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How affordable will your next car be?

By Claes Bell, CFA · Bankrate.com
Tuesday, August 10, 2010
Posted: 4 pm ET

It's funny; after writing about the affordability of family haulers yesterday, today I get a press release from Comerica Bank with the latest edition of its Auto Affordability Index.

The index takes the average price paid for a car, including total interest on the auto loan, and divides it by the median income of an American family to determine how many weeks it would take said family to pay off the average car.

Weeks of median family income needed to pay for a new car

Weeks of median family income needed to pay for a new car

Right now that number stands at 23.6 weeks, unchanged from last quarter. During the worst of the crisis, it was significantly lower, close to 22 weeks, mostly due to the price wars between carmakers squabbling over the diminished pool of customers that could afford a new car and/or qualify for financing.

"There was a big decline in the demand for cars, and an excess capacity to produce cars. That tended to result in a lot of discounting, which sometimes took the form of lower prices and sometimes took the form of more favorable financing terms," says Dana Johnson, chief economist for Comerica.

But in the last few quarters, automakers have slowly worked through the huge glut of unsold cars they had hanging around dealers and reduced production through the magic of mass layoffs. Less supply is meeting heightened demand, so manufacturers can charge higher prices and not offer sweetheart financing deals, so the number crawls up.

Overall, like the price of most technologically advanced products, the months required to pay for your family's new wheels are historically on a downward trend, says Johnson.

As you can see in the chart, since the late '90s, the length of time families would hypothetically need to pay off their cars has been on a downward trend. That doesn't mean that car prices have actually gotten lower. As those of you who were buying cars in the early '90s know, the opposite is true (see below).

Average price paid per car by U.S. consumers

Average price paid per car by U.S. consumers

The increase in affordability just means that car prices haven't risen as much as other prices, says Johnson.

Why is that? Advances in technology have allowed manufacturers to produce cars faster and more cheaply than in the past, and globalization has put downward pressure on prices through outsourced labor and the entry of automakers from countries like South Korea into the U.S. market.

Still, when you step back and think about it, 23.6 weeks is a pretty mind-blowing number. That number means you're basically working for almost 6 months straight to buy just one item. The transportation a car affords can be pretty darn valuable, but six months of your life seems like a high price to pay when life is as short as it is.

It just shows how important a car-buying decision is, despite how cavalierly many people make such decisions. And it's a powerful argument for trying to reduce your personal pay-off time to far less than 23.6 weeks.

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