Americans have been spending a lot of time at new-car dealerships in the past several months, a trend that most industry watchers expect to continue this year, boosting sales of new cars and trucks to a post-recession high. Yet a new study suggests most American households shouldn't be spending so much on their new set of wheels. Could the wisdom of crowds be so spendthrifty?
The study by Interest.com compared the average price of a new vehicle, which at roughly $30,500, stands as the highest adjusted for inflation since 1997, to the median income in 25 cities. Using its guidelines for what a responsible buyer should pay — a 20 percent down payment, a loan of no longer than four years and costs including insurance and sales tax not exceeding 10 percent of income — the study found that residents of 24 cities couldn't afford the average new vehicle payment of $601 a month. (The exception: Washington, D.C., which is facing the first real threat to local incomes due to the sequester.)
By Interest.com's math and guidelines, the average resident of Tampa, Fla., the poorest city in its survey, can only afford a new vehicle costing $14,516, or $256 a month; households in middle-tier cities could afford about $20,000. "A lot of Americans are spending too much money on their cars,” says Mike Sante, managing editor of Interest.com, who adds that shoppers would be better off buying used and investing the savings: “Car costs are one of the most controllable parts of a household’s budget."
But if Americans are spending too much on cars, they have a funny way of showing it. February's auto sales appear to have hit the highest monthly rate since 2007, with TrueCar estimating that retail sales will rise 5 percent from the same month a year ago. Across the industry, automakers expect to sell more than 15 million new vehicles in 2013, and none have evinced much fear about tax hikes, budget battles or any of the other economic worries affecting other industries.
Another study that tracks car prices, Comerica Bank's Auto Affordability Index, arrives at different conclusions about what Americans can afford. Under its formula, Comerica estimated that as of the third quarter of 2012, the average new vehicle cost 23.1 weeks of income to the average household — a measure that's been improving for buyers over the past year.
Why the difference? The answer lies in the definition of "affordable," and the levers dealers can pull to get a deal done. Interest rates bumping along near zero percent and new-car loans that can last as long as seven years can bring the monthly payment down while keeping the total transaction price high. Rising used-car prices mean some lucky buyers have more to put toward a car, and make leases on high-end vehicles more attractive since the vehicles will lose less value over the next couple of years.
And the auto industry has shifted its incentive game away from blanket offers of cash on a model's hood toward "stairstep" bonuses for dealers who meet monthly sales targets. Dealers use that bonus money to sweeten deals as they see fit — paying a little more for the trade-in here, easing the financing cost there — without having to write off thousands of dollars from the sticker price.
Sante says part of the study's goal was to get buyers thinking about how much they could truly afford, and consider saving money for college, retirement or other needs rather than getting wrapped up in the emotion of car buying. "The auto industry's ability to get us to buy more cars than we can afford is astounding," he says. "A lot of people are letting the car dealership determine how much they can pay."