New Auto Affordability Close To All-Time High

The chart above is Comerica Bank’s Auto Affordability Index back to 1979, showing the “weeks of family income to purchase an average-price new vehicle.”

The purchase of an average-priced new vehicle took 24.1 weeks of median family income in third quarter 2008, according to the Auto Affordability Index compiled by Comerica Bank. The latest reading is up 1.0 week from the second quarter and down 1.1 weeks compared to a year ago. Including finance charges, the total cost of buying an average-priced light vehicle was $28,929 in the third quarter, up about $1,200 from the second quarter. Family income barely increased in the latest quarter.

“The surprise to me was that the average amount of money spent on a new car increased about 5% to $25,200 last quarter, excluding financing costs, said Dana Johnson, Chief Economist at Comerica Bank. “In all likelihood, many moderate income buyers pulled out of the market due to the limited availability of financing, thereby temporarily inflating the average amount of money spent on a new car. A sharp drop in loan to value ratios, to the lowest level in three years, was another indication that tight auto financing conditions were a restraint for many potential buyers.”

Bottom Line: Compared to the 1980s and 1990s, new vehicles are about 17% more affordable today and can be purchased with about 5 fewer weeks of income; and compared to the peak in 1995, new cars are almost 26% more affordable and can be purchased with almost 8 fewer weeks of income.

Maybe that highlights one of the issues in the auto industry: relative to income, new vehicles have gotten more and more affordable (and inflation-adjusted new car prices have fallen by $2,500 between 1998 and 2006, see chart below), suggesting an increasingly competitive industry. In an increasingly competitive industry, the inefficiencies of the Big Three and the UAW have become increasingly exposed, and the inefficiencies have become greater and greater liabilities?

Posted in Categories: Contributor, Economy, External Research.

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