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Car prices on the way up


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April 27, 2005

Car prices on the way up

Amey Stone

I just finished writing a story about the impact of financial problems at General Motors and Ford on the general public. (See "Detroit's Woe, America's Worry," BW Online, 4/26/05)

I wasn't sure what I'd turn up when I started my reporting, but I uncovered something pretty major: Car prices are going to rise in the near future -- and keep rising. Incentives, too, are already fading. If you're in the market for a new car, you might want to buy sooner rather than later.

The problem is that the economics of the auto industry are out of whack. It simply costs car companies more to produce cars than they can sell them for. Since automakers can't squeeze anymore costs out of production and no one wants them to go bankrupt, they will have to raise prices.

Here's an anecdote that didn't make it into my story that shows how cheap cars actually are relative to other major household expenditures: David Cole, chairman of the non-profit automotive think tank, Center for Automotive Research (CAR), says he was shocked to find that he could buy three mid-sized cars for the same price it will cost him to remodel his kitchen -- about $60,000.

The new kitchen comprises new counters, cabinets, appliances and labor, but no major construction. "When you consider the technology, electronics, the power train,the materials, that go into three cars, they aren't even in the same game," he told me. "It served to illustrate to me the tremendous job the auto industry has done in creating value. But basically it is running out of gas now."

His research shows that 10 years ago it took the average worker 30 weeks to pay for a car, but it takes just 20 weeks today.

No one wants to pay more for a car. But the way the industry is going, it looks like we just might have to.

10:00 AM

Cars

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? Car Prices Going Up? from Consumerism Commentary

While doing research for an article for Business Week, Amey Stone has come to the conclusion that car prices are on the way up. Incentives are running out, and makers can?? squeeze any more savings out of their operational processes.... [Read More]

Tracked on April 27, 2005 11:33 AM

A lot that doesn't compute here!

Clearly, the cost of kitchen remodeling is vastly overpriced. And as you note, cars involve a lot more technology than kitchens do. OTOH, a new kitchen will likely increase the value of your home, should you decide to sell it (whether it will increase it by 60k or more is another question). Cars, however, are a depreciating asset. As soon as you buy one, its value begins a steep decline. Most cars will be worth only 50% or less of the price you paid for them after 4 years, unlike most homes. So one might conclude that cars SHOULD be cheaper than houses.

20 weeks or whatever to pay for a car is a completely meaningless metric. I don't think so. If the average new car costs 30k with taxes and options, then to cover this cost in 20 weeks of gross income would require a yearly income of around 80k. That might be a valid figure for BW subscribers but it isn't for all American's.

A metric like this also doesn't take into account income taxes, insurance, housing, living, education, medical expenses, etc., etc. I believe the average person takes out a 48 to 60 month auto loan, 192 to 240 WEEKS, a far cry from 20 weeks!

I've only owner Japanese cars since 1979. Every time I go to buy a new car, I take a look at what Detroit is offering up but consistently, they are not able to offer the design and value that foreign makers do.

Detroit needs to automate much more and get rid of the labor, which is where most of their costs are. Maybe they should follow the rest of America and offshore their manufacturing to China, et al? Of course, the more outsourcing/offshoring we do, the more people wind up without jobs or earning less in perhaps multiple part-time jobs. Which means they have less money to spend, particularly on large item purchases like cars. Maybe executive salaries and perks at the big automakers need to come down to Earth first?

Posted by: Jojo at April 28, 2005 01:53 PM

Jojo is right - Cole's numbers seem to be way off. According to a government report, the average American worker earned $739 a week 2003:

http://usgovinfo.about.com/b/a/009620.htm

Twenty weeks of this salary is $14,780. That might work for all car sales - i.e., assuming a large percentage of car sales are used cars, including junkers - but it isn't anywhere near average for new cars.

Posted by: PriusEnvy at April 28, 2005 11:41 PM

I think the commenters above are making some wrong assumptions. The article doesn't say the average cost car - someone making $35k a year doesn't buy a $30K car - but maybe a $15k car. Someone making $80k/yr would buy a $35k car. And 20 weeks to pay for a car means the workers salary for 20 weeks - not the period of financing as in 192 weeks.

Posted by: Lee at June 6, 2005 11:12 AM

when we do a bid for a new kitchen remodel, we are typically competing with consumer's wish list, which includes: new boat, new harley, new SUV, 14 day luxury cruise. These items are usually already in the garage before the kitchen remodel comes up. These other items are off the shelf and require no planning or design. These items also depreciate, grossly. A kitchen remodel will last for 20 years and is virutally free when considering it's appreciation value to the home especially when the home is offered for sale. Vehicle dollars go down the drain....kitchen dollars appreciate and are recoupable.

Posted by: david burr at July 10, 2005 09:36 AM

Of course a GOVERNMENT report would say the average American earns $739 a week. It certainly makes this gov't look better. I earn approx. $310 before taxes. That is $50 a day in tips and $2.15 an hour wage. That is what all the folks I work with make. I have NO friends who make $739 a week. Perhaps whoever wrote that needs a big bite of a reality sandwich.

How about the CEO salaries in this country that have gotten out of hand. At any point does anyone make them take responsibility for the high cost of cars? How about the average $4500 per car the auto companies pay for marketing? Let's look at reality before we start demonizing the labor field.

Posted by: not the average earner at September 13, 2005 03:31 PM

What I found about new car price are actually pretty good these days. The last time I check, auto industry are making the most profit on parts and services, not by selling new cars.

Proof? Look around to see if you can find a new car showroom anywhere w/o a service department in the back?

Last month, I was shopping for a new car and I found this website - AutosBargain.com actually keeps tracking for the best deal on most new cars.

If anyone you know who's shopping for a new vehicle, this will save them few bucks for sure.

Posted by: shingja at October 13, 2005 06:34 PM


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