If you were to guess what the average new car price is nowadays, what would you guess? I guessed $23,000, since my Honda Fit is sweet and only costs $19,600 new. Given I’m frugal, leaving a 20% upside pricing buffer seemed logical. Too bad I was way off!
According to Experian, one of the big three credit scoring agencies, the average car price now tops over $34,000! Holy moly that’s ridiculous. All-time best selling family cars such as the Honda Accord and Toyota Camry only cost $26,000 fully-loaded. So how on Earth can the average car price now be 31% higher than these two?
Take a look at 12 of the most popular sedans on the market today and their prices. All are under $30,000, even if you add 10% to account for bad negotiating or a nicer model. Something is up, and I’m going to get to the bottom of things.
But wait a minute. Why am I adopting a welfare mentality where I’m denying the reality of the $34,000 average new car price just because $34,000 seems expensive to me? Who am I to deny Experian’s millions of data points? It’s what so many people who read my 401k by age chart do when they aren’t on track. They go in denial.
I’ve come to accept the reason why the average new car price is so high now is because of strong demand. The economy is booming and people have money to spend. If people weren’t cashed up, prices would fall instead of rise to astronomical levels.
Given everything is rational, we can also assume the average new car buyer makes around $170,000 a year, or 5X $34,000 based on a 50% discount to my 1/10th rule for car buying. If all new car buyers followed my 1/10th rule, they’d all be making ~$340,000 a year. But, I’ve still got a long ways to go to convince people not to throw too much of their money down the toilet, despite Financial Samurai being around since 2009.
There’s a bull market in the stock market and real estate prices have recovered to pre-crisis levels and then some in some cities like San Francisco, LA, and New York City. To spend more than 20% of your gross salary on a car when you could be making mega bucks investing is completely irrational. Nobody I know would choose owning a new car over being able to retire years earlier.
Besides, those who don’t make $170,000 a year will simply buy a used car for less. That’s what I did for all but one of the previous cars I’ve owned. Everybody knows that a car is one of the worst financial independence inhibitors.
Therefore, it’s clear that all new car buyers are making around $170,000 a year. Used cars buyers make much less because cars depreciate very rapidly. Take a look at the chart below. In five years, a $30,000 car is worth about $12,000 using an average depreciation rate. Therefore, one can rationally assume the average buyer of a $12,000 car is making ~$60,000 a year, very near the median household income today.
Average Auto Loan Size Is Absurd
Unfortunately, it turns out that most new car buyers are probably not making anywhere close to $170,000 a year. The reason why I know this is because the average auto loan is now $30,032!
Holy hell. Who on Earth goes out and buys a $34,000 car and then borrows $30,032 of it? Are consumers really that financially irresponsible? Borrowing lots of money to buy a depreciating asset is the best way to financial destruction. At least when you borrow money to buy a house, the house has a chance of appreciating long term.
The last salvation of hope for Americans is that maybe the $30,032 loan is paid back over a very short period of time, like 1-2 years. Nope. The average term for an auto loan is 68 months (5.7 years) – the longest average term ever! In case you’re wondering, the average auto loan payment per month is $503, for a total payment of $34,204 over the 5.7 years.
The $30,032 borrowed today for a car would be worth ~$50,293 in 10 years based on a 5.3% annual growth rate if invested in the S&P 500 instead. If we use a 7.2% growth rate for the S&P 500, the $30,032 invested would be worth $60,140 in 10 years.
Even if the borrower decided to invest his average auto loan monthly payment of $503 in the S&P 500 for 68 months, he would probably have over $40,000 invested given 68 X $503 = $34,204.
Is there any wonder why those who are frugal or follow my 1/10th rule for car buying end up much farther head financially than those with zero financial discipline? In 10 years, the $34,000 car will be worth less than $10,000 due to a ~70% depreciation schedule. The investor of the $30,000, however, could have investments worth 5-6X more!
What’s Bringing Up The Average?
I still don’t get why the average car price is so high. Take a look at these small size and midsize luxury sales. Most of these cars all cost over $34,000 a year fully loaded. The charts say volume is down YTD June 2016 year over year.
Undeterred, I kept on looking for a reason for such a high average new car price when I came upon the SF Bentley dealer and their new Bentayga SUV for $235,000 MSRP, $250,000 nicely equipped.
The car sales people told me they can’t keep them in stock because demand is off the charts. It’s the same for their colleagues at the Ferrari, Lamborghini, Mercedes, BMW, and Maserati dealers. In other words, forget about the top 1% who can barely afford a $250,000 vehicle, it’s the super rich who have gotten super richer due to the raging bull market!
The top 0.1% are converting more of their funny money into real assets before it all goes poof like the last downturn. The super rich are also seeing folks like George Michael die at 53 with mega millions. As a result, they’re telling themselves to live it up while they still can.
Money Out The Tail Pipe
So there you have it. The super rich and the middle class who don’t read Financial Samurai are spending like there’s no tomorrow. The super rich don’t care about rising interest rates because they pay in cash or lease vehicles as a business expense. The middle class don’t care if they’re spending a lot for a new car because they don’t know any better. Eventually, the middle class will get crushed again, but for now, let the good times roll!
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