Car Payment Stupid Nation

In reply to Keith Tanner:

In my experience, employers never really take into account regional cost of living differences when making offers to employees to move. When we moved to MD from SC, it took us nearly a year of searching to find a house comparable to what we had in SC with land, garage space, etc for a not-exorbitant amount of money. And even then, we sort of lucked into a short sale.

There are "frictional losses" when moving, of course. An average family move can cost 10k or more, and the transaction costs on buying and selling a home can be 10% of each home's price. Some of that can be absorbed into the new mortgage, but it still needs to be paid eventually.

Like everything else, debt needs to be properly managed. A total aversion to debt can be just as crippling as an over-abundance thereof. My original post was not meant to totally slam anyone who took out a loan to buy a new car. My point was, rather, to really think about that loan and whether it's really offering the borrower the maximum utility from that cost. A huge, long term loan for a quickly-depreciating asset such as a car does not seem to meet that criteria. For me, anyway.

In the case of a mortgage, you have to live somewhere, so in my mind it just makes sense to be putting some of that cost towards equity. Homes don't tend to loose value over time. And I've enjoyed being in a home- a place I can think of as at least partly mine, even if the bank holds the note on it.

Not tying yourself down to a 30 year mortgage because you don't know if you'll be employed in 30 years seems like it's setting an impossibly high bar of expectations. No one know what will happen in 3 years, let alone 30. But at some point you have to say, "This is what I want, so, berkeley it, I'm going for it."

In reply to volvoclearinghouse:

Except that there are higher wages in areas that have high cost of living. For example, doing a Google coding job will give you much higher pay in Palo Alto than Ann Arbor. Or an example I'm very aware of- an R&A job in Palo Alto will give you a much higher salary than working in my building.

It's factored in. Maybe not to the degree you would like it to be, but it's there.

The other issue about cars- one is not just paying for an depreciating asset, one is paying for the ability to move from A to B in a manner you want to. Some cars require more money to do that job, some require less, some need help, some are more comfortable, etc. The ability for my '88 CRX HF to get me from home to work and back is exactly the same as my '99 Miata and my current '14 Fiesta. But I'm a whole lot more comfortable now paying for the Fiesta vs. not on the CRX, and it's worth it.

In reply to alfadriver:

I know they say it's factored in, but not fully. Not in my experience, anyway. I know several people in my industry (engineering) who have been offered jobs in different locations around the country but were not able to make the move due to the increase offered being insufficient to cover the added C-O-L. For some, specialized, highly in-demand jobs this may not be the case, but in general, in my and my co-workers' and friends' experience, it has been.

A very good friend of mine was looking at a job in San Francisco. He currently lives in Maryland, near me. C-O-L difference between the two areas, in reality, is quite high. To live in a COMPARABLE area, house, etc it would have been 3x the cost. The new job, which he was well qualified for and heavily recruited, offered him a 25% pay bump.

I don't know your current financial situation, but I'm assuming you make somewhere in the 6 digit income range. So a car payment for a 20,000 car isn't unreasonable. My original post was more aimed at the median income household (which you're likely above) purchasing a median income vehicle (which the Fiesta is below). I could easily walk into any Chevrolet dealership and drive our with a brand new Suburban, loaded to the gills and financed to the hilt, but that's not really a smart play. Yet how many people in my position do just that?

Full disclosure, I actually like the Fiesta, though I haven't driven one yet. I've strongly considered one for my commute. Gas is just too cheap now to justify. Talk to me in 4 or 5 years, and I may yet be rocking a brand new econo/sport-box.

In reply to volvoclearinghouse:

Again, you assume that the median income is buying new cars, when only a small percentage of people are buying new cars. I don't see the data where the average car buyer is the same as an average American.

In reply to alfadriver:

Fair enough. We can probably make some assumptions, however. As you say, about 15M new cars are sold every year here. There are approximately 150M households in the United States. So 10% of all households are buying a new car this year. If we assume they keep that car for the duration of the new car note (on average about 6 years now) before trading/ selling it and buying new, then 10% of all households, every 6 years, buys a new car. That's roughly 60% of the households in this country buying a brand new car on a regular basis. Since the Median is by definition the 50% point of income, then at least some number of people are buying new cars that have median household income.

Trying to pin down the actual price of those cars is probably harder to do, but we can probably estimate that even at the lower end of the income spectrum of that 60%, most of those new cars need to fulfill basic family hauler roles- 4 doors, reasonable trunk space, etc. Four-banger Malibu/Fusion/Camry/Accord territory. So we're looking at cars in the $20-$25k range, for annual income roughly double that.

Also, keep in mind, at that income level, one is much likely to spend a higher percentage of their income on basic necessities (food, shelter, clothes, medical care). My food costs are the same as someone who makes 1/2 of what I do, for example. I wouldn't plop down half of my annual salary on a new car; I can't imagine the stress in my life if I made half of what I do now and I did.

Interesting information:

"Overall, the mean household income in the United States, according to the US Census Bureau 2014 Annual Social and Economic Supplement, was $72,641, or $20,702 (39.86%) higher than the median household income ($51,939)." - Wikipedia

In reply to volvoclearinghouse:

To change your math some- about 30% of new car sales are leases, and a gross majority of those are 2 years- and since those are so regular, it's the same 30% every other year cycling products.

Of the 15M, that's almost 5M that are in a constant cycle of new leases. Since leases are not long term, and can be flexible with the jobs, and are generally lower cost for a given vehicle, it's safe to think that the average leaser is not the high end of the income spectrum.

In total, the leasers are about 10-12M people. It's easy to take them out and not count them.

That leaves the rest of the driving population for the remaining 10-13M cars.

Then add the statistic that 12M cars are permanently leaving the road every year. So it's not JUST people having to pay for the car, a lot of those sales are insurance adjusted.

With the average car lasting 11 years right now, I also don't think that people own their cars for the life of the loan. For sure, not 100%. Let alone the assumption that everyone is getting 6 year loans. Both of those change the demographics to the higher end.

It's hard condemn people when you can't really nail down who you are calling foolish.

In reply to volvoclearinghouse:

Your mean vs median household income post sent me on a search for all sorts of info with lots of graphs, diagrams and complicated sums.

It's so easy to skew the information of a particular set of metrics that when you try to reconcile income vs home and vehicle costs it can really make your head spin.

For instance:

This graph (woefully generalized and most likely inaccurate on it's own):

Versus the same information that's been "quality adjusted" (new vehicle price with the cost of manufacturer improvements factored in, of all things):

Then there's this blurb from fortune.com;

"If it is any consolation, cars aren’t the only big-ticket item whose prices have gone up faster than inflation. Look at real estate. Says analyst Drury; “Just like cars, we know they don’t make them like they used to but the median home price in 1965 was $20,700 (inflation adjusted $156,303). Today it is $269,800.” "

Also it's been thrown around that the age of the average car on the road is close to 11.5 years. I wonder what the average age of the fleet owned by the average GRMer is? I think we've done that before but, just for funzies.

Mine (total) = 17.75 years

Mine (on the road) = 17.33 years

In reply to alfadriver:

I'm not really calling people foolish. My original post was somewhat heavy-handed, but in reality I'm just trying to understand the economics at play here. As you, and others have pointed out, there's a lot of sometimes very different numbers, and it can be hard to really nail down what the facts are.

Granted, some number of new car "sales" are actually leases. However, I don't think my every 6 years assumption is off by much. Yes, the "average" age (and again, here would be an interesting place to compare "average" to "median") of cars on the road is 11 years, but a lot of those are on their 2nd, 3rd, etc owner. My estimation of the typical new car buyer is someone who doesn't work on theior cars and wants the warranty protection. 6 years is about the time when warranties are running out as well as when the notes are fully paid off. Plus there's a mentality of "well, I've been paying $$$ per month, I can keep paying that and have a new car!"

I do recall hearing somewhere that new car loans were averaging (there's that awful word again) around 6 years. Hence that number.

For one final piece of info, median household income in 1959 was about 5k, and the average new car was 2k. But again, home prices have risen MUCH faster than new car prices, and the median household income of 2016 includes a LOT more two-earner households than it did in 1959. Which means, generally, a lot more 2+ car households than in 1959.

In reply to The_Jed:

Funny. My total fleet is 18.75 but if you look at just the two grown-up plain old daily drivers, i.e. the way 'normal' people use cars? 11.5 years right on the money. We tend to buy cars around 10 years old and keep them for 3-4 years.

Income of 5k and car price of 2k somehow sounds OK. But income of 50k and car price of 20k sounds irresponsible. Funny how that works.

Personally speaking, I think I spent so long planning to never own a new car because my parents and grandparents never did, that I never considered it a priority. In fact this year we rearranged financial priorities to pay for preschool and are finding out it...um...actually doesn't hurt too much. Monthly amount saved is in the toilet in order to do so, but it is temporary. The preschool bill is more than a car payment bill. But for some reason we never had the motivation to rearrange finances to afford a car payment.

It is gonna be hard, when preschool is done, to save that money rather than letting the budget balloon again or buying a new Mustang with it.

In reply to The_Jed:

Interesting statistic...

My fleet average age is 32.8 total and 30.8 running, however the modern DD pair are about spot on at 10.5 years old.

In reply to RedGT:

I read an article recently about how parents will move mountains to make financial room to afford stuff for their children, but not so much for themselves.

In reply to RedGT:

Don't worry, the money will find a way of flowing into children and their activities somehow. The little creatures are black holes consuming infinite cash, time, and energy.

KyAllroad wrote: In reply to RedGT: Don't worry, the money will find a way of flowing into children and their activities somehow. The little creatures are black holes consuming infinite cash, time, and energy.

Which is why you should spend all your money on cars FIRST. If every available dollar gets used, you might as well reduce the pool.

KyAllroad wrote: In reply to RedGT: Don't worry, the money will find a way of flowing into children and their activities somehow. The little creatures are black holes consuming infinite cash, time, and energy.

Yes, but speaking as a relatively new parent, the rewards are better than any car.

The_Jed wrote: Then there's this blurb from fortune.com; "If it is any consolation, cars aren’t the only big-ticket item whose prices have gone up faster than inflation. Look at real estate. Says analyst Drury; “Just like cars, we know they don’t make them like they used to but the median home price in 1965 was $20,700 (inflation adjusted $156,303). Today it is $269,800.” "

Same deal as cars though.

What was the median square footage back then? Efficiency? Lot size? # of swimming pools/spas/18 car garages/etc?

volvoclearinghouse wrote: Automotive bubble, anyone?

If that happens, who gets bailed out? The banks again or the auto industry that does the in house financing?

Sine_Qua_Non wrote:

volvoclearinghouse wrote: Automotive bubble, anyone?

If that happens, who gets bailed out? The banks again or the auto industry that does the in house financing?

Some investment advisers think it's coming. Apparently there are a lot of sub-prime auto loans getting issued. When it pops it won't be as bad as the housing bubble as the amount of money involved is quite a bit less, but it'll still have an impact. Hard to say if there will be bail-outs next time.

ProDarwin wrote:

The_Jed wrote: Then there's this blurb from fortune.com; "If it is any consolation, cars aren’t the only big-ticket item whose prices have gone up faster than inflation. Look at real estate. Says analyst Drury; “Just like cars, we know they don’t make them like they used to but the median home price in 1965 was $20,700 (inflation adjusted $156,303). Today it is $269,800.” "

Same deal as cars though. What was the median square footage back then? Efficiency? Lot size? # of swimming pools/spas/18 car garages/etc?

Good point. It would be interesting to know the median age of today's occupied homes and what the age trend is. Getting ready for bed and too tired to search.

ProDarwin wrote:

The_Jed wrote: Then there's this blurb from fortune.com; "If it is any consolation, cars aren’t the only big-ticket item whose prices have gone up faster than inflation. Look at real estate. Says analyst Drury; “Just like cars, we know they don’t make them like they used to but the median home price in 1965 was $20,700 (inflation adjusted $156,303). Today it is $269,800.” "

Same deal as cars though. What was the median square footage back then? Efficiency? Lot size? # of swimming pools/spas/18 car garages/etc?

The answer to all of those questions relates somewhat to the pretty sizeable difference between median household income (~50k) and average household income (~78k).

It also relates to the much higher % of dual-income households now vs 50 years ago.

One final thing- what some you call a bubble, I would just call a cycle. The auto industry has been cyclic for, well, as long as I can tell. Goes up, goes down, etc. Sometimes it follows economic trends, sometimes it follows other things.

Nobody is likely going to get bailed out- people will lose jobs for a while, and then they will come back.

One key part of the equation is the constant market pressure of cars being permanently taken off the road PLUS the general increase of driving population. While one will never see the market expand like some new tech items, it's also not as if the market will ever go away.

One thing to note- the core reason why the industry needed propping up back in 2008 was that banks totally froze- which froze the industry to new loans for new cars and for new development. That pushed the market from about 14-15M (IIRC) to 9M in just 9 months. Which was not sustainable for GM or Chrysler- so they got direct bail outs. And really not sustainable for the rest of the market- and pretty much everyone got banking/ability to loan bail outs.

Right now, it makes sense to me that the market is probably closer to a 17M market than the current 19M market- but what's going on is that the years were new car sales didn't keep up with cars removed + population is being made up right now.

volvoclearinghouse wrote: I do recall hearing somewhere that new car loans were averaging (there's that awful word again) around 6 years. Hence that number.

The problem with the assumption that all loans are 6 years means that all the loans 6 years ago were for 6 years. As well as for 5, 4, and 3 years ago. Just because someone claims that all loans in 2016 are 6 year loans does not mean that all loans out there from 2010 to 2016 are 6 year loans.

In reply to alfadriver:

The "bubble" I refer to was specifically sub-prime loans, which represent a small, but noticeable, number of car loans which if there is a significant number of defaults may impact how banks write loans for a spell.

But a number of people buying a $60k car they can't afford is quite a bit different than when they buy a $500k house they can't afford, so any bursting bubbles will likely be concentrated on banks more exposed to those loans.

Regardless, there is "reality" and the "media impact" which tends to take a negative story like this and blow it out of proportion, which often affects the CCI mentioned earlier...