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How Broke Are We?
There are signs, some say, that an economic recovery is here. No one is really enthusiastic about it — except, predictably, some people in the Obama administration — but it’s hard to argue that there are small signs that the economy is picking up.
On the other hand, Americans are broke. And they know it. From USA Today:
According to a new report from the central bank, 25% of American households say their families are “just getting by” financially, and another 13% are “finding it difficult to get by.” Compared to five years earlier, 34% feel like they are worse off today, while the same number feel about the same. Only 30% report that they were somewhat or much better off financially.
To be fair, those survey findings are from one year ago. So as the economy gets stronger, you’d expect those feelings to improve. Except there’s this:
The average auto loan term increased to sixty-six months during the first-quarter, according to Experian Automotive. That is the highest level since Experian began publicly reporting the data in 2006. Nearly 25% of all new vehicle loans originated during the quarter had terms extending out seventy-three months to eighty-four months, representing a 27.6% surge from a year earlier. The average amount financed for a new vehicle loan also reached an all-time high of $27,612.
“As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,” said Melinda Zabritski, Experian Automotive’s senior director of automotive credit. “The benefit of a longer-term loan is the lower monthly payment; however, the flip side of that is consumers can find themselves paying more in interest or being upside-down on their loan if they seek to trade their vehicle in early.”
This doesn’t sound cheery. And it doesn’t sound optimistic. Stretching out payments — in essence, making the decision to hold onto a car longer than you might have a few years ago — is a deeply bearish thing to do.
When Americans are broke and feel it, they curb spending, investing, and the exact kinds of activities it takes to get an economy moving again.
So here’s the question: do you feel broke? Broker, say, that a few years ago?
Published in General
Interests rates are ridiculously low now. When that happens, the rational thing to do is get the longest term possible. If you can get 0% over 3 years or 0% over 6 years, which makes more sense?
By this time next year I will have three children applying for college loans. What’s you next question?
I think folks are responding to incentives with respect to the auto purchase data (bubble alert), low interest rates and long terms encourage higher nominal borrowing. We’ve seen the same in the higher education market, it can’t last (so it won’t). As to your question, I don’t feel broke, or broker, but rather unsure how to best invest the assets I have. You make an important point Rob about how struggling economies need capitol expenditure as much as consumption and I fear others are standing unsurely on the sidelines with me.
I suppose I feel slightly more broke. Like E.J., the older my kids get, the more expenses and I can’t imagine what college financing will do to us in a few years.
However my primary financial concern isn’t my current bank balance, but a looming sense that it will remain stagnant or get worse. Washington, D.C., continues to burden job creators and self-employed people like me with money-sapping rule changes, taxes and regulations. The second Obamacare hits, they call for single-payer. When one minimum wage hike is passed, they immediately demand another, and another.
Most Americans have been treading water so long, we’re forgetting how to swim.
I am concerned about the unusual volatility of NASDAQ; the old rules of investing in sound companies with good financials and dividend reimbursements no longer seem to be viable options to increasing personal wealth. In the past two weeks, I’ve watched NASDAQ drop and rise by 100 points, forcing me to become a day trader. This is not a sign of a sound economy.
Do I feel broke? You betcha.
I am told that there is no inflation. But just this month my natural gas bill increased by 15%. Last month my homeowners monthly bill increased by 11%. Next month my medical insurance in increasing by 12%, not including the change in deductibles. Nobody in the company has had a raise in years, the benefits that were taken away in 2008 never returned. When the boss is asked about raises; “he says you still get to come in and get a paycheck, that is all the raise you need”.
My wife, was an IT administrator and lost her job to India outsourcing last year. Not only can she not find a job locally she can’t even get an interview. This is odd since she (and I) practically had to beat recruiters off with a stick in the past. Now nothing. Her only hits have been for government jobs far away from home.
The sad part is that we have it good compared to many we know. I keep hearing about this economic recovery but nobody I know has actually seen it. It is not happening in my area.
So, yeah, I feel broke.
Several things going on here. As others have pointed out, lower interest rates make longer-term loans more attractive. Longer term loans don’t mean people intend to keep the cars longer.
Also, people seem to be purchasing more expensive cars as well. In 2000, for example, the average car loan was only about $20,000. It peaked at about $32,000 in 2010.
All this is part of longer term trends of more expensive cars (i.e. bigger loans) and longer term loans which have been increasing steadily over the years. So it’s not evidence of being more “bear-ish”.
Also you have to take into account that people who say that they feel it is harder to make “ends meet” may be spending more on discretionary activities (such as buying expensive new cars), and hence need to spend more. I.e., if you’re spending more, of course you’ll feel like its harder to make “ends meet”.
Do you think that cars cost the same as they did in 2000? Could the cost increase reflect the fact that you have to pay more to get the same level car?
Cars have jumped in price by what appears to be 50% since the last time I went looking approximately 5 years ago.
Around the time that I made the decision to only buy cars that are 5 years old or older I noticed a drastic change in my financial health – meaning, it got better.
So what is “Broke”? Does that mean you have little cash on hand? Does that mean you have no net worth?
My net worth has ballooned in the past 3-5 years as a result of a) the aforementioned cheaper vehicle, b) purchasing a home from foreclosure at the bottom of the crisis, c) diverting salary raises at work to 401(k) contributions and the attendant run up in the stock market, and d) aggressively paying down debts which damage cash flow.
So it’s a little bit of both. I’ve got less cash on hand, but I have a much, much higher net worth. I could access some of it, but it isn’t as liquid as I’d like.
We may be outliers, but we are better off now than we have ever been. Hubby still brings home raises every year, and promotions every three. I’m pretty much stuck where I am, but, then again, I’m 65 years old and like where I am, so I am not worried. I bought a new car in December 2008, and paid off my 3-year loan in 2-1/2 years. I bought my house when it was under construction in 2000, and paid off my 15-year mortgage last October. So our household has no mortgage debt, and no car payments. My long-term-care insurance premium went up by 40%, and I paid it out of current cash flow-didn’t have to borrow from savings. Both of our 401(k) accounts are doing well, and we both have defined-benefit pensions at work. No worries here.
Several issues to consider here:
1) In order to compare cars across time you have to control for their technical capabilities. I.e., a “mid-size sedan” from 2000 is not the same thing as a “mid-size sedan” from 2014.
2) Cars have certainly gotten cheaper, when one considers the amount of $ for a given technical capability of a car.
Compare 2000, 2005 and 2014 Nissan Altima (only base line model)
2000 MSRP – $14,547 …in 2014 dollars $20,100
2005 MSRP – $17,050…in 2014 dollars $20,800
2014 MSRP – $ 20,900
Virtually same price
Engine: 2000 – 155 hp; 2005- 170 hp; 2014 – 182 hp
Transmission: 2000/2005- manual/automatic; 2014- CVT transmission
Fuel economy: 2000 – 21/28; 2005 – 21/29 ; 2014- 27/38
A lot better car (with a lot more features build in), for virtually the same price as 14 years ago.
Regarding Auto Pricing:
Safety, Fuel Economy, Emissions and other regulations keep accumulating and getting stricter. Meeting the regulations costs money. People are also buying more heavily optioned vehicles with more powerful powertrains.
In addition, during the great recession, the automakers and their suppliers both cut capacity greatly, which greatly increased the Pricing Power of both the suppliers and the automakers.
Finally, people are wisely keeping their vehicles much longer – but the overall US fleet is getting older and starting to wear out — causing additional pure replacement demand.
To answer Rob’s specific question, I don’t feel “broke” (I make what most would consider a high income), but since my income has not increased in 8 years, I do feel “broker” than I did some years ago. Expenses (food, gasoline, New York real estate taxes, utilities) go up, income does not – feeling broker. Next car will probably be a lesser car than my current one.
I feel broke. My wife and I are pretty much paycheck to paycheck. Like Majestyk, my “net worth” has increased in the past 10 years but we’ve also added two children in that time. Inflation has raised our food bills and my student loans are a burden (low interest, but large amounts), but there rates have been fixed the whole time. Other things have increased in price. $4 gas when you commute 40 miles each way a day adds up…not to mention the costs when the school year starts back up and I’m commuting to UC Riverside 3 days a week.
And the inflation isn’t in manufactured goods, those seem cheaper. The real hit seems to be in gas and groceries and those add up quick. Of course, so do swim lessons, soccer, etc.
I found out a long time ago that it was cheaper to repair a vehicle than to replace it every few years so I’ve been driving the same Jeep for 15 years now. Even having replaced the engine, transmission, and other parts, I’ve still paid less overall than a new Jeep costs. The older it gets, the less I pay in insurance and taxes, too.
I was feeling broke earlier this year, living paycheck to paycheck, but we got our first raises in a while after everyone sat down and discussed where we were relative to inflation over the last 5-10 years. It was clear we were actually making less after inflation than we were before so our boss took care of us. One of the advantages to working for a small company where you talk to the owner daily.
Three kids college age, one coming up on it. Next question. Not that I’m a copycat or anything.
My wife usually writes out all the checks, etc., but since she and the kids are summering at the Cape house, I had to go through the bills this month.
So, Friday I got paid and felt pretty good about myself. Then Saturday morning came and I sat down and paid all of the bills. That made me feel a little poor. Not broke, but not all that successful either.
I think you’re missing the point, which is ceteris paribus people are taking longer to pay off their car loans. I suppose this would make perfect sense if auto loans generally had a zero percent interest rate, but so far as I know this is not the case.
In any case the bottom-of-the-line 2015 Altima is now $22,300, if I’m reading the website correctly. Here:
http://www.nissanusa.com/cars/altima
Wrong. It’s not the rational thing. The longer the term, the more you will pay in interest. Take a look at an amortization schedule, and the difference between a 5 year loan and a 7 year loan.
I’ve yet to see advertising for zero interest loans, but if you know of a location, please forward it immediately.
It doesn’t say people are taking longer to pay. It says people are taking out longer-term loans. Most people will trade in their car long before they pay it off.
Loan terms have been getting longer for a long time: i.e. its not a new thing and it doesn’t reflect people keeping cars longer.
Second, on the price of a car: that includes the “destination charge”. I was only counting the “invoice price”; i.e. the actual cost of the vehicle. The 2015 Altima costs exactly the same as the 2014, in invoice price. Which has essentially remained unchanged in 14 years. Except of course, a 2014 car is much much better than a 2000 car.
Google delivered me this, from June2, 2014:
http://www.cnbc.com/id/101721466
From it,
“IHS Automotive says the average American is holding on to their new vehicle for six years and one month. A decade ago, the average length of ownership was four years and two months.”
Ah. I presume that was the asterisk.
My situation is a little unusual. I left a good paying job three years ago to start my own business. That business isn’t making money yet, so I feel really broke!
About that good paying job, the raises had stopped at a time that the inflation-that-isn’t-happening was well under way.
1) Cars today last a lot longer than cars from 10 years ago too. Or I should say, cars from 6 years ago lasted a lot longer than cars from 10 or 15 years ago. I.e., people can keep their cars for any number of reasons. The primary reason to keep your car, is that it still works fine, which modern cars can do a lot better than a generation ago.
Just consider what utter JUNK GM cars were a decade ago, compared with today. Consider that in the price of a car today.
2) Including destination charge produces similar results when adjusted for inflation. So I wasn’t “cheating” ;) I was being more careful by only including actual costs of the car, and not other fees.
How broke are we? I have a food budget for the first time years. It kills me every time I go in to the store because prices have gone up since the last time.
To be fair, when Obama came in it was already 1929 out there. In five years, we’ve managed to make it like 1934 out there.
Whoop-de-do.
I know many of you don’t want to hear this name spoken, but David Frum nailed it, even back in the Bush days: Increased health care costs and (relatively mild) inflation have wiped out any feeling of growth for the middle class since 2000.
Larry Kudlow is kuddly, but his bombastic repetition of “the greatest story never told” (about how Americans were allegedly stacking up the loot in the GWB years) was widely perceived as hooey, especially after 2007. People felt they were better off under Clinton because, frankly, we were. That’s not necessarily W’s fault, but it’s a fact. Timing is often beyond a president’s control. The presidency isn’t like an airplane; the Prez can’t just pull back on the wheel and make the economy take off.
Meanwhile, the Chamber of Commerce Republicans in Tech are crying they need massive increases in H1-B visas because they can’t find any Americans who want jobs….
I’m doing better. But thats because I left the country last year to take a job overseas. It’s a trade off as its resulted in disruption of my family life, but I couldn’t say no to the added pay and benefits. And , they pay ALL my taxes. I’m working my tail off for 2 years ( tons of OT) but plan to bank a nice chunk in the 2 years I plan on doing this…
There’s so much obsession with “inflation” on the right that what is missed is that “inflation” has been some of the lowest we’ve had since the early 90s.
So how is “inflation” the problem, when inflation has been consistently higher in the past in the US except for the mid 50s to the mid 60s?
The feeling of broke is something my husband and I discuss on a pretty regular basis. He’s shifted into being a stay-at-home Dad with maybe 4-6 hours of work a week at a local wine shop, which brings is a little extra money, is fun, and doesn’t incur childcare costs. I work full-time and make a very respectable salary and good benefits. However, we rent (never owned a house) have a chunk of credit card debt (going in the right direction, but still significant) and have a car that is on “palliative care.” It’s old and can’t make trips over about 20 minutes or so.
What we don’t have is a lot of financial margin and flexibility. So our 25th anniversary planning is a bit stressful, there’s no college fund for the kids, and we are unlikely to everr own a house. Long-term unemployment has diminished our retirement prospects and ability to help our kids. I don’t feel like the economy has improved.
On the other hand, when I shift my view from money to relationships, I don’t feel broke at all.