The gap between U.S. income and car prices has widened significantly over the past 55 years, reflecting a complex interplay of economic, cultural, and technological factors. This trend is not merely a result of inflation, but also the rise of trucks and SUVs, which have become increasingly dominant in the automotive market. While inflation has certainly played a role, the real story is about how our driving habits and preferences have shifted, and how this has impacted the cost of cars.
In 1970, the average price of a new car was $3,543, which, adjusted for inflation, amounts to $31,411.13 today. This may not seem like a huge increase, but when compared to the median household income, which has grown from $11,800 in 1975 to $83,730 in 2024, it becomes clear that the cost of a new car has outpaced our income growth. In 1975, the average new car price was 42% of the median household income, but today, it's a staggering 62%. This disparity is even more pronounced when we look at the rise of trucks and SUVs.
One of the key factors driving this trend is the shift in consumer preferences. In 1995, cars and wagons accounted for 60% of all vehicles, but by 2020, that ratio had flipped, with only 31% of vehicles classified as sedans or wagons. This shift has been accompanied by a rise in the average price of trucks and SUVs, which now account for 65.6% of an annual median household income. This is a stark contrast to the 1995 average, when the price of a new truck or SUV was only slightly higher than that of a car.
The 20/4/10 rule for buying a new car, which suggests a 20% down payment, a four-year loan, and transportation costs not exceeding 10% of monthly income, is becoming increasingly unrealistic. According to Edmunds, 36.5% of new-vehicle buyers took out a loan of 73 months or longer, and a record 23.9% are onboard for seven-year loans. This trend is particularly concerning, as it suggests that many people are stretching their finances to afford a new car, which can lead to financial strain and debt.
One way to mitigate this issue is to consider buying a compact car, such as the Toyota Corolla or Honda Civic. These vehicles are more affordable, with an average transaction price of $27,590, and a 20% down payment on this amount is a more manageable $5,518. This is a stark contrast to the average new car price, which requires a down payment of $10,394. By choosing a compact car, consumers can save money and avoid the financial strain associated with buying a more expensive vehicle.
In conclusion, the gap between U.S. income and car prices has widened significantly over the past 55 years, driven by a combination of economic, cultural, and technological factors. While inflation has played a role, the real story is about how our driving habits and preferences have shifted, and how this has impacted the cost of cars. By considering more affordable options, such as compact cars, consumers can mitigate the financial strain associated with buying a new car and avoid the broken math of the 20/4/10 rule. Personally, I think that this trend is a wake-up call for consumers to reevaluate their priorities and make more informed decisions about their vehicle purchases.
