The typical American family can’t afford the typical new car!
Moneycentral author Liz Pulliam offers advice using one American symbol of success, the car, as one measure of the times.
I had suggested that if you can’t pay cash for your next car, you should make a down payment of at least 20%, finance the balance for four years or less and make sure the resulting payment is no more than 10% of your gross income.
[One]…reader did the math and sputtered, but that means the typical American family can’t afford the typical new car!
Someone who purchased a new car last year, when the average price was $28,966 according to the National Automobile Dealers Association, would have needed a household income of nearly $65,000 to swing a purchase under my formula. That assumes a 5.75% interest rate, which Edmunds.com says was the average paid by buyers who financed new cars in 2009. The latest statistics from the Census Bureau show median household income was about $50,000 in 2008. “Median” means half of all U.S. households earned less.
Then Harvard bankruptcy professor Elizabeth Warren (now on loan to the Obama administration to lead the congressional oversight panel for the Troubled Asset Relief Program) and her daughter Amelia Warren Tyagi wrote a terrific book called All Your Worth: The Ultimate Lifetime Money Plan
You can play with your own numbers here.
Edmunds has an ‘affordability’ calculator that allows a buyer to work the numbers from a different angle…with similar results for a total price range affordability. Using “$4000 less $600 car insurance and $1000 maintenance = $3600/yr” is about $300/month at 4.1% (a quick call to Triple A) for 48 months equals a car from $13,600 to $16,300 tops. Car owners should also set aside a budget for car expenses like auto glass replacement and other car maintenance services.
Which explains the availablility of 5, 6 and even 7 year loans. 10% is magic? And, finally, how would a VAT help matters for autos and all the other marginal products? Most of which I suspect reside in the “toys” category.
Although this is painful and sort of cruel that the average American consumer cannot even afford an average consumer good, could there also be an upside to this? From what I know, cars in the $13-16,000 range tend to be smaller, compact, more fuel efficient models. In that way, having consumers be nudged towards smaller cars could be more environmentally sound while also encouraging families to save on fuel costs, which is likely very helpful for families.
Well, it is a generic piece of advice and no magic was ever claimed, so the magic question is not relevant.
7 year loans with no money down might be considered magic given depreciation of price in cars…the magic and allure of an asset that is never worth the intrinsic market value. What you finance is the magic. Best to be painfully aware of that at the moment, if indeed pain is part of your economic lot.
The car is a symbol that many can relate to from Tea partiers to liberals, the pull is instilled from childhood whether one acts on it or not.
that is a silly analysis. people with more income buy more cars, and the buy more expensive cars. many poor people (and many smart middle class people) do not buy new cars. so the median to median comparison tells you nothing.
Yes anastasia, and I am not against pain. It comes our way no matter given how we match our expectations to realities lived, and can be used constructively. And rising fuel costs at some point will add again to the pain of change…like it did for choosing where to live based on the car.
I thought you were all for personal responsibility Corev? Also, as both government jobs especially local and state, and also public pensions go bust, and SS comes under attack, I thought a bit of advice worthwhile.
Um, “average” automobile price?
Are you suggesting that the sale of expensive and cheap autos is distributed evenly?
I couldn’t find median car prices of any kind.
Sorry, I have an extreme dislike for the term “average”. I find it used often only to conceal a greater reality.
And a bit OT but the term “median household income” deserves loathing for the same reason. It obscures the small detail that the number of wage earners in the household, and the total number of man-hours worked has changed significantly over time.
Long term debt for depreciating assets is rents for the zombie banks. 10% should be 1%.
Bernanke’s helicopter (4 years) has thrown around $4T in M1 expansion, over half the greenbacks printed since 1789.
This to keep the usurous zombie banks trundling along.
That Ben has to buy bank paper to keep them alive thrashes the US consumer. And the bond holder! Where is the bond vigilantes’ ire over .01% short rates???
As it turns out the Fed was the lender for a lot of debt created in the Bush bubble. (explitive deleted)
Car loans today should be direct from Ben (not syphoned through the zombies) at long terms and at the rate he lends to the bankrupt banks.
Monetary expansion from helicopter and F-22 to keep the zombies on wall st playing is hugley worse than stimulus spending.
Indeed where are the jobsother than all St?
And where are the bond vigilantes?
And what is all that M1 doing for anyone?
I’ve never paid over $15,000 for a car. We always buy new. I don’t consider owning a reliable car with good mileage to be painful.
While the exercise presented in this post is cute, I don’t find myself shedding any tears over the possibility that the average American can’t afford a new car that costs twice as much as the most expensive car I’ve ever bought. I certainly won’t shed any tears if the option to own a Hummer disappeared.
It is high time to end the U. S. love affair with the car.
Wave of the future.
2) Public transportation.
A good place for stimulus dollars.
The distribution of cars is extremely skewed, with Bentley, Maserati and Rolls Royce on the long, long end. A luxury car can cost $500,000. It is clearly a problem that they used mean car prices but median income.
Not to mention, this study suffers from an obvious, severe selection bias. The average American family does not buy the average new American car, whether you are looking at means or medians. They buy used cars.
The fact that their calculation seems impossible is because it is.
Dan, I’m definitiely for personal responsibility? Asking the magic 10% question was informational only. You hanging with Bruce? 🙂
“Average” American income is much higher than median income. I suspect that one of the reasons we seem never to see average income mentioned in the main-stream media — always only the median income — is that if the extraordinarily large fraction of the populace whose income is below the average became aware of it, we might get some change we could believe in.
but the whole concept is insane. why are we spending that much money to drive to work and back?
incidentally poisoning the planet.
picked up my daughter at the airport shuttle yesterday. the lamborghini parked next to me wouldn’t do anything my 34 year old volkswagen won’t do, and didn’t have nearly as much room for suitcases.
What’s the fascination with fancy cars? My spouse and I make in the top 1% of income in the US and our family car cost $14,000 when we bought it as a 3 year old used car. Our second car my spouse bought in 1996 for $8000. We’ll replace the 1996 car with a 4 year old Prius for $10,000 soon. I could never understand who was spending – or why someone would spend – $35,000 on a car.
I think this result is about right. The truth is, collectively and individually, we can’t afford to continue the previous way of buying cars. With current technology, cars are reliable for ten years of reasonable use, so trading in every 3-4 years is foolish. The instant depreciation is also a waste of money. $13-16K for an average car, whether new or old, is sustainable. The outrageous prices most people pay for new cars every few years are not. In the future people will either have to buy down, or not buy at all, and hold onto their car for longer to defray the financing costs over a longer period. I also suspect new models of car-sharing and car-renting services will become more common and buying cars outright on credit will become less common.
Not knocking your VW. Assuming it’s a beetle, it’s a truly remarkable 70 year old design that sure as hell stood the test of time incredibly well. But the 10 or fifteeen year old Toyota or Honda or Ford parked on the other side from the Lamborghini truly is a lot safer, gets better gas mileage, and doesn’t pollute nearly as much. (You can thank the US government for the first two of those and that of California for the third).
The economic issue is that margins on cheap, compact, cars are so low that auto companies can’t make a profit selling them. To edge profits up, the cars get loaded down with dubiously necessary features like fancy entertainment systems and ABS braking systems which — insurance companies tell us –do not now, and never have, worked worth a damn.
***Using “$4000 less $600 car insurance and $1000 maintenance = $3600/yr” is about $300/month at 4.1% (a quick call to Triple A) for 48 months equals a car from $13,600 to $16,300 tops.***
Say what? The only way I can see to get to $3600 from $4000.$600,and $1000 is $4000+$600-$1000 and I can’t quite see why one would subtract $1000. Is it assumed that the typical American family owns a junker that is costing them $1000 (probably a pretty good guess) a year to keep on the road? It’s not insured? If it is, should we not subtract its insurance costs before adding in the new vehicle’s insurance cost?
Anyway, the optimum strategy for car ownership would appear to be buying a 3-4 year old used car which will have taken a 30-40% depreciation hit and will probably still be 3 or 4 years away from high maintenance costs. It looks to me like the average American household can still (just barely) afford that.
I can remember a time when down payments were 20% and car loans were 36 months period .. end of discussion. Back then, many car owners simply rolled over their new cars every three years. They were, incidentally, terrible cars with horrible gas mileage and they didn’t last anywhere near as long as modern cars. But they were cheap compared to family incomes and the car companies — some of them anyway — actually made money — year after year after year.
Three years ago we bought a used car for $5K, put some work into it, and it runs great. We only need it once a week. For the equivalent of five percent of the “average” new car, I bought myself a very nice new bicycle for commuting. For ten percent, I could have had a really nice, custom-fit frame. If a new car really costs that much, no wonder Detroit is in trouble.
Taking the $29k for a new car as a given and pulling that back to 1975, new cars cost 112% of median household income then vs. 56% now.
When were the glory days when new car affordability was readily available to the median household?
An inexpensive car such as a Ford Focus or Nissan Centra costs about $18k. That’s about $340/mnth for 60 mnths IIRC.
I leased a Focus 3 years ago. Now the used car market has heated up, and I could get $2.5k more than my buy out price. Kinduva back door route towards “getting” a new car…but I’m better off than the average Amer household? I don’t know if that makes me feel good or bad.
But as others have pointed out somebody else IS driving that 5-10 year old car. And they paid much less for the priviledge of doing so. As somebody who has never bought a new car, you simply can’t ignore used cars in your analysis. But most people probably DO spend too much on their vehicles by any rational measure. It’s all about the fact that many people have skewed intuitions about the time value of money.
Huge thumbs up!
What we need is the metric of hours of work at the average wage to buy a car. Of course it was best during the mid 1920s before the Model T vanished as Henry demonstrated that if you keep working at cutting costs on a design you can drive the nominal price down even in the face of inflation.
Of course todays car is a far cry from a Model T even if it had a starter. Actually compared to 25 years ago cars are far better fuel injection being one reason.
they all gotta have a NEW suv for the soccer mom.
p.t. barnum must have had the car market in mind. a loan that lasts longer than the car???? detroit loves rednecks, that buy their p.u. religiously if there’s $$$ left over after buying a gun.
I wanted to point out another issue with the mean/median fallacy. Since cars are a luxury good, people spend a higher share of their income as their income increases. That’s why rich people have 3 or 4 nice cars (or, if you’re like Jay Leno, 100 or so). So the distribution of car prices is even more skewed relative to the distribution of income, making it very problematic to look at mean car prices relative to median HHD income.
I expect if you look at median prices, and disallow multiple counting of households, the average car is more like $20,000. And if you include used cars, closer to $10,000.
From the site
1908 the average car took 4696 hours of work, in 1997 1365 hours.
So its clear that instead of costing 2+ years of work for a new car its now about .6 years of work. I don’t think the numbers have changed that much since. However this just shows the issue do you look long term or short term.
My suspicion is about 20,000 as well. I have no idea about used cars overall. Household versus family and individual ownership patterns is also a tough proposition. I have owned only one new car ever, but had an ‘internet’ discount when dealers were trying to build a business (2001) and a cash payment from the GM credit card system at the start of no limits.
But car ownership is not viewed as a luxery item by many…no public transportation or used in business and personal.
I couldn’t find median car prices of any kind.”
Then that kind of makes your analysis…shit.
Comparing apples to oranges will never get too many rewards.
Lastly why should the “average American” expect to own a new car?? There is a used market, you know? Why not compare average American to AVERAGE new houses or new yachts?
New cars are for idiots. At the least buy a 2-3 year-old lease return or trade. There will always be plenty of idiots to keep the new-car supply lines stuffed. I have two cars, a ’91 and a ’94, both in great shape, and paid off, with cheap insurance.
and from the letters here the whole car can’t be counted on for much more than six years.
my VW is a bus. and everything you say about it v Toyota is true, except the Bus handles my dogs a whole lot better. and as you may have noticed, i had no need to trade it in ten or fifteen years ago.
as for safer… well that depends on how you drive it, yes?
as for the “features” Mike Boskin tells us they are why new car prices represent a higher standard of living and not inflation.
you see, granny doesn’t mind spending an extra 50% of her pension on a “better” car.
It’s not a median vs. median comparison. It’s a _average_ *new*car vs. a median income!
In other words this is a meaningless comparison and thus an incredibly sloppy analysis for two reasons:
1) averages are likely skewed upward by the purchase of expensive cars, and
2) lower income consumers are probably more likely to buy used cars
The correct comparison would be the median income of those households that purchased a *new* car vs. the median sales price of a new car.
Come on guys, I spotted this within a few seconds.
The one surely idiotic thing to do when buying a car, new or used, is to take the advice of your friendly expert, like 42 above. The expert knnows what is good for him/her, if they even know that much. If you have al close and trusted friend that actually sells cars that person can be helpful in explaining the “ins & outs” of leasing, buying, paying cash, taking advantage of new car promotions, etc. I’ve been doing this business for twenty years. You get what you pay for.
Most buyers make the big decision of what to buy based on a combination of lust and personal finance, in that order. Some buyers know what they can afford. Most know what they would like to drive. Most have only a vague idea of what they’re going to get for their money. David Frum, of all people, wrote an article for MarketPlace.com on the issue of car sales from the perspective of all the things wrong with the system. The comments to the article make for some amusing reading and supplements the discussion here at AB.
I personally favor a lease on a decent car of compact size, and look for a good promotion.
I measure the qwuality of the promotion by the rate of interest and the residual %. You want to be below 2% interest factor and above mid 50% on residual value. That puts a $21,500 unit out for three years for less than $300 monthly including the tax with no down payment. Something like a VW Jetta(my preference), a Mazda 6, etc. You can only match that payment on a purchase, instead of a lease, by financing only $16,500 over five years. To me it’s a no brainer.
Used cars are tricky because comparison is questionable. No one knows what the first driver has put the car through. If you buy within the dealer net work you can get good warranty coverage, but the cars are then more expensive. But they are less expensive than new, though after you give it back as a trade the net may not be that different.
So what to get and how to pay for it is a difficult decision. The most important thing in my opinion is to decide in a ratinal manner what yoou can afford to spend. If you’re financing, know what you can afford by the month. And talk with a knowledgable person that you trust. No, your neighbor or brother-in-law doesn’t usually qualify as an expert. The average person buys a car every several years, or longer. The sales staff sell 15-30 cars per month. Who do you think knows more about the process?
Telecommuting….sure. Try and find a regular job much less one that permits telecommuting nowadays. As an unemployed attorney and CPA, I can’t find a job, even with 15 years experience in the tax, estate planning and corporate transaction field. Your odds of finding a job that permits you to telecommute are slim to none today. Also, telecommuting has been proven many times to reduce job advancement–not seen every day early at the office and staying late–not even on management’s radar.
I actually clean house for a family and the lady of the house telecommutes. Also, another family I work for the man & wife telecommute (and minor commute). I believe it can be our future if we allow it to be – it seems out here in the silicon valley things are certainly going that way. Don’t be too doubtful or discouraged – and good luck finding a job!
I think the average car should Be a good representation of the average price of a car. so how much is a Toyota Camary. I think a Corola is too small for the average person and the best selling car, the Camary is the correct size and price. So just under $20,000 is what the average American should be able to afford.
I don’t know who these people are who make $60K a year or more. I’ve never made more than $30K a year, and yes, that means I cannot even think about buying a new car. I recently filed BK to get out of my expensive Mustang, which I should not have bought in the first place. I returned the car back to Ford Credit under the terms of the Chapter 13, thereby saving me about $600 a month. It was my fault. I never should have signed the contract. Lesson learned, finally. There is no cooling off period in Washington State. I tried to unwind the deal 3 days later but Harris Ford had already turned in the paperwork. I think it is wrong. Consumers need an ‘out’ that doesn’t cost them their credit for the next five years.
So, I got together $1,500 cash and bought a reliable ’94 Saturn and it has been running great (cancelling jinx). Now I can get to work and back cheaper than the bus, and I have no car payments! It’s true freedom. Now I can sleep at night and not wonder how I am going to pay rent. As long as I’m hovering at the poverty level, let those new cars sit on the lot. No freaken way I’m getting caught in that trap again. Now it’s about pure economy and not ego.
Oh, and by the way: to anyone who says that public transportation is the answer. Clearly, your lack of education shows. Less than 5% of the population uses public transportation for obvious reasons. Your schedule has to revolve around it. You can’t go anywhere, any time on demand. Your safety is at risk. You don’t have insurance. You lose your mobility and your freedom. You’re not saving the planet. You’re only fooling yourself but hey, it’s your life and you can do what you want. But don’t you dare judge me if I want to drive where I want, when I want. I can get to work in 7 minutes, can you do that on a bus or rail? Yeah, I thought so.
Cars are very important for Americans and they are trying to keep the step with technology and to buy the most fancy cars.However a modern car costs a lot of money and there are very few people who afford to pay it.I’ve recently bought a Jaguar and I had some problems with the steering pump.I’ve bought a new one from an auto parts online and it cost me a lot.Now I am thinking to sell the car as its mantainance costs very much.