Getting an auto loan these days is dirt cheap, and that’s because the cost of borrowing has been kept at rock-bottom levels by the Federal Reserve. Perry uses the Fed’s own data to show that financing a new car has never been cheaper.
“In 1981, when the car loan rate peaked at 16.8%, the monthly payments on a $20,000 car loan would have been $575. At today’s rate of 4.1%, monthly payments on a $20,000 loan would be only $452. Over the four years of financing, a 4.1% car loan rate today would save a borrower more than $5,900 compared to the 16.8% rate in 1981.”
Here again, car manufacturers will benefit from the low cost of financing. But auto dealers also stand to benefit, including national chains such as AutoNation (AN), CarMax (KMX) and Penske Automotive Group (PAG).
Perhaps the biggest takeaway from Perry’s piece is that when it comes to cars, they are more affordable than ever before. By showing a chart of the monthly Consumer Price Index for all items vs. the CPI for New Cars vs. an index of the Average Hourly Wage for Production and Nonsupervisory Employees in the Private Sector (adjusted to equal an index value of 100 in January 1995), Perry demonstrates the following:
“Since 1995, wages have increased more than 75%, and prices for all consumer goods and services have increased by almost 55% on average. In contrast, the CPI for new vehicles has remained almost flat for the last two decades and has increased only 4.4%. That means that after adjusting for inflation and quality improvements, the price of new cars has fallen by more than 50% since 1995! And compared to the increase in wages, the price of new cars has fallen by more than 70%!”
When it comes to the affordability of the vehicles that are owned by 95% of U.S. households, Perry says that today’s consumers are many times better off than the consumers of any past decade. As Perry puts it, we are in a “golden era” of auto ownership.
This affordability metric argues favorably for just about every major automaker, including the aforementioned Big Three U.S. manufacturers, as well as giants such as Toyota (TM), Honda (HMC), Nissan (NSANY) and Volkswagen (VLKAY).
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.