Tuesday, February 14, 2012

Auto Affordability is the Highest Since 2009 and Will Boost Car Sales in 2012: Great Time to Buy

From Comerica Bank:

"The purchase and financing of an average-priced new vehicle took 23.1 weeks of median family income in the fourth quarter of 2011, the best affordability reading since the third quarter of 2009. Consumers on average spent $1,050 less (a decrease of 4.0 percent) on new cars in the fourth quarter. 

“Auto affordability improved at the end of 2011, boosted by gains in personal income that were, in turn, supported by stronger job creation,” said Robert Dye, Chief Economist of Comerica Bank in Dallas. “Household credit conditions are also improving, as shown by the low household financial obligations ratio, which measures total debt payments as a percentage of income. When you put those two concepts together, it means that households are increasingly willing to take on a reasonable amount of debt by purchasing an attractively priced automobile. Those favorable trends are allowing consumers to feel more confident about unleashing their pent-up demand for automobiles. Favorable affordability and improved job growth mean more upside potential for auto sales in early 2012.”

MP: See related CD post showing that the household financial obligations ratio fell to an 18 year-low in 2011 at 16.5%, the lowest level since 1993, which will contribute to ongoing gains in car sales in 2012 as mentioned above, along with low interest rates, increased affordability, new models, and improving labor market conditions, which together bode well for making this the best year in auto sales since 2007.  

It's also interesting to note that over the last 15 years, auto affordability has consistently increased, and new cars today are about 20% more affordable than in the mid-1990s.  Reasons for increased affordability over time likely include falling financing costs, rising incomes, and super-competitive pricing.  Add in quality and safety improvements, and better options (OnStar, satellite radio, navigation, etc.), and there's probably never been a better time than today to purchase a new vehicle.     

40 Comments:

At 2/14/2012 11:31 AM, Blogger Hydra said...

Just because I can afford a new car, doesn't mean I am going to buy one.

 
At 2/14/2012 12:04 PM, Blogger bluecollartrader said...

I am curious to know if the "Household Financial Obligations Ratio" accounts for those who have defaulted on their obligations and therefore have shed their debt obligations in a dubious way? These folks are likely not good candidates for new borrowing and therefore nto likely to buy a new car.

 
At 2/14/2012 12:05 PM, Blogger Benjamin said...

Auto and housing affordability are both near or at all-time highs.

Huge amounts of cash are sitting on the sidelines.

Interest rates and inflation are dead.

A long secular property and equity rally ahead?

If the Fed says yes?

 
At 2/14/2012 12:08 PM, Blogger juandos said...

"Just because I can afford a new car, doesn't mean I am going to buy one"...

Hey wow hydra! Thanks for letting us know that...

'boosted by gains in personal income that were, in turn, supported by stronger job creation'...

This dude must be wearing waders to work to be able negotiate his way through the BS he's putting out there...

I would have to question Dye's grip on reality...

Still there might be a good reason to buy a gasoline stingy vehicle though: Gas prices' earliest-ever rise above $3.50 a bad sign for motorists

 
At 2/14/2012 12:19 PM, Blogger Jon Murphy said...

This dude must be wearing waders to work to be able negotiate his way through the BS he's putting out there...

Actually, man, total personal incomes have been rising. In fact, TPI in 2011 was 3.8% above 2010 (SAAR). Disposable income is down slightly (-0.1%), but both support Dye.

 
At 2/14/2012 12:26 PM, Blogger Jon Murphy said...

Just because I can afford a new car, doesn't mean I am going to buy one.

Right, which is why we are talking about potential and not absolutes. There is the potential for increased auto sales in 2012, but it will not necessarily translate into increased sales. But then again, it may.

The main point of this piece is not to make a prediction for the auto market in 2012, but rather to comment on how some of the barriers preventing strong growth in this market have been removed/diminished.

 
At 2/14/2012 12:52 PM, Blogger morganovich said...

december retail sales data for autos seem to bear this out.

"Even though the annual rate of autos sold last month reached the highest level in nearly three years, auto makers may have offered discounts, especially for fleet sales to business customers. Revenue from auto sales fell 1.1% to an estimated $71.7 billion from $72.5 billion in December, seasonally adjusted. "

based on the unit sales volumes, this would seem to indicate some pretty steep price drops in autos.

 
At 2/14/2012 12:55 PM, Blogger morganovich said...

"housing affordability are both near or at all-time highs."

only for a first time buyer. for those who already have a home, housing is stunningly unaffordable. the currency you held dropped and what, 25-30% mortgages are underwater?

that has a devastating impact on affordability.

not only do you have no equity to put up a down payment, but you have to pay to get out of the house you are in, adding that to the price of a new home, and that's a CASH cost.

sorry bunny, but housing is nothing like affordable in practice right now. sure, it's a killer time to be a first time buyer, but that's a very small part of the market.

and rents have SKYROCKETED, affecting far more folks than low prices and rates.

 
At 2/14/2012 12:58 PM, Blogger morganovich said...

"Just because I can afford a new car, doesn't mean I am going to buy one."

this kind of misses the point hydra.

if price drops, demand goes up. this is an aggregate. not every person has to buy a new car, just some at the margin.

think about it this way: there is some price at which you'd go buy a car right now. if i offered you a $5 car, you'd be a fool not to take it.

everyone has some price like that. some will be far off the market, some quite close. it's those ones that are close that cause demand to increase as prices drop.

 
At 2/14/2012 1:25 PM, Blogger Jon Murphy said...

based on the unit sales volumes, this would seem to indicate some pretty steep price drops in autos.

There have been falling sales prices, but according to Autotrader.com, the average transaction price for light vehicles rose in December 2011 to $30,686, 5.8% above December 2010. Also, dealership spending on incentives fell by 3%, so prices are rising, a sign of increasing demand.

 
At 2/14/2012 1:36 PM, Blogger juandos said...

"TPI in 2011 was 3.8% above 2010 (SAAR)"...

Yeah jm in a new & improved decline of purchasing power...

 
At 2/14/2012 1:48 PM, Blogger Jon Murphy said...

Juandos,

Firstly, you criticized Dye for talking about rising incomes, when they are in fact rising.

Secondly, you respond to this data with a stawman (PPP vs income).

Third, the author of the blog clearly does not understand the difference between share and absolutes. China has been gaining a greater share of world incomes, but you'd expect that. They are a nation of over a billion people who are getting richer by the day. Of course they're going to gain a larger share of world incomes. Conversely, the US population is considerably smaller and our incomes, while growing, are not growing at the same rate China is. This does not mean the US is losing purchasing power, just as a declining share of manufacturing does not mean manufacturing is declining. All it means is the other components (in this case, China) are growing faster.

If US absolute PPP was declining, I'd agree with you, but it clearly is not

 
At 2/14/2012 1:54 PM, Blogger morganovich said...

jon-

that's an interesting datapoint.

so price dropped big from nov-dec, but was up considerably year over year.

that makes me suspicious of the retail sales based data. "seasonal adjustment" can include all manner of shenanigans, and it would make sense that december tends to have heavy sales to get inventory down for year end.

it can be a bit of a judgment call on trusting sequential vs yoy data.
yoy avoids "adjustment" issues, but it's also much slower to spot a change in trend.

if the jan seq data shows signs of continued price drops, we might need to take that seriously, but i suspect we may not see it.

 
At 2/14/2012 1:59 PM, Blogger Mike said...

Juandos/Jon,

I apologize for my ignorance in advance, but wouldn't the calculation of TPI be like anything else? Meaning; when millions of low-paying jobs drop off the books, TPI would necessarily go up.

 
At 2/14/2012 2:06 PM, Blogger Jon Murphy said...

I apologize for my ignorance in advance, but wouldn't the calculation of TPI be like anything else? Meaning; when millions of low-paying jobs drop off the books, TPI would necessarily go up.

Sort of, yes. TPI includes all forms of compensation (including benefits), and government transfer payments (SS, SSI, Unemployment), and any investment income, rental income, etc. Those who do not receive any form of income are not counted. However, considering the including of government transfer payments, as well as the jobs market adding jobs hand-over-fist, we can attribute the current increase to improving economic times as opposed to low-wage jobs disappearing (although I am sure there is some of that going on, too).

 
At 2/14/2012 2:07 PM, Blogger Jon Murphy said...

You make a good point, Morganovich. Unfortunately, average transaction prices are not something I track, so I don't know the seasonality of it.

 
At 2/14/2012 2:30 PM, Blogger juandos said...

"Firstly, you criticized Dye for talking about rising incomes, when they are in fact rising.

Secondly, you respond to this data with a stawman (PPP vs income)
"...

jm I don't know where you live but locally here in the St. Louis area the purchasing power of my hourly pay rate has declined significantly...

Income and PPP are intricately connected at the end of the day whether you want to be or not...

"Third, the author of the blog clearly does not understand the difference between share and absolutes"...

ROFLMAO!

Thanks for that jm...

"If US absolute PPP was declining, I'd agree with you, but it clearly is not"...

Is that why the price of gasoline is rising?

Is that why Jan. sales fell precipitously?

 
At 2/14/2012 2:42 PM, Blogger morganovich said...

jon-

a 3.8% increase in TPI in a year when CPI averaged what, 3.5% is really very little improvement.

further, if you believe, as i do, that CPI significantly understates inflation, then it would be consistent with a drop in real income.

TPI also gets heavily influence by increases in healthcare costs. the nominal "value" of your benefit spikes, but in real terms, you got nothing.

you have to be very cognizant of that as TPI is notorious for showing increases due to nominal benefits inflation in spite of declines in take home pay.

http://bber.unm.edu/econ/us-tpi.htm

2008 TPI was higher than 2007.

in fact, 2009 was it's only down year in ages.

TPI cannot tell inflation from real gains.

 
At 2/14/2012 2:45 PM, Blogger kmg said...

Not only is auto affordability higher, but cars last longer too.

When I was a kid, a car with 100,000 miles was near death.

Today, such a car still has a good 40,000 miles of life left, and thus used car affordability is high.

 
At 2/14/2012 2:58 PM, Blogger PeakTrader said...

I guess, a retired American, who saw his U.S. Treasury bond rise from $10,000 to $13,000 over the past year, can sell the bond and buy an affordable new car, i.e. spend instead of save.

Also, he can get a part-time job, to further stimulate the economy, to make up for the additional spending and low interest income on his other bonds, instead of rebalancing his portfolio.

Praise to the Fed.

 
At 2/14/2012 3:03 PM, Blogger Ron H. said...

"Just because I can afford a new car, doesn't mean I am going to buy one."

This post isn't about you.

 
At 2/14/2012 3:11 PM, Blogger Jon Murphy said...

a 3.8% increase in TPI in a year when CPI averaged what, 3.5% is really very little improvement.

Right Morganovich,

If you'll forgive me for playing some semantics, I said incomes were rising, not real incomes were rising. Also, when you consider the long run average for income growth is 7.0%, the 3.8% number is even more stark.

As far as inflation goes, I half agree with you on the CPI. I agree it doesn't accurately measure inflation; it only focuses on price. I like an almost heretical notion of inflation: labor hours required. You may remember Prof. Don Bordeaux doing a blog post about what items cost in terms of hours worked and that it has fallen over the years (with few exceptions, cars being one of them). I like this measure of inflation better as it better reflects the cost of living and quality of life. Also, in my humble opinion, it makes international comparisons a hell of a lot easier.

 
At 2/14/2012 3:36 PM, Blogger FloridaSteve said...

This comment has been removed by the author.

 
At 2/14/2012 3:39 PM, Blogger FloridaSteve said...

You're very presumptuous with your prediction. There is another graph that I can't find that shows that the average car on the road today is older that at any time since the early 80's I believe. Car's are not selling because people can't afford them and the 10 year old cars that they are driving are much better built and longer lasting than, well, ever! Supply and Demand is still a law and the consumer confidence for a large purchase like a new car can't possibly be improving significantly in this environment. That's my personal opinion anyway.

 
At 2/14/2012 3:42 PM, Blogger FloridaSteve said...

From the Jan 17 USA Today
10.8 years in the latest survey.

"The cars and trucks in America's driveways have reached a record old age, but there are signs that people are growing confident enough in the economy to want a whiff of that new-car scent."

We'll see I suppose.

 
At 2/14/2012 4:18 PM, Blogger Benjamin said...

You may remember Prof. Don Bordeaux doing a blog post about what items cost in terms of hours worked and that it has fallen over the years (with few exceptions, cars being one of them). I like this measure of inflation better as it better reflects the cost of living and quality of life. Also, in my humble opinion, it makes international comparisons a hell of a lot easier.---
Exactly. Professor Bordeaux, former Chairman of the Eco. Dept at george Mason, says the CPI overestimates inflation. Serious studies suggested this is true.

On the other hand, you have Morgan suggesting the CPI overstates inflation, and that he saw Vincent and Jimmy Hoffa Foster piloting a UFO over the Federal Reserve Board, where he deposited Ben Bernanke. Elvis Presley rode off on a Harley motorcycle right after that.

 
At 2/14/2012 5:18 PM, Blogger Hydra said...

this kind of misses the point hydra.

if price drops, demand goes up. this is an aggregate.

=================================

I understand it is an aggregate, but aggregatesare made up of a bunch of individual decisions, as you point out.

But those decisions depend on a lot of other things than just auto affordability. If you are trying to pay down your mortgage so it is not underwater, or you feel you cannot move and change jobs because you are underwater, or yur kids have failed to launch, then the ratio of income to car costs means less than it might.

I agree with Juandos, that Dye has oversimplified the situation. That said, for people who are in the market for a car, now is a good time.

But if your price point is $5, then you are probably going to wait. if yur price point is that low, then an auto is probably not affordable, to you.

 
At 2/14/2012 5:25 PM, Blogger morganovich said...

hydra-

you are still missing the point.

all the things you mention are already baked into the demand curve at this price. (mortgages, income, preferences, the age of your car, all of it) it's the sum of all the individual preferences.

aggregate demand is just the sum of all the individual demand.

if price drops, then unit demand rises as those who were almost but not quire ready buy.

this is econ 101 stuff.

sounds like you are not near to being a buyer, but many others are. you comment is still a non sequitor.

 
At 2/14/2012 5:32 PM, Blogger morganovich said...

ahh bunny, more appeals to authority to attempt to cover your total ignorance of the subject matter. does this idiot schtick ever get boring for you? you obviously have no idea what you are talking about. why keep babbling and proving it over and over?

hours worked for a new house is still not the right measure of affordability.

it only matters if you are a first time buyer.

if you bought a house for $1 million and it is now worth $700k, a new house is much less affordable that it was.

if you put 20% down, you have $100k negative equity.

you bought the old place for $200k down.

to buy the new one, you need to come up with $300k to move and then another $140k down for the new one (at 700k).

that's more than twice the down payment of the old place.

you have some strange ideas about affordability.

and rents have skyrocketed.

so, housing is great for 3% of the population, but the other 97% are facing much higher costs.

sorry bunny, but as ever, your opinions simply are not supportable with facts.

think about it this way:

when price drops, demand goes up, right?

so, why is there no jump in demand if houses are so affordable?

seriously, do you even think before you start blathering?

 
At 2/14/2012 5:41 PM, Blogger Hydra said...

"Just because I can afford a new car, doesn't mean I am going to buy one."

This post isn't about you.

===============================

Just becasue one may beable to afford a new car, and just becasue the statistic on affordability is high, does not mean one is going to rush out and buy a car.


You clowns are way to literal.


Using impersonal language in formal writing to achieve an objective tone requires the writer, to avoid characteristics of personal language such as personal pronouns.

There is very little formal about the writing around this place.


Consider

"The inequity in the distribution of wealth in Australia is yet another indicator of Australia's lack of egalitarianism. In 1995, 20% of the Australian population owned 72.2% of Australia's wealth with the top 50% owning 92.1% Such a significant skew in the distribution of wealth indicates that, at least in terms of economics, there is an established class system in Australia."


Versus


"Because only a few people have most of the money and power in Australia, I conclude that it is not an equal society. Society has an Upper, Middle and Lower class and people when they born into one class, end up staying in that class for their whole lives."


Is the idea any different?


What I wrote was an epigram intended to protray the idea also passed by Juandos: "This dude must be wearing waders to work to be able negotiate his way through the BS he's putting out there...

I would have to question Dye's grip on reality..."



I have not mastered his pugnacious and graphic quality. Apparently the idea density in my statement is surpassed by the density of the readers.

 
At 2/14/2012 5:44 PM, Blogger morganovich said...

jon-

i have no issue with labor hours needed.

what i take issue with from the BLS is that they make assumptions that adjust the actual price of products and their weightings that are inaccurate and wildly subjective.

first, they make geometric weighting assumptions. so, if the price of steak goes up, they assume you eat more hamburger. this sounds reasonable, but it's not. it assumes that all price changes are supply driven, which is wildly untrue in a modern economy.

when the atkins diet hit, people ate more meat and less pasta. (this really happened, it was an invest-able theme) thus, meat goes up in price, and pasta down, so the BLS assumes you eat more pasta, but in fact, you ate less. the price move was demand driven, not supply.

in such a case, the BLS weightings have the wrong sign.

then they apply totally subjective hedonic adjustments for quality. they say this year's corrola is 1.4% better than last year's, so we;ll take that out of the price before calculating the change.

not only is it totally arbitrary, but they assume that ever product only gets better, which, in the aggregate, is clearly untrue. a j crew sweater today SUCKS compared to one 20 years ago. so does a gallon of gasoline or an airline seat.

these changes went into effect in the early 90's. over the next decade, new CPI diverged in terms of slope with the old one.

the net effect of this is to understate CPI vs the old method by 4-5% points. prices are moving like it's 1974 right now. we call it 3% cpi because the math changed, but it's the same actual price action. either there was low inflation in the 70's and there is now, or if you believe in high 70's inflation, then you cannot call this low.

it's like swapping your thermometer from F to C and wondering why water won't freeze at 30 degrees and flowers are blooming.

until you address this issue in the basic consumption basket, dividing by (hours*wage) does not accomplish anything.

you need to get the basket right.

the boskin report, which was the ideological smoke screen for this change in CPI was written for one reason: to cut social security COLA. ti had zero to do with accuracy.

i'd urge you to read it. many on this board view it as gospel. it's the cornerstone of this new cpi policy and it lacks any empirical data at all. it's all just subjective armchair nonsense. it makes the IPCC look credible and rigorous.

 
At 2/14/2012 5:51 PM, Blogger Hydra said...

Where s=does this post say anything about the demand curve?

All it says is that cars are more affordable based on the raion of income to auto cost. And that other debt is reduced.

It then predicts that demand will increase. Now you ae just making up stuff that is not part of the article, and all I did was point out, succicntly, what you just said about mortgages and other factors.


No doubt car sales will go up, but a marginal increase in affordability alone, does not make it a great time to buy. too many other things mitigate agaisnt it, and also compete with it.

When we get to $5 cars, let me know.

 
At 2/14/2012 6:20 PM, Blogger Jon Murphy said...

I can agree to that, Morganovich

 
At 2/14/2012 6:41 PM, Blogger PeakTrader said...

Morganovich says: "they (BLS) apply totally subjective hedonic adjustments for quality...not only is it totally arbitrary, but they assume that ever(y) product only gets better."

Common Misconceptions about the Consumer Price Index
BLS

Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI.

On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes.

A recent article by BLS economists estimated that the hedonic models currently used in the CPI outside of the shelter and apparel areas have increased the annual rate of change of the All Items CPI.

 
At 2/14/2012 7:36 PM, Blogger PeakTrader said...

It's not just improvements in auto affordability, household balance sheets, and the labor market:

Car loans coast down low-rate lane in 2012
Bankrate.com

Credit standards easing

Beyond low rates, the biggest news for car buyers in 2012 may be how much easier it will be to get a loan than it was a few years ago, when the financial crisis led to a collapse in lending to consumers with less-than-perfect credit.

"One thing we certainly are seeing is a loosening ... of credit standards," Zabritski says. "We are seeing more subprime financing being written."

 
At 2/14/2012 8:59 PM, Blogger Ron H. said...

"There is very little formal about the writing around this place."

LOL

That's because this is the comment section of a blog. Much is forgiven, even failure to proofread before publishing, so that one's comments come as close as possible to making sense.

You ARE missing the point, and you should reread the comments by the guy who writes in all lower case, because he knows what he is talking about, and you don't. He is trying to explain something to you, and you're not getting it.

 
At 2/14/2012 9:08 PM, Blogger Ron H. said...

"I have not mastered his pugnacious and graphic quality. Apparently the idea density in my statement is surpassed by the density of the readers."

I seriously doubt that's the problem. Are you admitting to being dense?

 
At 2/15/2012 11:18 AM, Blogger morganovich said...

peak-

"On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes."

that's an interesting datapoint, but it's also a bit misleading.

i may have overstated the case that they are only positive, fair enough, but look at food or energy or airlines or the dozens of others where they do massively overestimate quality.

they pick 2 sectors and try to pass them off as the whole.

to compare hamburger today with 1950, you'd need to use organic meat. but they don't.

and the car/electronics/whatever stuff is arbitrary and large. on balance, hedonics are taking points off the inflation rate.

it's also kind of irrelevant.

cars may be better, but i can buy an old, worse one, so what good does it really do me if my goal is to get to work?

it is also, you must admit, totally arbitrary.

how much better is this year's ford f150 than last year's?

how could you even begin to put a % on that?

adding that sort of arbitrary fudge CPI just makes it muddy.

was a vista pc better than an xp one? most people didn't think so.

it's far too complex a system and far to arbitrary to mean anything. in the end, it winds up being total nonsense.

how could anyone seriously tell you in %'s how the quality of every product in the CPI basket changed from a year ago every month?

in the end, it's just an injection of subjective bias.

 
At 2/15/2012 11:23 AM, Blogger morganovich said...

"It then predicts that demand will increase. Now you ae just making up stuff that is not part of the article"

um, wow. you really are determined not to get this.

there is always a demand curve.

affordability is another way of saying price.

when price drops, demand rises.

sure, a phrase like "great time to buy" is totally subjective and it's not a claim i ever made, just that volumes were going up in response to a drop in price.

do you really find demand increasing when price drops such a wild notion? which way do demand curves slope in your universe?

 
At 2/15/2012 1:57 PM, Blogger bart said...

"Auto affordability" only looks at the cost of a new car.

For a *real* comparison, add in insurance, costs to maintain and repair, gas costs, etc.

*Full* cost per mile is a much better way to judge whether "auto affordability" really is high.

 

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