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.