Background
We saw in a previous post that the second largest expenditure for American households is household spending on transportation. This averages a bit over $9,500 a year, or 16% of the typical household’s budget. What are the components of this cost, and how is it changing over time? Are we really a world of Teslas and BMWs? Or, is that a perception based on those who live in the San Francisco Bay Area? This post will look at how we spend on transportation, and how it’s changed over time.
Findings
- We are actually spending less on transportation today than 20 years ago. After adjusting for inflation, the average US household actually spent slightly less on transportation in 2017 than in 1997 (though households are also slightly smaller now).
- It’s all about the cars. Less than 1/10 of the household spending on transportation expense is for public transit. Almost all the spending is for the cars we drive. The average US household owns two cars.
- New cars actually aren’t getting much more expensive! There are various analyses and challenges with how to interpret them. The the bottom line is that inflation is the main driver of the cost perception. In 1997 the average new car cost $20,305; inflation adjusted to 2017 this is equivalent to $30,010 – nearly a 50% increase. Kelley Blue Book reported the average 2017 new car price as $36,000.
- Buy or hold makes a big difference: The average age of a car or light truck on the road is over 11 years. If you are driving an older car, with no loan to pay off, you’re avoiding finance charges, and possibly depreciation from a big purchase. On the other hand, a new car today will on average cost you over $9,000/year, including over $3,000 in depreciation. So, yes, if you buy a new BMW it will cost you a lot more than the household average. But if you’re an average American, you’re getting a much cheaper transportation deal.
Implications
In one sense, the implication is the hackneyed, long repeated one. It’s cheaper to keep your old car, than to buy a new one. But two concerning trends are making this better advice than ever.
One trend is the move to longer term auto loans. It used to be that you’d take out a 36-month (3 year) loan. However, now the salespeople sell you on a lower payment with a longer duration loan so that you can “afford” a nicer new car. Experian’s analysis indicates that the average new car loan period is now 69 months – almost six years. Consider the case of a prime borrower purchasing a $30,000 car with 20% down and a loan of $24,000 at 4.5%. The monthly payment is $714 and the interest paid over the life of the loan is $1700. But if you bite on a fancy $50,000 car, and put down 20%, a 6-year loan will result in a monthly payment of only $634 – less than the cheaper car. But over the course of the loan you’ll pay 3x as much interest plus the extra $20K for the car, and you’re in for a lot more depreciation.
The other issue is loan quality. Subprime auto loans have grown to almost 1/5 of the number of loans. An excellent New York Fed analysis shows that 8% of these are 90-day delinquent, and not surprisingly younger borrowers are the majority of these delinquencies. Across all borrowers, 7 million are 90-days delinquent, up a million from a year ago.
The bottom line is that if you’re helping your clients manage their money (or managing your own!) you should think long and hard about following the ancient advice, and avoid being upsold to a car you can’t really afford.
The small print
I used an online inflation rate calculator. The main source for household transportation expenses was the Bureau of Labor Statistics which conducts the consumer expense survey every year. Historical car prices were from the Bureau of Economic Analysis.
The “two cars per household” number is based on the US Department of Transportation, Bureau of Transportation statistics. Unfortunately, their definition of subcategories of registered vehicles has changed over time. Hence, it’s not possible to compare long term other than total registered vehicles. By today’s definition, out of 272MM registered vehicles in 2017, 13MM are larger trucks (probably commercial) and buses, so the vast majority of vehicles on the road are personal. For all these reasons, I’ve used the total registered vehicle number to calculate vehicles per HH which in 2017 was 2.05. The US household numbers I use to calculate vehicles per HH come from the US Census.