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 for an economy car 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 the valuation analysts at Kelley Blue Book reported the estimated average transaction price for a light vehicle in the United States was $37,876 in 2020. New-vehicle prices increased $975 (up 2.6%) from February 2019, while falling $126 (down 0.3%) from last month. Are you kidding me? Back in 2020, the average new car price was almost $38,000?
It gets worse. In 2021, Edmunds.com reported that the average new car price is probably closer to $40,000 and $39,950. That’s nut! The average new car price has risen partially due to production shutdowns and supply chain issues during the global pandemic.
I guess we must all be quite wealthy because I don’t know many people with a median household income of $68,000 who can afford such an average new car price.
What’s also surprising is that the average used car price has skyrocketed as well. Due to the pandemic, more people are buying used cars and taking less public transportation.
The Average New Car Price Is Crazy High
Take a look below at the most popular car brands and models on the market today and their prices. The data comes from Kelly Blue Book to get the average car price of $37,876 for 2020. Again, the average new car price in 2021 is closer to $40,000.
It really seems absurd that the average new car price is $37,876 according to Kelly Blue Book. However, who am I to deny their 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 demand is so strong and the average American is so rich! Forget the great recession and the pandemic. 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.
Below is a chart showing the average new car price of $39,950 and the averaged used car price of $23,169 in 2021. Mainly due to inflation and continued innovation, the average new car price continues to increase.
The Average New Car Buyer Is Rich
Given everything is rational, we can also assume the average new car buyer makes around $200,000 a year, or 5X $40,000, 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 ~$400,000 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. Meanwhile, real estate prices have recovered to pre-crisis levels and then some in some cities like San Francisco, LA, and New York City.
Don’t Spend Too Much On A Car
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 $190,000 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 $190,000 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 $190,000 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 $38,000 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 Opportunity Cost To Borrow Money To Buy A Car Is High
The $30,032 borrowed today for a car would be worth ~$50,293 in 10 years. This is 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. Opportunity cost is truly a car buyer’s worst enemy.
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 Car Price?
It still baffles my mind that the average net car price is about $38,000 in the new decade. As someone who drove a $8,000 used Land Rover Discovery for 10 years and more recently, a $20,000 Honda Fit, the average new car price of $40000 figure is hard to grasp.
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. 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!
Achieve Financial Freedom With Real Estate
Instead of spending money on the average new car price, invest in real estate instead. Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income.
The easiest way to invest in real estate is through a publicly-traded REIT, private REIT, or real estate syndication. Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREIT. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most investors, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. 18-hour cities also have potentially higher growth due to job and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Vehicle Insurance Recommendation
The best place to get affordable car insurance is with Allstate. With Allstate, you’re in good hands. Getting a quote is free and easy. Make sure you have the best auto insurance possible to protect yourself and your family.
Every year, there are hundreds of thousands of accidents on the road. You need great auto insurance to protect your finances as well. If you are going to pay the average new car price, good car insurance is a must.