Thursday, May 1, 2008

Driving Home the Debt

The WSJ has a small monthly section on the Hottest Car Models that I just recently noticed. I have saved these sections for the last two months, figuring they might be good material for a post. If you look at the data below, you will see why.

My jaw totally dropped when I saw the price tags on these cars. Almost all of them are what I consider “luxury” cars (anything over 30k is a luxury in my mind). How is it that the average American can afford these? The average price of these cars is just about double what we paid for ours (and yet we are well above average in the household income department).

I see this all the time around here, and its not just with homes. I have no idea how people afford all this stuff. Are we just crazy frugal? Or are people gorging on debt because they can handle the monthly payment?

Well today’s report that car payment delinquencies are way up may indicate I am not as crazy as I have started to think.

Another possible explanation, is that average people aren’t purchasing cars these days, so the data may be skewed toward the wealthy who aren’t worried about their finances and hard times ahead.


Deflationary Jane said...

We have one vehicle, a Tucson. We paid cash but at the time, I looked at what financing would cost vs. CD interest rates. I remember thinking 450k mo was outrageous and that didn't include ins.

It seems like everywhere I look, people are 1 paycheck away from total financial collapse and they think is normal, even admirable. I have no idea what people are thinking out there.

Buying Time said...

The more I see the more worried I get that we are in for some serious hard times ahead.

I have no idea what to do about it either....except save save save. Although I suppose I could go down to Costco to pick up my alotment of four 20 lb bags of rice ;)

Deflationary Jane said...

Well we're hoping to out of here in a few months time.

Midwest police depts and schools are starting to offer relocation bonuses to lure employees away from CA. Their cities are growing as ours are declining and they need seasoned support staff (teachers, firefighters, police, etc.). You can even find billboards up in locations like San Diego, wooing public servants away to affordable locations.

We're testing the waters and so far it's looking good, really really good. Mr. Jane is on a plane next week.

sacramentia said...

I've always wondered about the cars too - they are really expensive when you add in the depreciation.

I figure the people buying new cars are the ones that are pretty established.

In my little world the one friend I have that constantly buys new cars can afford them cash. Everyone else is like me a drives cars for 5+ years.

Paul said...

Remember when we wondered what people were doing with all of the HELOC money they took out of their homes? Now you know where the money went and how they could afford the downpayments for the new cars!

Of course, as previously noted, at least some who read this blog work to live below their means, not above.

Buying Time said...

Would really hate to see you go......but completely understand.

Might I suggest Madison WI?

Great university town, affordable, open minded, friendly and not too far from Chicago in case you miss big city life.

Patient Renter said...

Are we just crazy frugal? Or are people gorging on debt because they can handle the monthly payment?

The second one :)

Jacob said...

I think a lot of people do just look at the monthly payment. That is why people bought $500k houses that they would never be able to pay off.

Same with cars.

I know people that get paid on friday and are broke by monday.

I bought my last car in 2002 (2002 Hyundai Accent). $11k ish, paid cash. I am not a car enthusiest so just need something reliable and it doesnt need to be overy expensive. Working on the 7th year for it and it still runs great. Will probably get a new car in a year or so if needed.

2 of my brothers are constantly broke and 1 actually does save, so not sure why some people save and others spend freely.

But you are definitely not alone. I hate debt, cant stand it. I do use credit cards all month long so I dont have to carry cash, but always pay them off in full.

G Spot1 said...

Do these numbers include leases? Leasing really cuts down the monthly payment for cars, and encourages people to get new ones ever 2-3 years. Perpetual debt.

I, too, get really nervous when I look around and see spending that doesn't make any sense. The savings rate has gone negative the last few years and it can't sustain itself like that. We are already starting to see the unraveling but I think it is far from over. I think my generation has some lessons to learn about spending, saving and debt. I hope they learn them because if we go back to 0 or negative savings after this latest storm passes we are going to end up right back in the same place again....

Buying Time said...

It says that the price is less rebates, and that price is the average actual U.S. transaction price.

We must be a self selcting group here, as we all seem to be fiscally responsible (even if we are in the minority).

mbc said...

We have one car, a 9-year-old Honda CR-V. It still runs great and we plan on keeping it as long as it runs.

Our whole economy depends on Joe Consumer buying a lot of stuff, most unneeded and made in China. What happens to the economy if everyone becomes fiscally responsible? I would love to see our economy become more sustainable and less dependent on consumer spending, but the transition would be very painful.

DJ: There are a lot of great places in "flyover country", and I hope you guys find a good one. The only thing keeping me on the west coast is the weather. East of the Rockies it sucks.

sacramentia said...

I guess the commercials are right and the smart people do buy Hyundai's.

alba said...

just like homes, you don't really have to "buy" the car. Being an RE agent had some benefits. Leases, clothing, meals...all tax deductions.

Yellow Dog said...

I heard on NPR the other day (Sadness Spurs Spending, Experiment Shows) about a recent study on consumer purchasing behavior in different emotional states. It should come as no surprise that people tend to spend more when they are sad. More interesting, but not altogether surprising, was that people's perception of value was also affected by sadness. What shocked me completely, though, was the degree to which people's values were skewed by their emotions.

From the study:

It turns out, Cryder says, "the people in our study who are induced to feel sad are willing to pay more for the same item than are people who feel neutral."

It wasn't just a little more. Those who watched the documentary scenes paid an average of 56 cents. Those who watched the tearjerker paid an average of $2.11.

Could it be that our society's addiction to debt is very closely related to the pandemic mental illness of our society? I am suffering, so I buy, so I suffer, ... If this is indeed a chicken-and-egg viscious cycle, it would seem to be a very serious flaw in the free market system. After all, how do we value existential happiness (as opposed to the emphemeral happiness of SUVs and wide-screens)?

Sippn said...

Your last paragraph is the answer.

But consider this.... why do you think people with lower than average income are entitled to new - new cars and new homes?