost of buying and financing a new car rose, however, due entirely to the fact that consumers chose to buy more expensive cars on average. The average price of a light vehicle purchased in the second quarter rose by $300 to $26,300.

MP: Isn't it interesting that new cars have become increasingly affordable over time? In 1995 it took almost 31 weeks of family income to purchase a new car, compared to only 22 weeks of family income today, a whopping 29% reduction in the price of a new car, measured in weeks of income. Or we could say that it takes 9 fewer weeks of income today to buy a new car compared to 14 years ago. Imagine what 9 additional weeks of income could buy for a typical family purchasing a new car today, now that that amount of their income doesn't go towards the purchase of the car.

Why have new cars become increasingly so much more affordable over time? It's most likely a combination of: a) falling new car prices (even as quality and standard options have increased), b) lower interest rates for auto loans, and c) rising income. Although Comerica's series here only goes back to 1995, it's probably true that new cars have never been more affordable in U.S. history than today, which translates into a rising standard of living for all Americans.

And yet as economist Stephen Rose wrote in the Washington Post
in 2007:

The American middle class is fighting for its life -- or at least that's what Lou Dobbs would have you believe. The CNN anchor's rants about "the war on the middle class" are probably the most prominent examples of such economic doom-saying, but he isn't alone. Democratic presidential candidates pepper their debates with references to the assault; leading liberal thinkers argue that supply-side conservatives captured the Republican Party during the Reagan administration and implemented policies that continue to privilege the super rich today. They tell a compelling tale of middle-class decline. Pity it isn't true.

Bottom Line: Increasing auto affordability is just one of many examples that illustrate the reality that the standard of living of the average, middle-class American is getting better all the time, not worse.
Originally posted at Carpe Diem.

18 Comments:

At 8/18/2009 10:10 AM, Blogger Public Library said...

Who was the last person you knew that paid for their car in full? Your grandparents? 22 weeks of income after expenses? Or is this just plain old net income of which there is little after expenses?

Why don't you preach about how Americans should save money first, then decide whether they want to waste money on a depreciating asset.

We do not need another salesmen telling America to buy more products on debt while the taxpayer subsidizes the purchase.

 
At 8/18/2009 10:11 AM, Anonymous Anonymous said...

Is it fair to say new cars also depreciate more quickly today than ever before? This is mostly for the same reasons, but you don't acknowledge this in your articale.

In fact buying a new car is actually one of the best ways to throw money away! So even if people can afford a new car buying one certainly won't make them any better off.

Example:

New car $30,000
Value after 3 years $12,000
Miles 40,000
Cost per mile = 45 cents

Second hand car $4,000
Maintenance over 3 years $1,500
Value after 3 years $2,000
Miles 40,000
Cost per mile = 9 cents

Given that the cost of fuel is around 5 and 10 cents a mile you can more than half your cost of motoring by NOT buying a new car.

 
At 8/18/2009 11:08 AM, Blogger 1 said...

"Who was the last person you knew that paid for their car in full? Your grandparents?"...

In 2002 I paid in full on the lot with cash for a 2 wheel drive (rear) Astro Van LS...

 
At 8/18/2009 11:36 AM, Blogger Angela said...

I pay for all my cars in full. I do not buy them brand new, and I drive them far past the point of being embarrassed when I have to hand my keys to a valet. I over-tip to compensate. I can afford to.

 
At 8/18/2009 11:38 AM, Blogger Angela said...

Anonymous, where can I buy that 6 year old car for $2,000?

 
At 8/18/2009 12:36 PM, Blogger Public Library said...

This comment has been removed by the author.

 
At 8/18/2009 12:37 PM, Blogger Public Library said...

1 and Angela, you are not the problem. The car companies shoveling out cheap financing to pedal automobiles to people who do not need them are.

If everyone were like you, we would not be subsidizing the auto industry on the backs of taxpayers.

I own a 1996, paid for in full, as was my last purchase before that. I am not the problem either.

 
At 8/18/2009 2:03 PM, Blogger 1 said...

"The car companies shoveling out cheap financing to pedal automobiles to people who do not need them are"...

Hmmm, well Public Library the car companies aren't holding a gun to the heads of people who can't afford to buy vehicles, right?

Apparently 'personal responsibility' has somehow become one of those situations the federal government has to stick its nose in...

"If everyone were like you, we would not be subsidizing the auto industry on the backs of taxpayers"...

Personally I have a real hard time trying to rationalize how the federal government can steal from the taxpayer in order to bail out a favored sector, the UAW...

None the less the federal is also in large part responsible for the failure of American car companies with the inane CAFE standards they've foisted off on them...

We have the government we deserve since we voted them into office...

 
At 8/18/2009 2:45 PM, Blogger JimJinNJ said...

PublicLibrary--
screw your head on. "the devil made me do it." no one is forcing the average Joe to go buy a car or finance one. that is his/her choice pure and simple.

And you comment begs the question--how else, besides a supplier making an offer, do you suppose anyone would get a car or a bicycle or a bar of soap? pls offer the better approach--perhaps a new government agency to pre-qualify buyers.

"1" says it well. btw--I also own a '96 van; my wife however must tie me to the mast so I don't succumb to the siren's call to go out and buy a new one.

you make your choices; let the rest of the country make theirs.

my brother reminds me frequently how much the "middle class" has suffered esp in the Bush years (of course) because of no growth in income. I've given up on his rehabilitation but this data tells the truer story.

 
At 8/18/2009 3:03 PM, Anonymous feeblemind said...

The law of supply and demand says that when you lower the price of a product, demand goes up. However, auto sales have been in the toilet. If autos have indeed become cheaper, why aren't they selling like hotcakes? How do you explain lower prices AND lower demand for new cars?

 
At 8/18/2009 3:07 PM, Blogger Public Library said...

SlimJim,

I do not think you understand my position at all but your rant was humorous anyway.

We need less government, less reliance on selling depreciating assets to Americans financed by debt, and a more responsible fiscal policy from our government.

Pushing automobiles using taxpayer dollars does not fall under that category.

The government is leading the way to disaster, the lambs are only following what they have been told to do.

I am all for personal responsibility and it starts at the top. Our government has proven to be the most irresponsible of them all.

Who cares if cars are cheaper than ever, they still depreciate at the same rate as they always have. CARPE should be telling people about the value of savings and investment rather than peddling car stories.

And btw the way, if the Fed is hell bent on creating inflation then the lambs are only doing the reasonable thing. Getting rid of any dollars/savings they have because they will be worth less in the future.

So Jimmy, stuff it.

 
At 8/18/2009 4:18 PM, Blogger QT said...

feeblemind,

Lower prices and lower demand are consistent with the law of supply & demand although this may seem counterintuitive. In this case, there has been a shift in the demand curve. Consumers are reluctant to buy because they are worried about job security and the current economic downturn.

For an excellent analysis, you may enjoy
Why is supply & demand so confusing?

 
At 8/18/2009 4:26 PM, Blogger 1 said...

Thank you QT for yet another excellent link...

Something I can pass along to others...

 
At 8/19/2009 4:53 AM, Blogger arthur said...

I love all the people who say they only buy used and drive for 10 years. Although I dont love the UAW I think our country was built on the fact that I(or you) would work, people would buy our products, we would get paid, and we would buy someone else's product. A new US made car for 15K traded in every 7-9 years or so(for 2 or 3K)for a new car would renew our company. I only hope that people dont stop buying my service that allows me to pay

 
At 8/22/2009 12:38 PM, Blogger sadowski@udel.edu said...

"Although Comerica's series here only goes back to 1995, it's probably true that new cars have never been more affordable in U.S. history than today, which translates into a rising standard of living for all Americans."

This is a claim that's actually not that difficult to check. I once researched car affordability and two decades really stood out in that regard; the 1920s and the 1970s. In 1973, for example, median family income (in nominal dollars) was $12,051 (median family income data is available from the Census as far back as 1947). The average price of a new car was $4052 (U.S. Department of Energy has data on that as far back as 1970), or about the price of a Chevrolet Caprice. Thus it took 17.5 weeks of gross income to buy a new car. In 1926 I estimate that median family income was about $1500. And I estimate a new car averaged about $500, or about the price of a Chevrolet Superior. Thus it took 17.3 weeks of gross income to buy a new car.

So no, it's definitely not true that cars have never been more affordable. The average car price went up sharply relative to other goods in the 1980s as real median family income stagnated in real terms (so much for the Reagan era). It will take some income growth or a reduction in average new car price before they can be as affordable as they were in the 1920s and 1970s.

P.S. On the other hand you could get a Model T Ford for $265 in 1926 and a Chevrolet Vega for $2087 in 1973 (although I would have rather spent $2150 for a Honda Civic). Today a Nissan Versa can be had for $10,685 (no AC of course). Do the math and you'll see that they all cost almost exactly 9 weeks worth of gross income. So looking only at the most affordable cars nothing has changed at all by this standard in over 80 years.

 
At 8/22/2009 1:20 PM, Blogger Mark J. Perry said...

Sadowski: But isn't comparing today's cars to cars from 1926 comparing apples to organges? Look at the difference in options, dependability, reliability, safety, durability, etc. for today's cars vs. a 1926 model, there's a HUGE difference.

 
At 8/22/2009 4:41 PM, Blogger sadowski@udel.edu said...

Mark Perry,
Probably, although the Model T (unlike the Vega) did have an amazing reputation for dependability, relability and durability in the day (nobody cared about safety in 1926). (And that's a major reason why there's still a thriving market for used Model T parts.) But that wasn't really the subject of your article.

On a lighter note, with respect to options, it is interesting to note that, at the prices I quoted, the three cars that were the subject of my postscript all have at least one thing in common: no air conditioning.

 
At 8/27/2009 11:48 AM, Blogger sadowski@udel.edu said...

Mark Perry,

Full disclosure: I am a classic car collector. I have a 1959 Lincoln Continental Mark IV coupe, a 1966 Imperial Crown convertible and a 1974 Buick Estate Wagon (with a Stage 1 455 (Vroom, Vroom!)). Granted, these were hardly your average car in the day, but I would gladly stack any of my cars against modern cars in terms of options, dependability, reliability, safety and durability. The only mechanical modifications I've made were to put on wider wheel rims with oversized (wide white wall) radial tires and to convert to modern AC refrigerant. All of my cars are loaded with power windows, seats and doorlocks etc. My Buick has a power operated retractable tailgate (it's called a "clamshell" tailgate) and the Lincoln has an autolube feature, a power retractable rear window (it's called a "Breezeway" window) and an Autronic Eye that automatically lowers the high beams at night when another car approaches. You can't get options like that on so called "modern" cars.

And it's easy to add modern electronic gadgets to cars. (And let's face it, they go obsolete every few years anyway.) I've installed satellite stereo radio and GPS in all of mine for example.

The only real advantage that I see modern cars having is in fuel economy and emissions. But that's mostly because they're made of plastic and steel as thick as tinfoil.

 

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