Ed Wallace

The Affordability Issue

By Ed Wallace

It was the summer of 1974, and Detroit was in a panic. President Nixon’s wage and price controls, which had been instituted three years previously, had just been lifted. Sadly, however, it was that presidential economic program that led to the first lines at gasoline stations in America, months before the Arab Oil Embargo of 1973. Left in its wake was the start of the era of stagflation in America; slow economic growth combined with high inflation to bring us one of the worst economic downturns since the end of the Second World War.

That was the summer during which General Motors Acceptance Corporation rolled out 42-month financing in order to reduce payments on its vehicles; the company hoped that would encourage more individuals to replace their current vehicles by lowering their car payments. Did it work? Of course not; what was causing slow car sales was the economic downturn, not the affordability of automobiles at the time.

On the other hand, new car sales in America had hit a record 14.57 million in 1973. One year later they had fallen by 3 million, which is when 42-month financing came into play; new car sales would fall by 300,000 more over the first full year of extended-term financing.

More to the point, every time there seemed to be a downturn in the auto industry over the next four decades, the media would report there were grave concerns over the affordability of new automobiles and trucks. Longer finance terms were promptly introduced, then special subvented leases started coming into play a generation ago, and then it was back to even longer terms for financing, until we wound up where we are today: Many individuals now lease luxury cars they would not be able to buy under a conventional finance contract’s much higher payment, while many truck owners are paying on 84-month contracts.

The net result is that these individuals are buying ever more expensive vehicles, yet making payments that don’t really align with a vehicles’ MSRPs, but will align with their discretionary budgets. Yet because luxury vehicles and expensive trucks form a huge proportion of new vehicle sales, even if they are leased, the average price of a new vehicle today is said to be somewhere around $36,000. And it’s that average sale price that allows the media to claim that average families are being priced out of new vehicles today.

Do the Real Math

Let’s go back to the summer of 1974 and start testing these economic theories. When GMAC offered 42-month financing that summer, our sales manager in Houston, Milt Faigan, pulled us into his office to explain how customers would be coming in and asking for those extended terms to lower their car payments. His advice: Don’t do it. At the time the average person financed their new car for 36 months and traded it at just 27, leaving them with around $1,450 in equity to apply for their next car purchase. As Milt told us that day, financing for longer terms meant customers could no longer trade on that short cycle; but if they attempted to do that, the equity in their current trade-in would be questionable.

But here’s the reality. In 1974 a new Oldsmobile Cutlass Supreme was $5,180. An Olds 88 sedan was $5,500 and the Olds 98, a wannabe luxury sedan, was a grand higher. But the average American family only earned right at $10,800 that year. Funny how we remember how inexpensive cars were, but forget how little income we lived on at the time. So now let’s see what inflation does to those numbers. That 1974 Olds Cutlass Supreme would sell today for $26,681.84 based on income inflation. That $1,450 in a customer’s trade equity today is $7,465.95, and the average 36-month loan in 1974 cost $135 a month, or $695 in today’s money.

Today two-door coupes are not the rage, as they were in the days of the Chevy Monte Carlo, Oldsmobile Cutlass, and Pontiac Grand Prix, but one can buy any number of today’s far superior products for $26,681 or less. Think Accord, Fusion, Malibu, Mazda6, Sonata, or Camry. All can be purchased for that price, or less, and come with a much longer warranty than the old 12-month, 12,000-miles warranty once offered. (In 1974 squeaks and rattles had 90-day coverage.) And now you get radial tires, much better paintwork, crumple zones, airbags, Bluetooth, stereos, anti-lock brakes, electric sideview mirror control, and rear defrosters, and the list goes on and on. So, any way you look at it, a modern car with all of its standard features is not only light-years ahead of what we sold 45 years ago, but the real cost of many comparable vehicles today against income inflation is less.

Let’s move forward to 1983, when Mercedes introduced its first compact car, the very basic MB 190. It listed for around $25,000, or $63,611 in today’s money. The 1983 SL convertible was $49,600, or $125,205 in today’s money. Which is what an SL costs today, but that’s like comparing a horse-drawn buckboard wagon with, well, a Mercedes SL.

Three years later Acura showed up; its Legend L sedan with leather was $26,995 and could be leased for 60 months at $550 a month with $3,000-plus down and TT&L. Today you can lease an Accord that lists around $27,000 for far less than that 1987 Acura Legend and you keep the $3,000 down payment in your pocket; and often Honda Finance has sales tax credits so you don’t have to pay those up front, either. You do have to pay for the company that arranges the tax credits, which are about a quarter of the value.

That’s a Mean Average

Another way to look at it: For the same $550 a month, three grand, and TT&L down, Jaguar has offered from time to time its XF sedan, which lists for close to $60,000. Therein lies the problem of using the average list price of new vehicles sold as the sole metric for vehicle affordability. True, a $60,000 Jag pulls the average selling price of new vehicles way up, but it’s unaffordable for most; and yet - when special leases are offered - it can have the same lease payment as the $27,000 Acura did 32 years ago. Except it’s just a 48-month lease today, not 60 months. But even here, that Jaguar lease payment is still much less than the income-inflated $695 payment on that $5,180 1974 Olds Cutlass.

There is one group of Americans who have been totally priced out of the new car market. And I’ll give you a hint here, it’s not the 1 Percent. Not even the top 50 percent. No, it’s those who get by on minimum wage. If you were a minimum wage worker in 1969, your pay was $1.60 per hour. Or for a 40-hour week, 52 weeks of the year, you earned $3,328; that was enough money to purchase a new Chevy Camaro in those days. Better yet, those of us growing up in the late Sixties had friends who purchased new cars with their earnings from two or three years of part-time minimum-wage work. But that $1.60 wage in 1969, even using an inflation-inflated figure of $11.08 today, won’t buy you a new Camaro after a year’s work. You’ll still be short around $3,000 for a base model. Twelve grand short based on the real current federal minimum wage of $7.25.

There’s something fascinating about human memory. We remember how inexpensive cars were back then, but not how pitiful our paychecks were. People today may question a $550 short-term lease on a $50,000 car, but forget they paid that same lease payment gladly three decades ago on a $27,000 sedan. We remember what we paid for our first home, but can’t remember what we paid in federal taxes that same year.

The average list price for a new vehicle is no way to determine affordability, because 90 percent of all car buyers are payment buyers. They were in 1974 and are today. They have a mental budget they want to stay within — did then and still do. For most, what they are willing to part with for a car payment is often less than they were willing to pay in the mid-Seventies. But back then, there were no other toys we wanted to buy. No cell phones, no wide-screen TVs, no vacations on a Viking River Cruise in Europe as there are now.

For the record, in 1974 90 percent of all customers came into the dealership and said they would trade cars as long as the payment was $100 a month. Period. Seems quaint now, but that was everyone’s so-called payment redline. Again, the average payment that year was $135. So that’s how much we had to negotiate upwards to make the transaction work.

Today no one asks about 60-month leases or 36-month loans anymore. But for most there’s a truly exceptional vehicle for the money today. You just have to know the past to understand the true value now.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com