Sunday, December 02, 2007

Costs of Owning a Car?

A regular reader and astute commenter, e.r. dunhill, on Sociological Stew posted a series of responses to the "Politics of the damned?" that I've decided require a follow-up post.

We were discussing what kind of changes might be needed to allow modern societies to survive up-coming climatic shifts, and create modern, livable, sustainable societies. erd sited several writers who "advocate a shift toward producers providing services, not selling products. From a design and material-cycling standpoint, this makes excellent sense. But, it means that the end-consumer does not enjoy the economic benefit of ownership; the consumer simply pays ad infinitum."

I questioning the "economic benefit of ownership," using the automobile as an example, suggesting that owners of automobiles still pay "ad infinitum.," and that the value of the automobile was a use value not an economic value. By this I mean that private auto ownership gives an individual control over their movement and schedule and provides a sense of freedom, but does not provide an economic asset. Nonetheless, erd countered that "economic benefit of owner ship is that the first costs ultimately provide the owner with an asset. At the end of making car payments, the owner still enjoys the benefit of using the car. Moreover, the owner may ultimately recover some portion of that first cost by selling the vehicle."

This got me to thinking, and as often happens when I start thinking I do some research. What does it really cost to own a car? I took my research and made a few simplifying assumptions to come up with the following.

Suppose a man, let’s call him Charlie, bought a 2004 model year Toyota Camry LE 4 door sedan in December 2003, with payments to begin January 1, 2004. The Camry is one of the most popular cars made in the last 20 years so that’s a reasonable choice to make. It’s a reliable car, with decent gas mileage – EPA estimate of 30 miles per gallon.

The manufacturers suggested retail price on Camry in 2004 was between $15,900 and $28,500. So let’s take the median between those two prices, and assume a fairly well “loaded” vehicle at $22,200 original price. Let’s say Charlie put $2,000 down, and financed $20,200 at 6 percent over 60 months – this would be a monthly payment of $405. The total amount Charlie would have paid out on this purchase as of December 1, 2007 would be $2,000 plus $19,440.00 = $ 21,440.00. [Click here to see my spreadsheet for interest calculations and payments].

We’re going to assume that Charlie is a normal driver and averages 1,000 miles a month, or 12,000 miles a year, and 48,000 miles for the four years between Jan 2004 and December 2007. Based on data from the U.S. Department of Energy, the exact average price of regular gasoline for all the months between January 1, 2004 and December 1, 2007 is $2.32 per gallon. [You can calculate it yourself from the DOE's Excel spreadsheet -data series 1]. We’re going to use the EPA estimated miles per gallon of 30 mpg (even though this is probably a significant underestimation because most car owners do not drive their cars at the optimum speeds for the highest gas mileage performance). So the cost of gasoline for the four years from January 2004 through December 2007 is $3,712.00.

Charlie is a good car owner has his car serviced every 3,000 miles. The cost of regular service varies around the country, so I’ve made a simplifying assumption that service every 3,000 miles or 3 months, will cost $30. That’s higher than where I live, but much less than urban areas where most people live – Charlie lives in the greater Boston Metropolitan area [yes, gentle readers "Boston Charlie"]. And, I did not include any higher charges as might be made for the 30,000 mile check. So I’ve allowed $450 for regular servicing over the four year period.

Of course there is also insurance to pay on the automobile. Here I’m going to have to do a little guessing (because I can’t get the Progressive site to work for me, and it would only give me the cost right now). We own a 2005 Chevy Cavalier (a substantially less expensive, and less popular car than the Toyota Camry) and pay $78 a month for full coverage insurance. Since we live in an area that has high insurance rates, I’m going to be very cautious and allot $80 a month of insurance coverage for Charlie’s Camry. That’s $3,840.00 for four years of car insurance.

So the total expenditures of our car owner, after four years of ownership are:

Down payment and payments$21,440.00
Gasoline$ 3,712.00
Maintenance/Service$ 450.00
Insurance$ 3,840.00

Notice, that I have not even bothered to include other important costs of car ownership, such as property taxes, registration and licensing costs, which vary considerably from place to place. Then there are also the costs of bridge and road tolls. So this exercise underestimates the true total cost of car ownership.

Suppose Charlie wishes to sell his car right now (December 2007). He has put $29,442 into the car, and still owes, $3,754.00 on the principle of the loan. The current Blue Book value of the 2004 Toyota Camry LE sedan modestly loaded with 48,000 miles – for sales between two private parties (the best deal) is $12,625 on a 2004 Toyota Camry fairly well “loaded” in good condition. If Charlie is successful in getting the full $12,625, and pays off the remaining loan of $3,754, he will have a “profit” of $8,871 to deduct from the $29,442 that they have paid into the car. The net COST of the car to our owner over the period of four years was: $20,571.

As we said earlier our Charlie lives in the greater Boston area -- let's say the town of Lexington (I choose this because I actually have a friend named Charlie who lives in Lexington, MA), and has access to a well developed public transportation system (one of my personal favorites) -- two bus routes #62 and #76 connect Lexington with the MBTA. The MBTA offers monthly bus passes in a range of prices depending upon location. Although I suspect that our Charlie, in Lexington, could suffice with one of the less expensive passes, for the sake of argument let's say he needs the most expensive pass -- the Outer Express Bus, which costs $129/month, and provides "unlimited travel on Outer Express Bus PLUS all Inner Express Bus, Local Bus, Subway, Inner Harbor Ferry, and Commuter Rail Zone 1A." If Charlie purchased the Outer Express Bus pass, and used it for the majority of his work and pleasure travel, over the course of the same four years he would pay $6,192.

Compare $6,192 to the net COST of car owning of $20,571 for the same period, and you can see that Charlie could easily have afforded to rent a car for a weekend or a week, several times, for vacations, weekend trips, etc. He might even have purchased a "share" in a cooperatively owned vehicle by several individuals that would cost less than the occasional car rental.

It might be that Charlie does not live alone (my actual friend Charlie has a wife and two teenage children). While we would need to consider the costs of public transportation passes for all the members of the family, we also have to recognize that nearly all middle class families have more than one vehicle, with teenagers, perhaps three or more vehicles. I recently saw a statistic (sorry can't remember where) that said for every 100 Americans of driving age there were 102 private vehicles on the road. From a strictly economic standpoint, given the figures discussed here, a family of four would save money, by having one automobile, and several public transportation passes.

erd is probably thinking about now, that I didn't address one of his major points -- that one does finally pay off the car loan, and then has an "asset." In my example, I stopped short of paying off the loan (largely because it was easier to get reliable data on 2004 models). The cost of paying off the loan would be another $ 3,853.90 (plus maintenance, insurance and gasoline for another year). Once the loan is paid off, there is still monthly costs of insurance, gasoline and maintenance. The cost of gasoline is now averaging $3.07 and rising, and not the 2.32 average of the past four years, so that will be a increasing cost. The costs of maintenance will rise as more and more things need to be replaced and repaired. The costs of insurance will likely decline. But all-in-all given the costs we've been discussing the monthly upkeep costs of the automobile will continue to be greater than the costs of the monthly public transportation costs. At the same time, the Blue Book value of that car, an the amount of money Charlie could recoup by selling it, will be declining. The Camry keeps its value better than most cars, but even that will decline in value over time.

"Not every one's from Boston, John" [nod to "1776"], and most Americans do not have such well developed public transportation systems available to them. Given the costs of owning a vehicle, from an economic stand point, most Americans would gain financially if they could exchange the ownership of one family vehicle for higher taxes to support comprehensive public transportation in their area. There is nonetheless a very high resistance to public transportation (and to taxes to support it). My primary point here, is that such resistance is based on psychological, emotional and cultural reasons, not economic reasons. If we were all rational economic actors as most economists mistakenly take us to be, then it would be easy for us to exchange our automobiles for comprehensive, public transportation systems. We do not want cars because they make us economically better off. We want cars because we have been culturally conditioned to equate them with adulthood, freedom, independence, convenience and other emotionally laden concepts. There was a some years ago a series of "Mr. Goodwrench" advertisements on TV, that had a very catchy tune, the refrain to which declared "it's not just a car it's your freedom."


E. R. Dunhill said...

Thanks for this extensive analysis. This makes a great case for group-use / group-ownership over individual-use / private-ownership. I’ve been enjoying the benefit of commuting via rail rather than car for some time. Owning and using a car is very expensive (I recall reading an interview with petroleum magnate J. Paul Getty, in which he cited as one of the sources of his success, "As a young man, I didn't own a car.").
My concern over the economic advantage of ownership arises in situations in which there is no readily available group-use alternative to private-use. In the transportation problem, first costs associated with creating a public transportation system and costs of operation make it economically infeasible for communities that are small; geographically isolated; and/or have high unemployment or other impediments to a reliable tax or rider base. Examples abound: Suburban enclaves in otherwise rural areas, residential enclaves in large commercial/industrial districts, areas of old development that have low occupancy rates and high unemployment; and urban areas in which periods of low land costs have created distributed or patchy development. These communities simply lack the population density or incur costs too high to enjoy the benefit of traditional public transportation.
Likewise, a group-owned resource that is more similar to private ownership, something like ZipCar, is not a use-competitive alternative in some of these cases. In communities that are built at the vehicle scale, like remote suburbs and residential enclaves, the demand would be sufficiently great as to more than negate the benefit; most of the residents in those communities would need a vehicle to get to work daily and to access public facilities, like schools and stores.
In these cases, the only use-competitive alternative to owning a car is leasing a car. Suffice to say that in the long run, the lease is less attractive than ownership. This is where I describe the problem of "paying ad infinitum". I would offer the decision to buy or rent one’s home as another example in which there is an economic advantage to ownership, resultant from the total costs of each option, and the lack of a use-competitive alternative.
I think the ideal of living in a large single-family home in the suburbs is a major driver of many of the problems that prevent group-use resources. Community, urban, and regional planning, and a massive shift in thinking must continue, if we are to replace (or at least evolve) that image of success. But, as long as people make decisions that preclude group-use resources and other alternatives, they create genuine economic barriers.

Sue said...

erd -- I am most acutely aware of the fact that there are many places in America where to be without a car of ones own is to be crippled. I live in such a place, in mountainous, rural Appalachia. There is almost no public transportation within a hundred miles, other than the type of transporation mandated by federal funding for the poor, disabled and elderly (mostly in the form of vans operated by non-profit groups, occasionally by municipalities). Bicycles and walking are not alternatives, because narrow rural roads without sidewalks are heavily traveled by overloaded coal trucks going well above the speed limits.

However, the mountains have not always been without mass transportation, passenger trains used to reach the vast majority of communities, and buses linked most towns of any size. These did not disappear because they were not economically valuable to passengers, but because they were not profitable to private industry (which is why Europe and Japan all subsidize trains, and why U.S. cities who have transporation systems have to subsidize them).

You raised a question in one of your comments on how to promote public transportation. My general point is that it is important to use the costs of automobile ownership as part of that strategy.

Home ownership is, of course, a different matter. Under normal circumstance (the present housing crash is not normal), housing is an appreciating asset. However, one can accomodate home ownership without having isolated, sprawling suburban enclaves.

I know the very last thing a graduate student wants to hear is "there's a book you should read" -- but I highly recommend Redesigning the American Dream: The Future of Housing, Work and Family Life by Dolores Hayden, Norton, 1984. Hayden examines some interesting experiments with alternatives to detached single family dwellings that reduce resource use and encourage community from the past in the U.S. and around the world.

Shown Poolack said...

In the loaning arena people having bad credit history are considered as potential risk factor and lenders are reluctant to lend money due to the absence of surety of repayment of loan. But if you are having property which you can pledge as a security against the loan to get the money to buy your own car then you won't find any problem to get a lender. To find auto loans, bad credit auto loans, online auto loans, cheap rate auto loans.for more information log on