Are Cars Too Expensive?

It’s hard not to feel like a victim when the media keeps reminding us that we are being taken advantage of and pointing out the evildoers. This segment from CBS This Morning is fairly typical.

The question posed and answered was: “Can a middle-class budget buy a new American car? Probably not.” They begin with the fact that the average vehicle price increased by about 38% for a new car or truck compared to 10 years ago. Of course they don’t mention that more than half of that amount can be attributed to normal inflation. Some comes from required and optional safety improvements and some from added amenities. 

That situation will likely not improve in the future as GM just settled a six-week strike with 46,000 union members who will receive $11,000 ratification bonuses along with other contract improvements. This sets the level for negotiations with the other two US automakers. Economic understanding reminds us that those added costs will be passed along to the car buying public, but back to the story…

Armed with the average annual take-home pay and the recommended percentage for car payments, Tony Dokoupil visited a couple of New Jersey dealers to price a typical car. The only way he could meet his presumed budget was either with a 96-month loan or by buying a much smaller car.

Where is the problem according to CBS? “The big three auto-makers are retiring many family sedans while rolling out souped-up SUVs and trucks at premium rates that families often can't afford without taking on loans that are now larger and longer than ever” while “a record number of Americans fell behind on their car payments.”

About this time I’m yelling at the TV that automakers don’t make cars that don’t sell. The reason they are producing bigger cars is to meet the demand. They are not the bad guys.

To back this up I found a site from January 2019 headed: “39 Interesting Car Buying Statistics, Trends, & Analysis.” Two facts near the beginning of the list were: 

• “Passenger car sales dropped below 30% of the market share in August 2018 for the first month ever. (USA Today) 
• Sales of mid-size (15.6% decrease) and compact cars (13.6% decrease) fell in August 2018, while compact crossovers and SUV’s rose about 14.8% of the market share. (USA Today)”

That’s what people are buying.

Later in the list is the fact that the “top three features consumers are looking for in a new car are safety (21%), Bluetooth/USB connectivity (15%), and a spacious interior (11%). (Crimson Hexagon).”

Safety is number one. A reliable source provides the unsurprising information that “new small cars are safer than they've ever been, but new larger, heavier vehicles are still safer than small ones.” Not only does this explain the trend toward bigger vehicles, it also explains why the cost of cars may have risen more than inflation – even the smaller ones are safer than ever, plus customers are expecting more amenities.

Finally, Americans for a long time have had a love affair with larger vehicles. In 2016 we read: “With gas prices relatively low, you might be tempted to buy that SUV you’ve always wanted.” A few years earlier: “larger vehicles accounted for 63 percent of total US sales in 2013” and “88 percent of all pickups sold in the US in 2013 were full-size models” and 54% of the SUVs “were on the larger side.” 

A couple of other observations: the percent of budget given to Tony to spend was a range of 10-15%. In the story he used 10% for his examples resulting in a worst-case scenario. There was no mention of a down payment or trade in, but many Americans are underwater with the car they are driving, so this may be fair. But it also could be an indication of where the problem really lies. With cars and many other purchases, buying now to pay later has become normal. (See my last entry.)

Finally, in the story CBS included statements from GM and Chrysler explaining their decisions were based on a “customer-driven trend to larger vehicles” and “based on what the customer wants,” respectively. Much as it’s popular to blame the big corporations for problems, the real problem is the appetite and resulting behavior of consumers. Saving for a car before stepping on the lot and then not overspending seem to be ideas of the past.