Autos and Disruption

Prior to moving to the West Coast, I had little need for a car because I walked and / or took public transport to work (or a cab if I was lazy, back in the days when you could hail a cab on the street).  Thus I typically invested the minimum amount I could in a reliable car that could fit 4 passengers with a full size trunk and also squeeze into a narrow parking garage.

The cars that “fit the bill” for me were the older model Nissan Altima which I drove for a decade and then a Jetta which I picked up in 2011.  Each of these cars cost about $17,000 “out the door” and contained a reasonable level of equipment (the Altima was my first car with air bags, the Jetta was my first car with ABS and traction control) – they weren’t completely stripped down models with manual transmission, for instance.  These cars have both turned out to be highly reliable autos – and the old Nissan Altima is still driving today, almost 20 years later, as a starter car in my extended family.

The average age of a car on the road today is 11.5 years (nowadays you don’t even have to “link” to sources – Google just brings in the data from Wikipedia as a search response when you ask a common question) and that seems long to me.  For every new car on the road, for instance, there is a late ’90s model still driving to offset it in order to get back to an average of 11.5 years.

My theory today is that the total package of “functionality” or “value” that you could obtain from a new Jetta for $17,000 would be comparable to autos that cost far more for 99% of the scenarios in which you would plausibly use that auto.  These scenarios include 1) commuting to work 2) running errands around town 3) going on a trip and putting luggage in the trunk.

That’s not to say that there aren’t scenarios where it doesn’t make sense to have a more powerful or capable auto.  In Oregon we went to visit a friend who lives up in the hills and I had 4 people in the car and gravel had been newly laid on an uphill slope (which, as it turns out, means that it is very slippery).  As a result our car couldn’t make it up the hill and we slid sideways into a ditch and had to have a friend hook up a rope and give us a pull from their big pickup truck to get us back on the road.  If I lived up there, for instance, then this car would be completely inappropriate.  But that isn’t a common “use case” for my auto.

When you look at the “true cost” of owning an auto, there are a lot of factors to consider, and whole web sites to calculate it in various ways.  Instead, I am going to make the general statement that if you buy a new car at around the $17,000 price point and drive it for perhaps 7-8 years before selling it you are probably going to pay about $150 / month for that car (net of what you receive on resale).

Given the increased reliability of most new cars, you get a 3 year warranty on virtually all cars (5 years from some manufacturers) and you should be able to make it to the end of 7-8 years without any major expenses (> $1000 or so).  This is a significant benefit of buying a new, modern car and it should not be under-estimated.

These new cars also generally get higher mileage than the older cars they replaced.  While gas now is closer to $2 than the $5 that it was at peak, this will also make a big difference across the life of a car.  You can spend $1000 more on gas (depends on all circumstances, but this is a reasonable number) for an older model car with worse mileage than a newer model that can get probably 30 mpg in a reasonable commute.

Finally – the cost of financing (and to some extent, insurance) increases with the cost of your car.  The less you spend on the base car itself, the lower will be your total payments on interest and insurance.  Parts and maintenance will also (generally) cost less if you are involved in an accident or need to make repairs.  Ever try to get a BMW fixed at the dealer?  You aren’t walking away without spending $1000. Try it and see (I did when I had a used 740).

There may be some skepticism – can you really buy a decent NEW car for $17,000?  VW’s brand (but not the cars, themselves, unless you are buying a diesel) has been so damaged by recent scandal that you can absolutely do it.  This Jetta which is reasonably well equipped (i.e. it isn’t a stripped down manual shift without power windows that the dealer usually uses as a “teaser”) is selling for around $14,000.

Thus I believe that there is a COMPELLING financial case for upgrading cars that are many years old and buying a basic, reasonable new car at around the $17,000 price point with modern features, high reliability, and solid gas mileage.  A new basic car also is likely to be far safer than the car it replaces given that the average car is 11.5 years old so even an expensive car back then won’t have all the features that a base car would have today.

So let’s assume for the sake of discussion that I’ve made the FINANCIAL case and that it makes sense to buy a new $17,000 car for basic tasks and drive it for 7-8 years and then sell it and get another one.  Then the question becomes

Why don’t most people follow this sensible advice on how to purchase a car?

There are many reasons why most people don’t follow this advice.  First of all, I think that most people have a low sense of financial literacy and don’t understand that buying a car based on the monthly payment (and not taking into account all the factors I’ve laid out above) is a bad decision making model. Cars are not an asset for 99% of people, they are a liability, or they are essentially owned by the bank.

Cars are also marketed very well.  You can’t turn on the TV without seeing an advertisement for cars (especially when I am forced to watch live TV during a sporting event, for example) and they are rarely advertising the lower-end basic models I am discussing in this post.

There is a lot of false differentiation between brands.  Modern cars (I’m not talking about cars from the ’70s to the 2000s) are almost all the same in most important ways, at various price points.  Advertising and ego help to drive very minor functional and visual differences and also drive this net, irrational behavior.

Autos are also tied to ego and self-worth.  There is a common perception that someone driving an expensive or fancy car is more important or richer or “cooler” than someone driving a basic Jetta. Watch any music video for the clearest representation of this phenomenon.  This is likely reinforced by marketing (above) and the fact that cars are often sold based on their monthly payment (also tied to low financial literacy, above).

Thus we are in a situation where 1) people buy more expensive cars than they need 2) cars stay on the road longer because we are in a cycle where it is too expensive to buy a new one 3) the “net” of this is that we have less efficient, less safe cars on the road (when you remember that the average age is 11.5 years) overall than if we stuck to buying more efficiently and less about ego.

What is the impact of all this?  The impact is significant.  As a whole we spend much more than needed for cars and have worse outcomes.  For many people, a car is a very significant expense all-in and is one of the areas where you can improve your financial situation by making intelligent choices and exercising self-discipline in the face of a media blitz and your own ego.

Cross posted at LITGM

23 thoughts on “Autos and Disruption”

  1. When I was in practice, a car was a tax deduction and I drove more expensive cars than I do now. I also tended to lease the car, then buy it at the end of the lease. The lease made the cost simpler for taxes. Now, I only buy Toyota or Honda. I bought a VW for my youngest daughter in 2006 and it was nothing but trouble for several years. It had inferior brake pads that wore out every three or four months. Finally, they seemed to improve and lasted longer.

    I bought a Honda for my middle daughter and recently a Prius.

    I traded in a Toyota Highlander on a year old Honda Pilot because the Toyota had 140,000 miles. In retrospect, I probably should have kept the Highlander but I thought my son was going to want the Highlander.

    I am moving from Orange County to Tucson in two weeks. I work a day or two a week at a MEPS which is in Los Angeles. I drive 50 miles and it takes me an hour and a half or two hours each way,

    When I move to Tucson, I will still work at the Phoenix MEPS which is 105 miles away but the time will be the same or less. Gasoline in Arizona is about $1 / gallon less than California.

    The Pilot gets less mileage than the Highlander did but at highway speed is close. I like it and it is easy to drive. This weekend, we drove to Tucson to meet painters and contractors and drove back to California, a round trip of 900 miles. We pulled a trailer with house plants as the movers will not take them. The trailer killed the gas mileage.

    Tucson traffic at rush hour is the equivalent of LA traffic at 4 AM. Plus, we look forward to lots of nice day trips in southern Arizona.

    California is just too crazy anymore. We looked at Oregon wine country but my wife has emphysema and the wet cold winters are tough on her.

    People used to go to Tucson for tuberculosis 100 years ago. There is no better place for lungs.

  2. In 2015 we carefully bought a 2005 car. The type of car we wanted is available in Yurp with diesel engines only. More modern diesels were no good to us because they are fitted with DPFs (i.e. diesel particulate filters) which would block, expensively, with the low mileage we do.

    It accelerates so well that we wonder whether the first owner had had it chipped; certainly it’s from a different world from the sluggish Toyota diesel we owned in the early nineties. Happily VW have probably buggered up the European markets for diesels so that when we come to replace this car (if ever we do) we can reasonably expect that there will be available suitable petrol or petrol-hybrid cars. We’ve only once owned a brand-new car: mid-seventies to late-eighties. Cars haven’t, on the whole, cost us much; we are grateful to all the other drivers who have subsidised us.

    My views may have been influenced by my having first learned to drive on a tractor and having had a few years as a motorcyclist.

  3. “{T}he average car is 11.5 years old” simply because most any modern-made car will last for 200,000 miles (some brands, even longer) if you keep up with the maintenance, especially regular oil changes. So, people are keeping their cars longer (and staying away from car payments) because cars are much more durable than in the past.

  4. Mike K. I hope you enjoy Tucson. When my son was attending UofA, I’d visit Tucson and spend much of the time being all touristy in the area. I found it a treasure-trove of interesting places. If you’ve pre-explored the town, you’ve maybe already visited some of them. It’s been a couple of decades since I’ve been there, so I hope that it hasn’t changed its character by too much.

    PS: If you like photography at all, the UofA Center for Creative Photography has an awesome Ansel Adams exhibit….

  5. “It’s been a couple of decades since I’ve been there, so I hope that it hasn’t changed its character by too much.”

    I’ve been going to Tucson for 25 years. My daughter went to U of A and graduated about five years ago. While she was there, I had a house on the east side.

    This house is west and just at the entrance to Oro Valley.The reason is that I want to commute to Phoenix a day or two a week. It’s much closer to I 10.

    Ten years ago, the streets and the I 10 were all torn up but the construction has been finished and all is well.

  6. I looked at your link to Ansel Adams and the first photo is Wonder Lake. We were there in September,

    There is a wilderness lodge 100 miles into the park and just past Wonder Lake.

    You can walk to it now. In those days it must have been quite a trip to get to it.

    The lodge is built on an old gold mine claim and is not part of the park although it is surrounded by it.

  7. Autos are also tied to ego and self-worth.

    Unlike what other economic goods we purchase? My daughters went to an all girls school with uniforms. But there were no regulations about underwear, so they all wore the wildest boxer shorts they could find. The trick then was to hike the skirt by rolling the waistband so that the seam of the boxers showed. Ego and self-worth begin their expression at an early age, despite the best efforts of our betters.

    Modern cars (I’m not talking about cars from the 70’s to the 2000’s) are almost all the same in most important ways, at various price points.

    Agreed and due to the commodification of cars and government regulations.

    Why don’t most people follow this sensible advice on how to purchase a car?

    Your advice is good, but why drive it only 7-8 years? Drive it till it drops. Earlier this year, I totalled my original owner ’92 with 378,000 miles (One fender and the headlight assembly were more than the car was now worth.) Bought a 2005 with 50,000 miles and expect it to outlast me. That’s what makes utilitarian sense. But most people aren’t that utilitarian. Also my mechanic noted that the 2005 was likely to last much longer than the 2015 because it has fewer computers and more metal parts. Long term durability of vehicles has declined significantly in the last decade due to price pressure.

    What is the impact of all this?

    I see it differently, perhaps because my time horizon is different. Millenials seem to have a very different relationship with cars, as in not so emotional. This factor, combined with self-driving cars and Uber will lead to tremendous changes in the structure of the automobile, or personal transportation, industry. Because you will be able to have whatever vehicle you want when ever you want it for only as long as you need it at a price you can afford, individual automobile ownership will become as ubiquitous as individual airplane ownership today. At that point, the vehicles will be owned by corporations that will do their profit maximizing thing. I suspect this will mean longer lasting, more reliable and safer fleets that will receive preventive maintenance on a mathematically determined schedule. Mileages on these vehicles will approach 1,000,000 miles. Vehicles will be designed so that interiors can be easily replaced as they show wear. Perhaps exteriors as well. Cost per mile driven will fall perhaps by an order of magnitude. Gotta find my sunglasses.

  8. Ed stole my thunder a bit. For those of us who need to commute (i.e. more rural living) it can really be a pleasure to drive a nicer car. I wish my car was autonomous but since we aren’t there yet I like making the 70 minutes a day that I spend in my car to be as tolerable as possible.

  9. “I like making the 70 minutes a day that I spend in my car to be as tolerable as possible.”

    You obviously don’t live in Los Angeles or its suburbs. Thank God I did not have to commute during most of my working life. I am a part-timer like the other docs who do what I do.

    The others who work at the LA MEPS live closer. I spent about 2 1/2 hours per day commuting. There are MEPS employees, most of whom are either active duty military or former military who commute from San Bernardino and leave home at 4 AM to get to work at 6. The DoD made a decision to put the MEPS in West LA when the staff cannot afford to live there. They are usually short of staff, which affects the whole process. I also work in other MEPS and see other ways of doing things that are more efficient but cannot be done in the LA MEPS.

    I will drive from Tucson to Phoenix, twice the distance in the same time now. I don’t want to live in Phoenix and the others who work there talk about how they love Tucson.

    A daily commute would be too much, which is why people live in Phoenix.

  10. Also my mechanic noted that the 2005 was likely to last much longer than the 2015 because it has fewer computers and more metal parts. Long term durability of vehicles has declined significantly in the last decade due to price pressure.

    Average light vehicle age has increased over the last decade. I guess it could be that people are spending more money maintaining their older cars but probably not; cars are just getting better. I do get the impression that Japanese brand cars are no longer much more reliable than US and Korean brands. They’re all reliable now.

    I can’t wait to subscribe to a autonomous car service and dump my car. It should easily cut the cost of local transportation in half for most people, plus driving is generally a waste of time. People have more valuable things to do than pilot an automobile and hour or so a day.

  11. Thanks for all the great comments. A few thoughts:

    – agreed that it is nice to have a better car for a long commute if you can afford it. There is less road noise and it is a better experience. But still a luxury for most people that they don’t consider too much
    – also agreed that the best plan is to drive a car into the ground but at some point I am valuing reliability a bit and the pain in the rear that comes with visiting a mechanic more than infrequently. But definitely the best from an economic perspective if you can swing it
    – marketing is definitely the driver for a lot of these decisions, ego, and financial illiteracy. I see it all the time with people from millennials all the way up. I work with a bunch of millennials and they do think a lot about money because many / most have a lot of student debt that they are trying to pay down so they had to build up more skills in that area
    – I often think about buying a cool car. If I had a big house with a garage and a place to put it I’d probably have something stupid like a Plymouth Prowler to drive around the countryside with and I’ve always wanted a Nissan GTR too. But instead of having a mid life crisis like most normal people and buying a fancy car I packed up and moved to the west coast and throw my money away on higher rent and higher cost of living ha ha

    But overall I 100% stand by my thoughts that it would make a ton of sense if people bought newer, simpler models and drove them rationally. But it isn’t happening. VW can barely give those things away.

  12. I rent a lot of different cars from high end SUV’s to cheap sedans. I’m afraid your utilitarian analysis is strained here. First there are very significant difference between auto brands. My recent experience with almost any Chrysler product is horrible. Fit and finish, general performance and user friendliness are all poor. Toyota’s are reliable but lack a good user experience. Mazdas and Kia’s are surprisingly good while Hyundai’s are bottom of the heap. Nissan is an odd mix with generally interesting design spoiled by their use of CVT and some odd controls. GM is improving but have a way to keep up with Ford.

    All this matters for the time you spend driving particularly on open highway. A good performing and handling vehicle lowers your mental and physical effort dramatically. Good passenger comfort in seats, sound deadening and climate control does the same. Good access and storage space means less effort and frustration in hauling luggage and shopping. If you do recreation involving skis, camping, boating or dogs you will value this.

    This leads to the feeling that it is no effort to take a long road trip thus expanding your horizons without suffering airports and their ilk. Occasionally if the price is right I’ll rent something more fun like a Mustang or Mercedes SUV. Just like flying business class it is nicer if not perhaps worth all the cash. Jeeze guys have some fun.

  13. I think the human interface for the heating & cooling systems in cars has declined in friendliness in line with the drive to eliminate knobs and buttons. On my Mazda RX-7, if you wanted warmer or cooler you just turned a knob, and the amount of turning was proportional to the amount of temperature change. On my 2004 BMW convertible, you have ‘up’ and ‘down’ buttons, there is no tactile feedback and the only way to know how much you’ve changed it is to watch the numbers change on the screen. On a rental Toyota I’ve driven lately, it’s worse.

  14. “I’ll rent something more fun like a Mustang or Mercedes SUV.”

    My Toyota Highlander was rear ended by a motorcycle about five years ago. I rented a car while mine was in the shop. I had an E class Mercedes for a week, which I did not like. Then I had to drive to Tucson for a court case and I got a Dodge Charger instead, I loved it.

    I tend to avoid Chrysler and GM products since Obama bailed them out to suit the unions.

    Ford is fine, especially their trucks. I had an F 150 I used to keep in Tucson when I was there every other weekend when my daughter was in school.

    Southwest airlines was very cheap from San Diego to Tucson and I parked the F 150 at the airport, where parking is about $1.50 a day.

    Southwest is now much more expensive. My son still has the F 150 and drives it to work. It is a 2003 model, I think.

    I bought the Pilot used because I don’t like the new style of both the Highlander and the new Pilot. Besides, it was cheaper but mainly the style.

  15. The youngsters I know mainly live in London. They don’t own cars: they use trains, the tube, or “minicabs”. All will change, though, when they start dropping sprogs.

  16. “They don’t own cars: they use trains, the tube, or “minicabs”.

    The same is true of New York and Chicago although the violence in Chicago is driving more and more to the suburbs.

    When my daughter registered her car in Los Angeles instead of Orange County, her car insurance more than doubled.

    My friends in England live in Chichester and there seems to be a form of self segregation going on. I’d be interested if you see it too.

    They seem to be fleeing London unless they have to be there for work,

  17. There is the automotive equivalent of Fran Lebowitz’ quip that “Nothing succeeds like address.”

    Or to quote Shakespeare on clothes – “As expensive as thy purse could bear, but rich, not gaudy, for apparel oft proclaims the man.”

    Driving is a highly social activity, even if we seldom see the other drivers. Our passengers certainly see and experience one’s choice in vehicle and it reflects on the owner. The utilitarian aspect is one angle that can be more or less ignored based on one’s discretionary income.

    That said, a fine automobile a few years old and hugely depreciated is my choice of wheels. But one selling point for a new machine is the warranty and included regular maintenance.

    As an engineer, I delight in a finely designed and well-built machine and I’ll pay for that pleasure. So sue me.

  18. “They seem to be fleeing London unless they have to be there for work”: once they have children, they want a bit more space, they want some hopes of decent schools, they will want a car, and they hope that can afford the commute into London (still mostly by train). The trouble is that if you change jobs, or your employer moves your place of work, you can find that your new house is badly placed for your commute.

  19. Makes still more sense to buy a better car for the same price that is 2-3 years old. You can get a 2014 for about 10 grand.

  20. Whitehall: As an engineer, I delight in a finely designed and well-built machine and I’ll pay for that pleasure. So sue me.

    Me too. I will never (unless I magically win the Lottery) never own a new car. The price of driving it off the lot and a mile down the road is just too steep at anything resembling a rational income.

  21. Hey I’m not saying it isn’t nice to have a nice car. I’m just saying that it is not a wise economic decision. I make unwise economic decisions too, like moving to a place with almost a 10% personal income tax. That’s not smart on that dimension alone, but it is part of an overall plan.

    Agreed too that not all cars are the same – my VW is fine but I’m sure if you go a bit further down the price point you can get garbage. But you can find decent ones in that price range.

    Also when you are sitting in mostly bumper to bumper traffic, that’s when the cars are mostly the same. That’s commuting life.

    Cars are paid for in after tax dollars, unless you can write it off on your business, which changes the equation significantly. Since this is such a large, controllable item, it probably would add a few years onto the average persons’ working life to buy cars “expensively” vs. “cheaply”. That’s what its impact is, all in.

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