words about things

What follows is my subtle attempt at honesty.

high prices, low interest

When I was just a lad my father imparted upon me some wisdom to the effect of “If a poor boy wants something nice, he has to be able to build it.” Nowhere was this philosophy more evident or accurate than when it came to vehicles. Living in the woods it can be miles to a stop sign, let alone a store, so we depend on personal vehicles. There’s no public transport of any kind except the school bus and the ambulance (and you have to wait for them).  I became quite a competent mechanic and as such I have always had multiple vehicles. I’ve never had very nice vehicles mind you, but I’ve always had multiple, reliable cars and trucks. That is, I HAD multiple reliable vehicles. About 10 years ago I finally got myself to a position where I could buy a couple late-model, lightly used vehicles that didn’t require me to be a mechanic. It was wonderful. I had tangibly more free time because I wasn’t playing mechanic regularly. Then, two years ago, I was debating buying a new vehicle and someone convinced me the first step was selling my spare truck to a poor family in need. Now I’m a one truck man with only a bicycle for back up.
(To be fair, I have a spare bicycle in case one breaks). It physically bothers me that I have only one vehicle but the alternatives bother me more.

Alternative #1   buy a new(ish) vehicle and have a payment

Alternative #2   buy an old(er) fixer-upper and do a bunch of work to it

Both have their pro’s and con’s but that’s not how you start an important decision like getting a vehicle. You have to start with the two most important tenants of vehicular commitment. What do you want verses what do you need?

I’m a pretty utilitarian guy and I tend to be rational but I’m going to play with this list anyway. (Prepare to be bored)

My current vehicle is a 10 year old ford ranger, 4.0L V-6, 4X4. It needs some cosmetic work but is mechanically sound and perfectly meets 90+% of my monthly vehicular requirements. The only problem I ever have is that it is too small to carry multiple people (rarely a problem) or much cargo that can’t get wet (a seasonal problem). I drive it to and from work each day (~ 20 miles round trip) and at least some of every day is spent off pavement. I typically drive several miles per week across sandy, rocky or grassy terrain. Occasionally the 4x4 is a must.

I have a daughter who is off at college right now and will need a car in the next year or two (also when she comes to visit) so I was thinking I could just buy myself a new vehicle and semi-retire the old ranger until she needs it. Seems like a good way to justify a step up in vehicles for myself.

I then considered things like: Improvements in modern vehicles are such that I can buy a brand new full sized, quad cab, F150 4x4 and get better gas mileage than I get from my ranger! That’s a great argument for what I need. It ticks all the boxes and doesn’t change my daily driving much. It’s a truck and can live the same lifestyle my other truck lives. It has more room for passengers and weather sensitive cargo.

But is it what I want?

No. I want a Jeep Wrangler Unlimited (the 4 door version of the jeep wrangler). It is more than tough enough to do all the off road stuff I do, dependable enough for the on road stuff, gets slightly better gas mileage than I get now, and has more room for cargo and passengers plus all the stuff I normally carry in my small truck. Well, that settles that right? It meets my needs and my wants. I should go test drive and pick a color.

{insert record scratch sound here}

Quick note: I am about to make a horrendously over-simplified argument that assumes modern sub-6% interest rates, 4 year loans, good credit scores, and no down payments. But in my defense, I will also be ignoring the cost of housing, insurance, food, clothes, and the dream of saving for the future. I won’t even try to address the idea of raising a family. Let’s just talk dollars and cars.

Have you priced those things? They are $45,000 new in my area. A clean used one is rarely as low as $35,000. The F150 is $35,000 new and pushing $25,000 used. So that route isn’t much better.  To responsibly finance $25,000 for 4 years I’d need an extra $600/month just for the payment. (Not to mention incidental expenses like insurance). If you’re one of those people who consider what % of their monthly income they can spend on things you might say “10-15% for a car is about right” By that rule $25,000 for a car is the high end of a $4,000/month income. Well, I’m one of those people who doesn’t EVER count gross income.  I count the $$ I actually get to put in my bank. After federal withholding, social security and medicare/Medicaid I lose 25% of every paycheck. $1 = $0.75 for me. To pay that $600/month I have to earn almost $800. As these numbers escalate my blood pressure rises. Let’s talk about something else and come back to this.

I guess I could shop around for an older, cheaper vehicle with more miles on it but cash-for-clunkers seemed to have wiped most of them out of the market and paying for a 10 year old high mileage vehicle seems wrong because that’s what I have now. Before I get too anxious I’m going to look at other vehicles to see what’s going on with pricing. As of this writing average price of a car or truck in the US is almost $32,000. Going back to that 10-15% of gross income rule the average American has to earn $5,350/month to responsibly make this payment. That’s a $64,200/year job. Half of American households do not earn this much money, let alone individuals.  Most “households” still have multiple working adults in them requiring multiple vehicles and the median income per person who is working is $28,500. Let’s use that 15% of income rule again. The average person earning $28,500/year (which we already discussed is more than half of us) can afford a $350/month car payment. What can you get for $350/month? A $15,000 car.

There are a few of those out there. The Chevy Spark, Kia Rio and Nissan Versa pop up at the top of all my searches. Those are new cars you can buy on a budget. But what if you need more than a subcompact cheapo car? Well here’s the break-down of used cars in my area.

Ø  2-5 years old <50k: Cars that fall into this price range are almost all compacts. I hope you want a Ford Focus because that’s what you’re going to get. I did not have any luck locating late model, low mileage trucks available at this price point.

Ø   5-10 years old, <100k: Some mid-sized cars and SUV’s come in under the $15k at this point. I guess if you are shopping for the best value it’s probably here except for the misuse factor. Modern cars are well built but the end of their life is still decided by the beginning of their life. It’s hard to tell how a vehicle was treated at this point unless it is actively showing wear and mechanical problems. A few trucks will show up at $15k as they approach 100k but it’s usually a sign that they are in bad shape or they are plain jane models with no features.

Ø  10-15 years old, 100k+: Cars are plentiful here in the $6-8,000 range. The average “household” needs two cars anyway so this is probably the way to go for most people. Trucks are a couple grand more if they are still in good shape. The plus side to cars of this age is that the weak points have all wore out and if it was badly mistreated it will barely be running. Budget for maintenance and you might be OK here.

Ø  15+ year old, 150k+: Most vehicles here are just a few grand (except certain specialty trucks like big diesels). If you can keep them running (and don’t mind being seen in them) why not buy one?

So what happens if you really need a truck? I guess you look for a 15-20 year old mid-sized plain jane truck that looks like it’s been cared for.

What happens if you are a poor single income family with 3 kids? I guess you go through 10-15 year old super high mileage minivans until they leave home. I know families that have done just that, used minivans until the kids were big enough to drive and then used compact cars until the kids left home. They drove them until they could not fix them and then found another. But most Americans aren’t doing that.

We have 212 million drivers in the US.

We have 256 million passenger automobiles

And we sold 7.8 million new cars & trucks last year

If we extrapolate the earlier numbers half of those 212 million drivers can’t afford a new car unless it’s one of the uber-cheap sub-compacts. I can’t find a good resource for this but it looks like 1 in 15 or so vehicle sold last year was compact or subcompact. Most of those don’t fit our price point but let’s assume half of them do that means 1 out of every 30 cars was cheap enough to be purchased by 1 out of every 2 licensed drivers. So 260,000 new cars (costing <$15k) were sold last year with a 50/50 chance that any one of them was bought by one of the 106 million drivers who couldn’t afford more. 

(Again, I am assuming a bunch of things, this is bad math, and that’s not how you do statistics but stick with me here).

This means 1 out of every 815 drivers making $13.70/hour or less potentially got a brand new car last year. Does that sound like the market is working? Could Apple stay in business if it was still cranking out the 4S and selling it primarily to people who can afford a 6S? No. Their business model is to sell the cool new thing to everyone who can possibly afford it. Where is the frugal smart phone market?

Well a new iPhone is the equivalent of one median household car payment so you tell me.

Okay, if we accept that new cars aren’t priced to meet the income levels of the median household then we must have a thriving used car market. According to Edmund’s we do, to the tune of almost 40million vehicles per year with an average price of $18.5k and rising. “Used” cars are getting newer and their prices are going up.

If you scroll down that .pdf document to the category and composition page you can see the average “used” price by vehicle type. 18 of the 22 categories don’t match our <$15k requirement. Only cars in the sub-compact, Compact, mid-sized, and full sized categories routinely sell cheaply enough for median households to afford one. To be fair they represent 39% of used vehicles but for their average price to be below our price point then a notable number of them must be beyond our purchasing power.  Let’s assume some more data and see how we feel. (Please note, “assuming numbers” and “feeling ways about them” are both bad things to do, but I’m not here to make friends or sense.)

39% of 40million cars = 15.6million. We can assume that at least 1/3 of those are too expensive for our budget. That leaves 10.4 million cars. Compare that to the potential 130,000 new cars median households might have bought responsibly and then remember that there are 106million “median household” drivers. So 1 in 10 working stiffs got a new car last year. Hooray for making up numbers!

Actually a muddle all those numbers up because it doesn’t really matter. Feel free to play with the facts and the assumptions all you like. The real problem is on the “higher prices” chart of that Edmund’s report. Over 852% of cars bought last year were financed for more than 55 months. Almost 60% were financed for over 66 months. That’s 5-1/2 years of debt for a car. That’s 3 more star wars movies. Also, in the age of super low interest rates, the way to pay high interest is by financing for a long time.

Unfortunately, people tend to think “What can I afford this month?” and not “What can I afford over the next year?”. We like to forget that things are going to happen, stuff is going to break, and there will be unforeseen expenses. This is why to 10-15% rule is a good one to follow but even then, do you want to commit 10% of your monthly income for the next 6 years on a car?

In defense of the newer higher priced vehicles I could point out that they have never been as well built or technologically advanced as they are now. Every year’s batch of cars & trucks are true modern marvels. They make more power, get better mileage, pollute less, and last longer. That doesn’t forgive the cost being out of touch with the average person’s ability to pay it. This income to price discrepancy shows me that the market intends to make its money on bad financing which signals collapse. I understand that the sub-prime lending heathens left housing behind 6 years ago and moved to auto finance, I understand that American’s love their cars, but this bubble has to burst. (Not unlike some other bubbles I could mention. Cost of college, I’m looking at you.)

Having said all this and made it plain that I think the trending current price of a new or used vehicle is too high for the majority of the consumers who drive the market what am I going to do about my own car needs?

Well, first things first, I have money saved up to put down on the principle and to pay the tax title license. Don’t ever let the salesman talk you into rolling it all together. He wants you to pay INTEREST on TAXES. That’s as un-American as it gets.

Because of this I can easily buy one of those inexpensive sub-compact cars. Would they meet my needs and desires? I could drive to and from work and possibly there’s enough increased room to help out when I go to the store on rainy days but I won’t know until I sit in one and drive it if it’s comfortable and if I trust it with my life. Most likely I would be better off with a more expensive compact hatch back or something along those lines. Front wheel drive helps with stability in bad weather. They are loaded with safety features like side impact air bags and they get 10-15 mpg better than I get now.

Sound good?

How much does increased gas mileage mean to me? 15 mpg more than I get now adds up to one car payments per year in savings. That sounds worth it. So over the 48 months of the note I only pay 44 months if I manage my money and pay it towards the note.

Then I remember that I live in the country have no garage and that nice new(ish) car would be relegated to sitting under an oak tree all day so I think about other options.

I could get a slightly older truck with some miles on it and not many features but I already have one of those an no debt. Hrmmm.

Or I could shop my ass off for the jeep I wanted in the beginning, put a little more down, finance for a little longer and have the vehicle I want and need. I’d just have to go to bed every night knowing it’s an overpriced symbol of a market that is so out of whack that they can't calculate a fair price for their products, correct their ridiculous interest rates or pay me enough to participate responsibly. Decisions like this would be easier if I had something more important to do than think about them.