“Total U.S. Auto Lending Surpasses $1 Trillion for First Time” is a WSJ story that shows (a) for all of the whining about how the American middle class is getting squeezed, it still has plenty of money (don’t think the one-percenters need to get car loans), and (b) Americans are putting a huge amount of money into the dumbest possible asset. Cars have always been a terrible investment due to rapid depreciation. On the other hand, that made them good status symbols because people could see that you had money to burn. But with semi-automatic and totally automatic (self-driving) cars just around the corner, how can it possibly be a good idea for a society to invest $1 trillion in yesterday’s technology?
[The article also shows that Americans are basing spending decisions on a machine with a 20-year life based on today’s oil prices:
“A lot of the gain we’ve seen is from light trucks, SUVs, cross-overs, minivans and pickup trucks,” said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio. “Because gasoline prices have come down, it makes it less expensive to run the vehicles that use more fuel” and frees up consumers’ budgets to put toward more cars or higher car loan payments.
]
Related:
How many people buy cars as investments? I buy cars to use, to drive, and I fully expect they will be worth less when I’m done with them than when I bought them. But, for better or worse, I still need one to get around.
Self-driving cars may be coming soon, but I need a car to get places today.
Trevis: Nobody said that you didn’t need a car today, but at the same time nobody said that you and your fellow citizens needed to borrow $1 trillion so as to drive around in newer/fancier cars today. That $1 trillion could very likely have been put into something that would yield a return in the future.
Shhh, don’t tell anybody about the huge subsidy passing between new car buyers and used car buyers. We haven’t bought a new car since 1979 (and it was a lemon). Had a few maintenance bills but no car debt and lower insurance rates. That shiny new one will be available in a few years for half price.
Cars are indeed a bad investment, however, many people trade the stability of a higher monthly payment, against the unpredictable reliability and repair cost of an older vehicle. Unfortunately, mechanics who are other than “parts changers” are tough to find these days, so it is frustrating to have an older car be repaired – either the dealership (often called the stealership) will fix it at their high rates, or you can try to find an independant who won’t rip you off either by malice, or incompetence.
For myself, I did buy new, and have kept the car for 85K trouble free miles so far.
Buying a new car is not an investment, it’s one of the most expansive “luxury” to have with the fastest depreciation value [1] of anything that I know of (can a reader new something else?) And if you are trying to keep-up with the Jones next door, you are literally throwing away money as if leaving a window open in your house during the winter months in New England.
The only new car I ever bought was back in 1999 when GM used to have credit card that paid back in car cash money every time you used the card. I accumulated over $6K in car cash and with sales going on, I ended up paying $13K for a new $24K car (just sold it last year for $2K).
That said, self-driving cars are not that far off [2] and once they are on the road, watch what it will do to the industry (not just personal cars, but public transportation). It could be far more destructive (in a good way, I hope) then Uber is to cabs.
[1] http://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html
[2] http://www.ted.com/talks/chris_urmson_how_a_driverless_car_sees_the_road?language=en
Engraved on my tombstone: “the average person is an idiot”
Like anything physical (equipment, houses) cars are a depreciating asset not an investment. (Houses of course wear out and need maintenance/rebuilding regularly at hefty expense, although the land underneath has been know to appreciate). The marketing and branding are part of the car’s price like any other product but I think people overestimate the effect of “drop as soon as you drive off the lot”: Per car profit is about 10% for Toyota and maybe 3% for everyone else. http://www.detroitnews.com/story/business/autos/2015/02/22/toyota-per-car-profits-beat-ford-gm-chrysler/23852189/
“The article also shows that Americans are basing spending decisions on a machine with a 20-year life based on today’s oil prices:”
It’s interesting to note your earlier post about converting US fleet to electric used peak oil prices of $130/barrel. It turned out that the average price over the last 7+ years was closer to $83/barrel. Over the 8 years ended in 2008, about $50, over the 20 years ending in ’08, $32/barrel. So instead of comparing to $8 billion of oil, you’d need to get closer to $5 billion.
Of course if you’d started by converting even 10-20% of the fleet to electric in 2008, you’d have hit $20 oil immediately (marginal demand drives marginal cost) instead of this fall as I think we might.
lvl: Excellent point about the 2008 article using $130/barrel. My belief in the Efficient Market Hypothesis did not work out too well there! (My theory being that the best guide to next year’s oil price is this year’s.) But of course I too am an American and therefore apparently biased toward short-term thinking!
Shh. The world economy would likely collapse if the US consumer only bought stuff they could actually afford, using cash. And that includes housing.
I buy a new car every 4-to-6 years depending on how I feel about the car. If it meets my “wants” (not needs), I drive it to the long end. If I think the design engineers never actually drove the car for more than a week, I trade, fast. I put on about 20-thousand miles per year. Current car is exactly 3 years old, 64,000 miles (2012 Subaru Outback, ~28 mpg, 500 miles per tank). I spend a lot of time in my car. I mostly enjoy exploring historic sites (The Trustees Of Reservations) and the backroads of New England, “I wonder what’s up that road?” I don’t think of my car as an investment. It’s freedom to go where and when I want, any time day or night. The gasoline powered car is a wonderful thing. And I’m old enough to have lived through the golden age, 1955-68, when cars were stylish, fun, and hideously lethal in a crash. C’est la vie.
It will be a long time before electric cars are practical transportation in New England. The power companies are barely keeping the lights on during peak load. And the Clean Power Plan will only make things worse.
Pubic transportation is well and good, but don’t you want some personal power tools (F-150, chainsaw, good sharp machete, Barrett M92A1) in case the S hits the F, gnomewhatimsayin?
20 year life is a little optimistic. How many of your friends and family drive 20 year old cars? And even if they are run by some, probably 80% of the value is gone after 10 years. So even if the introduction of self-driving technology were to reduce the value of non-self driving cars by half ten years from now, you are talking about a loss of 10% of the new value – not a good reason not to buy a new car today.
A lot of people spend a good portion of the day in their car, and you only live once, so might as well spend it in a nice car. You might as well spend your money on something ’cause you ain’t taking it with you.
I usually target around 100k miles for my cars – around then the interior starts to crumble, little things stop working, etc. and the car becomes more annoying than it is worth (to me). Until then I fix whatever breaks but at that point a major repair requirement spells the end.
The cars they sell now are better than they were even ten years ago. You can totally plan on driving it for 20 years if you take care of it. It’s not the 1960s anymore; new cars last. One of the valid arguments for not buying used is the new cars actually keep getting better bit by bit every year, especially in terms of safety, but also with the performance and durability of the powertrain.
It’s all the ancillary electronic stuff that breaks on new cars, which is an expensive pain in the neck.
Izzie:
http://press.ihs.com/press-release/automotive/average-age-vehicles-road-remains-steady-114-years-according-ihs-automotive
says that 11.4 years is the AVERAGE age of a light vehicle on the American road today. From that I would infer that 20 years is roughly the life expectancy of a car. I see plenty of 20-year-old cars on the highway here in Massachusetts, which has above-average wealth and also a harsh climate for cars (a lot of salt on the roads) so I have no reason to doubt the IHS.
kbb.com publishes Blue Book prices for cars back to the 1992 model year, i.e., 23 years old (actually closer to 24 years at this point in the year). So enough 23-year-old cars are being purchased for them to build a database of typical prices. And presumably the purchaser of a 23-year-old car intends to drive it for at least some additional time.
(Walter Scott, before being shot by the police, was driving a car built 25 or 26 years previously)
If you’re buying brand-new cars right off the dealer’s lot, then yes, your investment chops are dubious at best.
But if you’re buying, let’s say, air-cooled Porsches, you are, in the words of Aladdin, one jump ahead of the hoof beats, one hop ahead of the hump, and one trick ahead of disaster. Now, the folks buying investment-grade cars may not need loans, but with interest rates at historic lows, why not ?
I just looked up a 2005 BMW 530i with 120,000 miles. According to KBB it’s worth around 5,500 as a trade in (vs. $46,000 new). So in 10 years from now, if self driving cars cut the value of a 2015 BMW in half, you will sustain a loss of $2,750 ten years from now, or maybe half that on a present value basis.
It’s true cars stay on the road for 20 yrs. but the last 10 of them they have very little value.
Show me any big-ticket “durable goods” article that isn’t a depreciating asset. Cars may be among the bigger-ticket ones, but right after that comes any large home appliance, home furniture, clothing of nearly every type, watches, electronic equipment, cameras and optical gear, computers (cars can expect to follow this depreciation curve soon as we evolve to driverless technology with potential for ever greater improvements in machine vision, radars, AI and real-time satellite feed). If you think of cars as an appliance, which is reasonable, we should treat them as an expense. The irony is how housing paradoxically resists so much of this depreciation: Buy a cooktop new for $2000 (I’m guessing) then try to sell it ten years: you’ll get nothing. Sell it with the house you installed it new in, and you will get back quite a bit.