New Cars More Affordable than Ever Before in U.S. History

DALLAS/August 17, 2009 – The 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.

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.

Using BLS price data, the chart above shows the CPI for all items vs. the CPI for new cars from January 1953 to July 2009, both series are equal to 100 in January 1953. Over this period, general inflation for all prices has averaged 3.78% per year, compared to new car prices, which have increased by less than 2% annually. If new car prices had increased since 1953 at the same rate as prices in general over that period, new car prices today would be more than 2.5 times their current prices.

The chart below focuses on the period from July 1996 to July 2009, which is a period during which the CPI for new cars has actually fallen by .22% per year, compared to prices in general, which have increased by 2.43% annually over the last 13 years.

Bottom Line: New car prices have actually been falling over the last 13 years, and new cars are more affordable today than ever before.

Comments

[pedrom:]

I submit three other factors for your third paragraph:

Median family income is boosted by more second earners
Worldwide overcapacity of autos has driven down prices
The mix of smaller (and lower priced cars) is increasing

Aug 18 01:42 PM

[johnsond:]

People are buying less car because that is all they can afford. Simple supply and demand. More of their paychecks are going to health care cost, energy cost, cell phone bills, etc. Middle america is not better off, it is only able to afford less.

Aug 18 01:55 PM

[conceptwizard:]

I have a hard time to support the Governments approach to the automotive industry. Taxpayers are now on the hook for what cost us 80,000 per union job, we now own stock in a company that is questionable for success. In order to promote a false floor we throw another 3 billion giveaway in a cash for clunkers deal that hurts used car dealers and charitable organizations relying on that inventory.

I am so tired of the FED and Obamanomics trying to circumvent and delay the inevitable by selling out the American people and our quality of life, to support the very people who put us here to start with.

The system must and will cleanse itself, no matter what, blowing a debt bubble beyond comprehension will only drastically exacerbate the implosion.

Who will pay back this debt? Who has ever paid back this debt? It just keeps multipling by 3 billion a day. Does anyone ever stop to think that this and the committed indebtitness is going to anihilate us. NO, we just keep running headlong into oblivion. I just can't comprehend this thought process.

Aug 18 02:32 PM

[Dave Wrixon:]

If cars were more affordable then more cars would be selling unless the need for cars has evaporated.

Affordability, however, is about more than the ratio of income to price, it is also about liquidity and availability of credit.

Aug 18 03:06 PM

[nova:]

If cars became "so affordable" then, how-come, are GM, Chrysler and Ford are in such trouble?

It is the time for our government to get out of car business and stop impoverishing the rest of America.

Apparently, Mark Perry prefers lies and a fantasy-world.

Aug 18 03:25 PM

[Pstoneki:]

Cars may becoming more affordable, but they are also becoming more durable. Whereas people may have felt it necessary from a reliability standpoint to replace a car every 3-4 years, that may no longer be the case. Cars are much more durable than they were in the past so, for normal folks who live based on need rather than style, owning the same reliable car for 7-9 years is a benefit. Hence, less need to manufacture more new cars.

I find the $26,300 average price interesting. I could by a new Impala, Malibu, Taurus, or Camry for that price. Maybe even a few of the near-luxury cars from Infiniti or Lexus. However, on the certified pre-owned market I could by a 2 year old Mercedes E-Class, Audi A6, or BMW 5 Series. With a better warranty than most new cars. Why would someone by a new car???

On Aug 18 03:25 PM nova wrote:

> If cars became "so affordable" then, how-come, are GM, Chrysler and
> Ford are in such trouble?
>
> It is the time for our government to get out of car business and
> stop impoverishing the rest of America.
>
> Apparently, Mark Perry prefers lies and a fantasy-world.

Aug 18 03:47 PM

[Greater fool:]

One of my vehicles is a 1999 Ford Explorer, so naturally I looked into the Cash for Clunkers program. The upshot was I had three choices: 1) spend approx. $18K for a new car (all rebates included; and not counting interest on a loan, since I would prob. pay cash), 2) spend about half that and get a used version of the same vehicle, or 3) keep driving it and continue to get a (small) return on the cash.

The moral of this story: New cars may be the cheapest they've ever been, but they are still not as cheap as buying used, or driving what you've got.

Aug 18 03:51 PM

[Cabdriver:]

I totally disagree, & some of the posters here have mentioned just a few of the reasons. Why is Toyota losing money if all is so rosy? I'm so ashamed of what they've done to my party, denial is not just a river in Egypt. 30 years of [I'm sure I'll mispell this] Lazaire faire economics & rolling back of regulations [whats the next food scare gonna be?, wheres the SEC been the last 15years-enron, or FDA-Vioxx, the FDIC seems to be the only agency able to do their job!]

Aug 18 05:59 PM

[twistedstee...:]

No matter how low the 'bargain' on new car gets, a bargain isn't a bargain if there is no work for the family.

Aug 18 08:49 PM

[j-dub:]

Cars are more affordable partly because of the Japanese, Mark.
They came here in 1990 with the lexus and turned the luxury market on it's head. For instance, Cadillac couldn't raise prices because they had to compete with a car far superior to theirs. You need to keep Cadillac at a much higher price point than let's say Chevy, so you can't raise Chevy prices either. So you lower quality, when you can.

Cadillac still has to compete with Lexus today and round and round it goes
There are about 15 things wrong with your article.

On a side note-
Just wondering what a 10 day vacation in Fantasy Land costs now a days?

Aug 18 08:56 PM

[TCK:]

You also need to add the billions of dollars in bailouts for GM and UAW to compute the true price of the vehicle !

Aug 19 09:53 AM

[TBill:]

Cars more affordable than ever? NONSENSE! In the fifties the average guy could buy 5 cars a year with his income. In the sixties you could be a good car for $2000, cheapies for far less. That about 25% of income, 12 weeks!

That's the problem with you young guys, not thinking outside your own experience.

Aug 19 11:45 AM

[Pstoneki:]

Bad generalization. However, I can buy 7 average cars per year on my salary. Seems I'm doing better than my old man.

And that $2000 car was junk. I know - my dad used to run a plant in the 60's that built them.


On Aug 19 11:45 AM TBill wrote:

> Cars more affordable than ever? NONSENSE! In the fifties the average
> guy could buy 5 cars a year with his income. In the sixties you could
> be a good car for $2000, cheapies for far less. That about 25% of
> income, 12 weeks!
>
> That's the problem with you young guys, not thinking outside your
> own experience.

Aug 19 05:09 PM