half of family's annual income
One step forward and two steps back.
what it seems like when you review the affordability of new cars in the U.S.
affordability improved dramatically in the late 1990s, it has leveled off since
then and the number of weeks a family needs to work to buy an average-priced new
car has lingered around 25 -- which adds up to almost 50 percent of a family's
A step forward came in the first quarter of
2007 when the average cost of a new car was $28,200, says Dana Johnson, chief
economist for Comerica Bank -- which puts out a quarterly auto affordability index.
|How many weeks?
courtesy of Comerica Bank
That average price
was about 1.6 percent higher than the average car price in the first quarter 2006,
but the median family income increased 3.7 percent to $59,200 -- meaning it would
take 24.7 weeks of a family's income to buy that $28,200 car. And that small improvement
came only after a sharp increase in the fourth quarter of 2006, when the number
of weeks of income needed to buy a car rose from 24 to 26.2 -- the biggest jump
in the index's history.
So far this year, Johnson says,
cars became more affordable because consumers
reacted to the sluggish economy, a rebound
in gasoline prices and troubles in the real
estate market by spending about $550 less
per car than they did in the last three months
of 2006. "That, along with the availability
of more attractive financing rates reversed
somewhat more than half of the last quarter's
deterioration in affordability," explains
Johnson. "With demand soft and the car
companies fighting for market share, buyers
were able to find pretty attractive deals
on new cars in the first quarter." You
can compare up-to-date auto loan rates in
your area at Bankrate's auto
loan home page.
downward trend in inflation and a strong dollar helped cars get a lot more affordable
starting in 1995, Johnson says, but since 2002, even though incomes have risen,
the amount spent on cars has gone up and loan rates have increased. "It's
sort of like the cost of acquiring a car has gone up in parallel with incomes
in the last five years," he says.
You would never know
any of this from the aggressive marketing tactics of car companies, who use creative
financing methods to make cars feel more affordable, says Philip Reed, consumer
advice editor with Edmunds.com.
"People waste all kinds
of money when purchasing and owning cars. It's a depreciating asset. There's no
way to get around that," Reed says. "So right from the get-go you will
lose money, but the question is: How much? You want to control the bleeding."
is fairly strict about how much money people should spend on a car. He says a
good rule of thumb is 20 percent of income. This means someone who buys a $20,000
car should be making $100,000.
However, Bryan Lee, a financial
planner in Plano, Texas, rejects such a hard and fast rule. He says it's more
important to look at your overall financial picture, as well as your priorities.
someone says 'I always wanted a BMW and I'm 42 and I never had the chance to get
one,' we're not going to try and talk them out of it," Lee says. "But
we'll take them through the process and help them decide."
|-- Posted: August