Commentary: A Wanton Love Affair? - Americans Spend Too Much On Cars

By Chris Pummer, CBS.MarketWatch.com October 9, 2002

SAN FRANCISCO (CBS.MW) - The number jumped out of the auto-dealer's newspaper ad like a neon sign hit by a power surge: "$6,888." That's a mighty markdown - it had to be the discount on one of those elephantine SUVs that well-to-do soccer moms with 1.8 kids drive for no good reason.

On closer examination came an astounding discovery. This was no discount -- this was the actual selling price of a new car! Sure, it was a stripped 2002 Hyundai Accent - five-speed and no A/C - but with a five year bumper-to-bumper warranty and roadside assistance, it's the closest thing to an ultra-affordable, dependable automobile America has seen since Henry Ford's Model T.

To appreciate how inexpensive this car is, consider that $6,888 is barely 25 percent of the average cost of a new vehicle in the U.S. And therein lies an even more amazing fact - that average price reached $25,900 in July, minus tax and registration, according to the National Automobile Dealers Association.

How in blazes, in the midst of an anemic economy and widespread financial anxiety, was the automobile industry able to sell 17 million vehicles in the last year at near that staggering average cost, 10 percent above the level three years ago? How could so many of us possibly afford that?

Zero-percent financing born of 30-year low interest rates certainly had a lot to do with it - U.S. consumers seize on bargains, whether it's on borrowing costs or outright price-slashing.

But the reason American car-shoppers continued partying like it's 1999 goes far deeper. Our legendary love affair with the cars we drive blinds us to how much we're spending beyond our means. And when times are tough, it now seems we spend on cars almost like an act of defiance.

"I often ask myself what is it that spurs us to spend $21,000 or $51,000 or $81,000, when you can buy a perfectly nice car for a lot less money," said Tom Bryant, editor-in-chief of Road & Track magazine. "Getting solid transportation is the bottom line in buying a car, yet it's still a purchase decision wrapped up in self-image.

"Most Americans want to own and drive a car they think they look good in, and that their neighbors will think looks good in their driveway," Bryant said. "That's probably what keeps Hyundai from selling a million Accents a year, even though it's a remarkably good little car for the price."

The $6,888 car

There's no denying the base-model Hyundai Accent is basic transportation - it's not even available in automatic, and A/C will cost an extra $800. The $6,888 was a "loss leader" ad vehicle quickly sold at Concord Hyundai in the San Francisco Bay Area, yet the sales manager was willing to let another base model go for $7,500 Monday, and invited a would-be buyer to come in Friday morning to grab the next weekend's ad vehicle.

The car itself is the well-engineered product of a South Korean auto industry that's been trying to establish itself in the U.S. since Hyundai moved south from Canada in 1984. The workmanship of its entire line - from the entry-level Accent to the "near luxury" XG-350 - is vastly improved from the days when Hyundai stormed the U.S. with poorly made Excel models selling for $3,999.

Hyundai's biggest obstacle in gaining U.S. sales may be the arbiter of all car values in the U.S. - Consumer Reports. While the magazine accepts no advertising, it has for years been the biggest ally that Honda (HMC: news, chart, profile) and Toyota (TM: news, chart, profile) could ever ask for - it promotes the value of their vehicles like a carnival barker over all others.

And while Hondas and Toyotas are great values if you buy them new and plan to hold them for years - both for long-term reliability and resale value - they are vastly overpriced in the used-car market in large part because of Consumer Reports long-running promotion of them.

That bias was clear Monday in talking with David Champion, director of Consumer Reports auto-testing operations. The very magazine that should be touting affordable transportation was pooh-poohing it.

"It's hardly what you'd call the best car in the world; it's cheap and cheerful transportation," Champion said. "I'd still tend to go for a used (Honda) Civic in that price range."

Of course, $7,000 will buy you a 1997 base-model Civic with 60,000 miles that's two years and 24,000 miles out of warranty, maintained in who knows what fashion, that you'd never want to drive for five more years and which might cost you hundreds or thousands in repairs over that time. And you can probably only get a two- or three-year loan - at used car rates.

The cost of vanity

The larger issue is how much we're spending generally for cars.

With 10 percent down, the $25,900 vehicle carries a monthly payment of $456. While that may seem affordable to many people, it amounts to about $6,700 a year including insurance - or about $9,000 in gross income, excluding fuel costs.

Just as many of us stretch to qualify for the maximum possible mortgage and end up house poor, so too do we stretch for the highest-priced car and end up pinched on each monthly payment. The difference, of course, is that a house is an appreciating asset.

"Americans love their SUVs and expensive cars, but it's always better to look at less-expensive options that can be paid off in less time," said Travis Plunkett, legislative director for the Consumer Federation of America and an expert on personal bankruptcy. "Very few people take on these debts without having the income to cover it, but they don't give themselves room for error."