Americans love their cars. For generations now, car ownership and the auto industry have been deeply intertwined with American culture. We view our cars as a symbol of freedom, in many cases. Freedom to come and go as we please, or as a means to see the country in all of its majestic glory. Though most of us use our vehicles for simple conveyance, it’s hard to understate the level of importance we consciously or subconsciously assign them.
Cars are, however, a major expense. Not only does the vehicle itself come with a heavy asking price, it requires maintenance and gasoline. You need to wash it from time to time and pay for insurance. This can quickly add up to hundreds upon hundreds of dollars per month. And though we love our cars, the expenses are sometimes simply too much.
For that reason, many people are giving up their cars. They’re forgoing ownership and adopting other means of transportation — even if it means sacrificing their own personal symbol of freedom.
Though we’re still inundated with car commercials and a healthy dose of news regarding the auto industry, there’s an ugly flip side in which many Americans can’t afford a car. You wouldn’t know it, however, by looking at vehicle ownership rates — more than 90% of U.S. households have a car, and 59% have two or more. And Ford may be selling hundreds of thousands of F-150 pickups every year, indicating that things are still strong.
But a closer look reveals some cracks in the facade.
Buying a car: A look at the numbers
You may recall the housing crisis and subsequent financial crisis in 2008, which led to the Great Recession. We all do. And the last thing we want is to experience that again. But we’re seeing something eerily similar in the auto loan market right now — similar to what was happening in the mortgage market before the crisis.
People are underwater on their loans, and as a result, defaulting at higher rates. Subprime auto debt is growing, and with a lot of people’s debt having been securitized (chopped up and sold to investors), their defaults or delinquencies could create a ripple effect – similar to what we saw in the housing crisis.
According to the New York Fed, 6 million people are 90 days behind on their auto loan payments. In all, there is $1.135 trillion in outstanding auto loans out there — roughly on par with the $1.3 trillion in student loan debt.
This tells us that people are buying vehicles that they can’t afford. Just like they were buying houses they couldn’t afford 10 years ago. It’s hard to determine why, exactly, that’s happening. But we can also look at the basic financial picture that many Americans are facing.
We know that the average American hasn’t seen much in terms of wage growth for decades now, though a little progress has been made since the Great Recession ended. Still, wages have more or less been stagnant, and purchasing power has dropped as a result. But the average price of a new car hasn’t. In fact, car prices have been steadily increasing year-over-year, and the average light vehicle now costs $34,663.
So, people are earning less, and cars cost more. That means fewer people can afford the vehicle they want. But it doesn’t mean that they don’t buy one.
A future without cars?
As a result, you’d expect to see more people default or go delinquent on their auto loans. Which we are. We’re also seeing more people with negative equity on their cars when they trade them in. “An estimated 32 percent of all trade-ins toward the purchase of a new car through the first three-quarters of 2016 were underwater. This is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new car purchases from January to September last year,” an Edmunds report said.
And those people with negative equity were, on average, $4,832 in the hole on their trade-ins. Still, though, they were looking to trade in to get a newer vehicle with all the latest toys. “It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” said Edmunds Sr. Analyst Ivan Drury, in the Edmunds report. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”
This points to a trend: People continue to spend money on new cars, even though the evidence suggests that fewer Americans are seemingly able to afford a vehicle.
On an individual level, this can be frustrating and mean a loss of convenience and mobility. On a macro level, it can be a very troubling sign for the auto industry. We’re already facing a future in which cars drive themselves, which will likely lead to fewer cars on the road and fewer people working in and around them. Ultimately, that means that fewer people will buy and own cars.
We’re already seeing other business models pop up as a result. Ride-hailing companies like Uber and Lyft are the most obvious and allow for people in many urban areas to get by quite easily without a car. Paying for a couple of rides per day is often cheaper than making an auto loan payment, an insurance payment, and buying gas, insurance, and parking spots.
For people in rural areas, it’s a different dynamic. But in 50 years, is it unreasonable to assume that Uber (or whatever kills Uber) will be able to send an autonomous vehicle just about anywhere? And if it’s a cheaper alternative to buying and owning a car, the market will shift people in that direction.