Nearly a year ago I asked the question: "Who is buying all these cars?" The answer not surprisingly was baby boomers, parents and grandparents of today's students who had the money to afford a new car.
A year later -- thanks to incentives and low interest loans -- it seems everyone is buying a new car, but can they really afford it.
A survey by Truecar.com, a California car pricing website, found the average new car or truck cost $30,550 in 2012 and that purchase price is increasing as consumers opt for more advanced electronics, safety features and fancy infotainment systems that can add thousands to the bottom line.
At the end of last year the average vehicle sold for a record $31,228, Kiplinger's Money Power said.
In its 2013 Car Affordability Study, Interest.com, a financial website, suggests a "20/4/10" rule to calculate how much you can afford to spend for a new ride. That's a downpayment of at least 20 percent, financing for no more than 4 years, and principal, interest and insurance not more than 10 percent of a household's gross income.
Based on that formula residents of only one city in the United States -- Washington -- could afford to buy a vehicle with an average price of $31,940, the sticker price of a well-optioned family sedan or crossover sport-utility.
D.C.-area residents had a median annual income of $86,680, $7,223 a month, largely because of the many very well paid professionals living in the area. To finance a vehicle stickered at $31,940 a buyer would have to come up with a downpayment of $6,390 and then would have a monthly payment of $628. Of course, don't forget Washington's 7 percent vehicle sales tax -- $2,236 more.
That's out of reach for most Americans, the survey indicates, although most buyers want more in a new car -- not less.
"What this research indicates, more than anything, is that a lot of Americans are spending too much on their cars," said Mike Sante, managing editor of Interest.com. "Car costs are one of the most controllable parts of a household's budget. For example, if you live in New York City or San Francisco, you're probably going to have to pay a lot for housing, but you don't have to pay a lot for a car."
Sante says consumers would be better off buying an affordable vehicle and saving or investing the difference. Now that the stock market is fattening rather than slimming 401(k) retirement accounts, the temptation for splurge on a car is harder to resist.
"Cheap out" is easy to say before you get in the showroom and fall in love with new wheels to replace an aging vehicle that's been costing a fortune to repair. The average passenger car on U.S. roads is more than 11 years old feeding what industry watchers call "pent-up" demand.
Interest.com determined how much the typical household can afford to pay for a new vehicle in the nation's 25 largest cities.
Washington $31,940 4.55% 1
San Francisco $26,786 -12.32% 2
Boston $26,025 -14.81% 3
Baltimore $24,079 -21.18% 4
Minneapolis $24,042 -21.30% 5
Seattle $22,963 -24.83% 6
Portland $21,985 -28.04% 7
Denver $21,835 -28.53% 8
San Diego $21,781 -28.70% 9
New York $21,464 -29.74% 10
Philadelphia $21,069 -31.03% 11
Chicago $20,616 -32.52% 12
Los Angeles $20,385 -33.27% 13
Sacramento $19,965 -34.65% 14
Dallas $19,959 -34.67% 15
Houston $19,811 -35.15% 16
Milwaukee $19,297 -36.83% 17
Atlanta $19,122 -37.41% 18
St. Louis $18,550 -39.28% 19
Pittsburgh $17,298 -43.38% 20
Phoenix $17,243 -43.56% 21
San Antonio $17,137 -43.91% 22
Detroit $17,093 -44.05% 23
Miami $15,188 -50.28% 24
Tampa $14,516 -52.48% 25
For example, in Minneapolis, where the median annual income is $63,352, or $5,279 a month, an affordable purchase price would be $24,042, about the cost of a well-optioned Honda Civic, Ford Focus or Mazda 3 sedan. With a 20 percent downpayment of $4,810, 7 percent of annual income, a family would have to finance $20,795, with a monthly car payment of $470.
Minneapolis' vehicle sales tax of 6.5 percent would tack on $1,563.
The average New Yorker with an annual median income of $62,322 could afford a purchase price of $21,464 and the average Chicagoan with a median income of $57,267 could afford a vehicle stickered at $20,616.
It's no wonder smaller, more fuel-efficient vehicles are flying out of dealerships and most of those cars and trucks are loaded with standard features like air conditioning, power windows and stability control that once were expensive options on larger vehicles.
Nationally, vehicle sales tax ranges from highs of 9.8 percent in Seattle and 9.5 percent in Chicago to zero in Portland, Ore.
Car dealers are well aware of the math. Avoid questionable dealer packages that add on thousands for things like key replacement or interior and exterior protectants or extended-service warranties. But remember one of those electronic keys can cost $300 to replace and program if it's lost.
Experian, one of the big three credit reporting agencies, reports nearly 60 percent of new car loans are for 5 years or longer as consumers spread out the payments.
Carmakers also are working with dealers to offer certified pre-owned programs that give a like-new warranty to a 2- or 3-year-old vehicle. With used cars in tight supply, prices rose 1.3 percent compared to last January, and the used-vehicle wholesale cost topped $10,000, Automobile Dealer Exchange Services of America reported based on data from CNW Marketing/Research.
The average wholesale price dealers pay at auction rose 1.1 percent to $9,082, partly a result of thousands of vehicles destroyed last fall by Hurricane Sandy. The average price of a crossover ute-let (a term of endearment for mini SUVs) rose 1.7 percent to $13,568 and average used midsize car prices jumped 4.2 percent to $8,365.
Used full-size van prices averaged $10,116 but prices of full-size SUVs and CUVs fell 6.8 percent and 4.8 percent, respectively, to $10,821 and $15,134.
Autodata Corp. said sales of certified used vehicles were up 14.9 percent in January.
And the old saw about a vehicle dropping in value as soon as you drive it off the dealer's lot is true. Black Book and Fitch, a global financial information services company, said vehicle depreciation rates averaged a little less than 13 percent in 2012 -- below the historical range of 15 to 18 percent.
The good news is with used cars in short supply, vehicle depreciation rates are expected to stay low in 2013. Average monthly depreciation on wholesale values of 1- to 5-year-old vehicles was slightly more than 2 percent in late 2012.
If that holds true a new car will retain more of its value when it's time to trade in or sell. Just keep it well-maintained and looking good and the next owner will be hunting for it.
Geneva Auto Show
In Geneva, the 2013 Volkswagen Golf was named European Car of Year by a panel of 58 automotive journalists from 22 European counties.
The Subaru BRZ finished second and the Volvo V40 third.
The Golf, now in its seventh-generation, introduced in 1974 as the VW Beetle replacement Rabbit, has topped 29 million in sales in 39 years.
"Over 29 million customers have made the Golf into the icon that it is," Volkwagen's management board Chairman Martin Winterkorn said. "The Golf will continue this success story."
Nissan is showing the new, extended-range Leaf electric car at the 83rd Geneva International Motor Show.
The new U.S.-built new Leaf, assembled in Smyrna, Tenn., has an EPA-estimated range of 75 miles based on a 90 percent battery charge. The European version of the Leaf has more than 100 updates and is assembled in Sunderland, England.
Also starring in Switzerland, as it is on the U.S. auto show circuit, is the 2014 Chevrolet Corvette Stingray, which was unveiled as a convertible in a worldwide introduction in Geneva.
The Vette's three-ply, fabric folding top can be opened or closed while the car is moving as fast as 30 mph. Operated remotely by a key fob, the ragtop has sound-deadening padding and a real glass rear window.
The convertible has the same 450 hp, 6.2-liter LT1 V-8 engine as the coupe mated to a seven-speed manual transmission.
The Stingray roadster arrives in U.S. showrooms later this year about three months after the coupe with a base price of $55,595 including shipping.
In the realm of dream cars, Ferrari showed off its high-performance LaFerrari special-edition car with hybrid technology and a starting price of $1.3 million. Only 499 will be made.
McLaren showed the 903-hp P1 sports car, Lamborghini took the wraps off the $3.9 million, 750-hp Venenos super car and Fiat's Alfa Romero unveiled the production version of its two-seat 4C roadster.