Is the price of a new car a good proxy for the expense of owning it?

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vineviz
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Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Mon Aug 13, 2018 11:00 am

I've noticed that as net worth and/or annual income increase, people often become curious about questions related to "how much car can I afford".

Unfortunately, the very phrasing of this question carries an implicit assumption that you should buy AS MUCH car as you can afford rather than a better assumption (IMHO) you should buy only as much car as you need. Obviously "need" is a vague term but at the very least it implies that we are looking for some balance between DESIRE to own a thing and ABILITY to pay for that thing.

Automobiles are depreciating, not appreciating asset, and there are some real cash liabilities associated with owning a car: depreciation, maintenance, taxes, insurance. I think when budgeting for any expense of this type, calculating the long-run total cost should be part of the decision-making process. Luckily, the consumer auto website Edmunds.com provides what I think are reasonable estimates for what they call "Edmunds True Cost to Own" (TCO) which they describe as "proprietary data that helps you estimate the total five-year cost of buying and owning a vehicle". The components of TCO are Depreciation, Financing, Fuel, Insurance, Maintenance, Repairs, Tax Credit, and Taxes & Fees.

E.g. for 2018 Honda Accord: https://www.edmunds.com/honda/accord/20 ... st-to-own/

I looked at TCO for a pseudo-random selection of 25 new vehicles, ranging in price from a 2018 Nissan Versa 1.6 S (roughly $12k) to a 2018 Mercedes-Benz E-Class AMG E 63 S 4MATIC (roughly $124k) to explore the question at the top of this post:

Is the price of a new car a good proxy for the expense of owning it?

If it is, then consumers could use the cash price of a new vehicle to estimate their annual expense to decide if that annual expense is affordable to them or not.

Edmunds TCO employs a LOT of simplifying assumptions but I find them reasonable in direction and magnitude. Obviously every consumer will find themselves in a slightly different situation, but I was curious about the general relationship between initial cost and annual expense.

Image

I found, unsurprisingly, that the annual "total" cost to own a vehicle is directly related to the initial "cash" cost. Unsurprising in part because many expenses of owning a vehicle are directly related to its value (depreciation, financing, insurance, taxes & fees) and in part because the market for automobiles is IMHO fairly efficient. Some people may object to the inclusion of financing costs since some people choose to literally pay cash for their vehicles instead of taking out a car loan. I consider financing costs to be a fairly reasonable approximation of the opportunity cost of using cash instead of a secured loan and I don't expect changing the interest/discount rate within normal bounds would make a large difference in the finding.

The simple linear trend line in the graph tends to very closely approximate the individual estimates annual expense of each vehicle. The regression for the trend line has a high r2 of 0.98, an intercept of $1,622, and a slope of .20.

That means, over the first five years of ownership, you can expect the annual expense of an automobile to be approximately $1,622 + 20% of the initial purchase price.

Using that equation a consumer who knows their net income, their savings rate, and their other living expenses should be in a very good position to estimate their ABILITY to afford a car in a particular price class.

Imagine a person with an annual salary of $60k and net income (after taxes etc.) of $46k, which is about $3,800/month. With living expenses of $1,500/month and retirement savings of $800 per month this person has roughly $1,500 in disposable income. If they spent roughly third of that disposable income on a car, that'd be about $500 per month or $6,000 per year. Subtract the "fixed annual" auto expense of $1,600, divide the remainder by 0.20, and you get an estimated car value of $22,000 under the assumption that the person had both the DESIRE and ability to spend 33% of their disposable income on a car.

Vary that desire and you get a varied price estimate, but either way you have concrete estimate with which to begin the decision making process.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by livesoft » Mon Aug 13, 2018 11:13 am

I like the analysis. Thanks.

Do you have any hint if ownership goes beyond 5 years to 10 or 15 years?
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by Maverick3320 » Mon Aug 13, 2018 11:16 am

Interesting. Intuitively it makes sense, but I can't imagine the market is that efficient, though. For example: new car prices on vehicles that hold their value better than others. If the (rough) new vehicle prices are set by manufacturers, how would that account for resale value?

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by justmytwospence » Mon Aug 13, 2018 11:19 am

Interesting. As someone who is considering a used/CPO car purchase, I'd also like to see this as a mixed-effect model with used & CPO alongside new. That data might be harder to get though.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Mon Aug 13, 2018 11:24 am

vineviz wrote:
Mon Aug 13, 2018 11:00 am


I found, unsurprisingly, that the annual "total" cost to own a vehicle is directly related to the initial "cash" cost. Unsurprising in part because many expenses of owning a vehicle are directly related to its value (depreciation, financing, insurance, taxes & fees) and in part because the market for automobiles is IMHO fairly efficient.
To some extent yeah. But you still end up with noticeable difference between some models. For example

Honda Pilot
Cash = 40.8
TCO 47.8k

BMW 3 series
cash = 41k
TCO = 56k

Call it 20% more for buying the BMW sedan versus Honda SUV despite having roughtly the same cash price.

If you keep things in the same class (luxury sedans not SUV and luxury/nonluxury manufactors)
BMW
cash 46k
TCO 61.8

Audi
cash 46.1k
TCO 59.7k

Lexus is
cash 48k
TCO 59k

The gaps tend to shrink. Now what you get for your money( i.e the 46k audi might have different equipment than the lexus or bmw).

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Mon Aug 13, 2018 11:25 am

livesoft wrote:
Mon Aug 13, 2018 11:13 am
I like the analysis. Thanks.

Do you have any hint if ownership goes beyond 5 years to 10 or 15 years?
I haven't run those numbers as rigorously. You could "roll forward" the Edmunds numbers by chaining together the TCO for a used car at the end of the first five years of the new car, but that is cumbersome to do over multiple vehicles (especially ones that haven't been manufactured very long).

Obviously on an older vehicle the maintenance and repair expenses grow in proportion to the other expenses, but even then my guess is that they still track initial cost pretty well (e.g. a 10 year old BMW M3 is going to have higher maintenance expense than 10 year old Honda Accord).
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Mon Aug 13, 2018 11:33 am

Maverick3320 wrote:
Mon Aug 13, 2018 11:16 am
Interesting. Intuitively it makes sense, but I can't imagine the market is that efficient, though. For example: new car prices on vehicles that hold their value better than others. If the (rough) new vehicle prices are set by manufacturers, how would that account for resale value?

Most of the time it is an illusion that cars hold value better. It is normally something like
Car A MSRP 40k sells for 28k in 3 years
Car B MSRP 40k sells for 20k in 3 years

Which holds value better? What if I tell you Car B is sold with 10k of discounts off MSRP while car A is sold at MSRP. There are some exceptions that hold value really well (see something like the toyota 4runner) but remember deprecation is only about 30-50% of the TCO. Gas, maintenance, insurance and financing still cost you even with no depreciation.

TCO over years 5-10 and 10-15 is where I think the big differences show up. Unfortunately I am unaware of any place that really tracks them. Gas, maintence, insurance and the like are easy to figure out but figuring out repairs is a total crap shoot.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Mon Aug 13, 2018 11:36 am

vineviz wrote:
Mon Aug 13, 2018 11:25 am

Obviously on an older vehicle the maintenance and repair expenses grow in proportion to the other expenses, but even then my guess is that they still track initial cost pretty well (e.g. a 10 year old BMW M3 is going to have higher maintenance expense than 10 year old Honda Accord).
Sure but the question is will a 60k lexus and a 60k BMW have divergent repair costs. Or if you compare a 40k BMW to a 40k toyota. The accepted wisdom is yeah some cars will have higher repair costs than others and over time that will dominate the difference in the numbers.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Mon Aug 13, 2018 11:37 am

randomguy wrote:
Mon Aug 13, 2018 11:24 am
vineviz wrote:
Mon Aug 13, 2018 11:00 am


I found, unsurprisingly, that the annual "total" cost to own a vehicle is directly related to the initial "cash" cost. Unsurprising in part because many expenses of owning a vehicle are directly related to its value (depreciation, financing, insurance, taxes & fees) and in part because the market for automobiles is IMHO fairly efficient.
To some extent yeah. But you still end up with noticeable difference between some models. For example

Honda Pilot
Cash = 40.8
TCO 47.8k

BMW 3 series
cash = 41k
TCO = 56k
This is true, and there are definitely some higher order effects you could model if you wanted a more complete estimator. I stopped where I did mainly because I guess I felt that the overall explanatory power was "good enough".

The other place where the simple trend line sometimes misses is with electric vehicles which are eligible for a substantial tax credit. The lowest ratio of TCO/cash in my list was the 2018 Toyota Prius Prime Advanced, for instance.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Mon Aug 13, 2018 11:39 am

Maverick3320 wrote:
Mon Aug 13, 2018 11:16 am
Interesting. Intuitively it makes sense, but I can't imagine the market is that efficient, though. For example: new car prices on vehicles that hold their value better than others. If the (rough) new vehicle prices are set by manufacturers, how would that account for resale value?
MSRP is set by manufacturers, but the actual cash price is effectively set by the market (where buyer and seller come together to clear the inventory). That's why looking at the average transaction value, as Edmunds does, rather than MSRP is important.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by Dottie57 » Mon Aug 13, 2018 11:54 am

Very interesting. Thank you.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by whodidntante » Mon Aug 13, 2018 1:30 pm

Thanks. Could this mean that the endless discussions about car brands are largely based on irrational brand loyalty, recency bias, selection bias, and confirmation bias?

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Mon Aug 13, 2018 1:34 pm

whodidntante wrote:
Mon Aug 13, 2018 1:30 pm
Thanks. Could this mean that the endless discussions about car brands are largely based on irrational brand loyalty, recency bias, selection bias, and confirmation bias?
To some extent yes. But the big differences that people argue about are not years 0-5 (call it 0-75k miles). It is year 10-15 (120-200k mile). Pretty much ever new car is reliable and has low repair costs. Get north of 120k miles and a lot of people feel that is no longer true and that their is a wider distribution of outcomes.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by T4REngineer » Mon Aug 13, 2018 1:41 pm

I would say it makes since as a general statement that as the price of the car goes up the long term cost of ownership rises. The devil is in the details, how long do you keep it, how well does it hold its value, how reliable does it turn out to be, do you do your own work, does a dealer, indy shop etc.

Personally I think the most money can be saved by learning to turn a wrench :sharebeer

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by Ged » Mon Aug 13, 2018 1:42 pm

vineviz wrote:
Mon Aug 13, 2018 11:00 am

That means, over the first five years of ownership, you can expect the annual expense of an automobile to be approximately $1,622 + 20% of the initial purchase price.
I bet this calculation is dominated by depreciation.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Mon Aug 13, 2018 1:50 pm

Ged wrote:
Mon Aug 13, 2018 1:42 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am

That means, over the first five years of ownership, you can expect the annual expense of an automobile to be approximately $1,622 + 20% of the initial purchase price.
I bet this calculation is dominated by depreciation.
Repairs and maintenance are about as large as factor
Honda Civic
TCO 34k.4k
depreciation 13.8k
FI 4k
gas 5k
insurance 4.8k
maintence 4k

E-Class
TCO 90k
deprec 45k
FI 10k
Gas 10k
Insurnane 5.9
maintence&repaire 15k

Yes depreciation is 3x as much. But repairs&maintence are also 3x as much and gas and Financing are 2x. If it was only depreciation the line would be a lot flatter.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Mon Aug 13, 2018 1:53 pm

Ged wrote:
Mon Aug 13, 2018 1:42 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am

That means, over the first five years of ownership, you can expect the annual expense of an automobile to be approximately $1,622 + 20% of the initial purchase price.
I bet this calculation is dominated by depreciation.
No need to guess: you can look for yourself.

E.g. https://www.edmunds.com/honda/accord/20 ... st-to-own/

In this example, depreciation plus taxes & fees constitute the majority of the cost in the first year but not in years 2-5. By the fifth year, maintenance and repairs are significantly greater than depreciation.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by Maverick3320 » Mon Aug 13, 2018 4:37 pm

vineviz wrote:
Mon Aug 13, 2018 11:39 am
Maverick3320 wrote:
Mon Aug 13, 2018 11:16 am
Interesting. Intuitively it makes sense, but I can't imagine the market is that efficient, though. For example: new car prices on vehicles that hold their value better than others. If the (rough) new vehicle prices are set by manufacturers, how would that account for resale value?
MSRP is set by manufacturers, but the actual cash price is effectively set by the market (where buyer and seller come together to clear the inventory). That's why looking at the average transaction value, as Edmunds does, rather than MSRP is important.
I was under the impression that auto manufacturers could choose to stop supplying car dealerships that did not meet minimum MSRP levels.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by daveydoo » Mon Aug 13, 2018 4:48 pm

The purchase price swamps everything else. The regression line looks awfully close to purchase price, divided by five years.

As others have pointed out, the utility of this "relationship" is questionable. I can think of a handful of cars that are unreliable and depreciate like crazy, and a handful of cars for which the opposite is true. The former will be above the line and the latter below. The line itself is no more helpful as a rule-of-thumb than is purchase price, imo. Pretty much everyone who contemplates a car purchase has some idea about reliability, cost for the repairs, and depreciation.

Is there anyone out there who did not think that the purchase price of their car will largely determine the overall annual cost of ownership? :D

Edit: There is a pair of spendy cars and a pair of reasonably-priced cars on your graph for which the purchase prices are nearly identical (within each pair) yet the annual cost of ownership differs by $5000. So, my snarky comment notwithstanding, this is a potentially useful relationship to the extent that deviation from the relationship is worth noting.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Mon Aug 13, 2018 6:20 pm

daveydoo wrote:
Mon Aug 13, 2018 4:48 pm
The purchase price swamps everything else. The regression line looks awfully close to purchase price, divided by five years.

As others have pointed out, the utility of this "relationship" is questionable. I can think of a handful of cars that are unreliable and depreciate like crazy, and a handful of cars for which the opposite is true. The former will be above the line and the latter below. The line itself is no more helpful as a rule-of-thumb than is purchase price, imo. Pretty much everyone who contemplates a car purchase has some idea about reliability, cost for the repairs, and depreciation.

Is there anyone out there who did not think that the purchase price of their car will largely determine the overall annual cost of ownership? :D

Edit: There is a pair of spendy cars and a pair of reasonably-priced cars on your graph for which the purchase prices are nearly identical (within each pair) yet the annual cost of ownership differs by $5000. So, my snarky comment notwithstanding, this is a potentially useful relationship to the extent that deviation from the relationship is worth noting.
When I dig into data like this, I try to approach it with an open mind. Insights often seem obvious in hindsight but also often I find the nature of relationships surprising.

In this case, its not obvious to m that the relationship between cash cost and annual expenses should be linear nor is it inherent that the slope should be either .20 or .25 or some other number.

I make no claim at having reinventing the wheel here, but i do think some things can be interesting without being earth shattering.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by daveydoo » Mon Aug 13, 2018 9:22 pm

vineviz wrote:
Mon Aug 13, 2018 6:20 pm
...but i do think some things can be interesting without being earth shattering.
+1. It would be fun to look at the whole data set, and maybe color- or symbol-code by manufacturer to get a sense where each tends to fall relative to "the line." I'm sure there are a few like Infiniti, maybe, that are off the radar for me but shouldn't be.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by mikeyzito22 » Mon Aug 13, 2018 9:39 pm

vineviz wrote:
Mon Aug 13, 2018 11:00 am


Imagine a person with an annual salary of $60k and net income (after taxes etc.) of $46k, which is about $3,800/month. With living expenses of $1,500/month and retirement savings of $800 per month this person has roughly $1,500 in disposable income. If they spent roughly third of that disposable income on a car, that'd be about $500 per month or $6,000 per year. Subtract the "fixed annual" auto expense of $1,600, divide the remainder by 0.20, and you get an estimated car value of $22,000 under the assumption that the person had both the DESIRE and ability to spend 33% of their disposable income on a car.

Vary that desire and you get a varied price estimate, but either way you have concrete estimate with which to begin the decision making process.
Just look at that. I do not know a person working in my part of America (Oregon) that has living expenses of $1,500/month. Jesus, I must be rich. Who the f can live on that? Hello, we are not all retired here, we work too! Yeah, good luck with a car. If you have kids or are part of the working class (not retired), please chime in here and tell me if your living expenses are $1500 a month or lower.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Tue Aug 14, 2018 2:10 am

daveydoo wrote:
Mon Aug 13, 2018 9:22 pm
vineviz wrote:
Mon Aug 13, 2018 6:20 pm
...but i do think some things can be interesting without being earth shattering.
+1. It would be fun to look at the whole data set, and maybe color- or symbol-code by manufacturer to get a sense where each tends to fall relative to "the line." I'm sure there are a few like Infiniti, maybe, that are off the radar for me but shouldn't be.
It really needs a lot more data. You want to plot out clusters (say compare the BMW 3, mercedes c, audi A4, lexus IS, infiniti whatever, acura tlx,...) so you can see what the range is for 40k entry level luxury cars. Then do it for SUVs and so on. As it is with we have very few data points past 45 k or so. Maybe all the others it in nicely. Maybe the OP got lucky. It is fun to look at it.

For example notice the 1 35k car that is about 5k/year. Or about the same price as 3 or 4 22k cars on the graph. You have a car that costs 50% with the same TCO.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by SDLinguist » Tue Aug 14, 2018 7:12 am

randomguy wrote:
Mon Aug 13, 2018 1:50 pm
Ged wrote:
Mon Aug 13, 2018 1:42 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am

That means, over the first five years of ownership, you can expect the annual expense of an automobile to be approximately $1,622 + 20% of the initial purchase price.
I bet this calculation is dominated by depreciation.
Repairs and maintenance are about as large as factor
Honda Civic
TCO 34k.4k
depreciation 13.8k
FI 4k
gas 5k
insurance 4.8k
maintence 4k

E-Class
TCO 90k
deprec 45k
FI 10k
Gas 10k
Insurnane 5.9
maintence&repaire 15k

Yes depreciation is 3x as much. But repairs&maintence are also 3x as much and gas and Financing are 2x. If it was only depreciation the line would be a lot flatter.
Those numbers are just totally wonkadoodle.

If you look at the maintenance packages the "luxury" brands sell you could get all normal maintenance covered for about 5k over the first 5 years. Warranty covers the first 3 for unexpected repairs and you can buy extended warranty to cover the remaining time for less than another 3k usually.

Those "benefits" are not sold at a loss by the manufacturer. There is no way you could pretty much cover all your repair/maintenance expenses except tires from the manufacturer for roughly half the number listed if that were the true cost over 5 years.

Same with gas numbers even considering the difference in price between regular and premium.

The national average for regular last year was 2.35 and for premium 2.87. If we take those numbers the Civic would have used roughly 2125 gallons over 5 years and the E class would have used roughly 3500. If we take the average fuel economy of the base models from the government numbers for the 2014 model year, the Civic has a combined rating of 33mpg, the E class is 24mpg then the Civic would have driven ~70k miles in 5 years and the E class ~85k miles or 14k and 17k miles per year. The only way we would get to around $10k in gas over 70k miles is if we were driving an E550.

Lastly the depreciation numbers: if we take a 60% hit over 5 years the Civic would have been a mid range Civic with an MSRP of around 23k while the E class would again have to be a top of the line E550 loaded with an extra 15k in options.

Given the above the only logical conclusion is that the comparison is between a bread and butter range for Civic sales Civic and a top of the line E class which makes up ~10% of all E class sales in the US. That's not even an apples to oranges comparison let alone apples to apples.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by alfaspider » Tue Aug 14, 2018 8:05 am

Agreed that Edmunds numbers are a bit wonky. Assuming $15k of repairs/matieanance for an E-class in the first five years of ownership is absurd. The car will be under warranty for four of those five years! While the car could self-destruct right at the end of year 4, that's not terribly likely. As for maintenance, there's no way you are getting into 5 figures unless you are just getting taken for a ride. Over 5 years, all you are likely to need is 5-7 oil changes, front pads/rotors, a set of tires, and a few air filters. That should be about $2-3k total. A four year maintenance plan for a mid-range E class from Mercedes costs $1,500.

It's also worth noting that the relative complication of various vehicles can make a big difference in maintenance costs independent of purchase price. You can easily spend $100,000 on a Cadillac Escalade, but under its skin is the same v8 Chevy uses on most of its trucks, which is nothing but an evolution of the Chevy LS small block that has been in use since 1995. Any general mechanic will be immediately familiar with it. Contrast that to an Alfa Romeo Giulia Quadrifoligo, which sells for around $75k. It runs the engine from the Ferrari California, with two cylinders lopped off and 20+ PSI of boost. The specific engine is only used in the Alfa, which means low parts volumes and very few places that would be willing to work on it. As far as maintenance/repairs, the Alfa is almost certainly going to be higher cost.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by grabiner » Tue Aug 14, 2018 9:56 pm

One important exception: you may pay extra now in order to reduce future costs.

For example, I own a Toyota Prius. A comparably-equipped non-hybrid car would cost less to purchase, but would use almost twice as much gas (I get 57 MPG, and got 32 in my previous Honda Civic). I expect to break even in total cost if I keep this car for 120,000 miles.
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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by triceratop » Tue Aug 14, 2018 10:16 pm

mikeyzito22 wrote:
Mon Aug 13, 2018 9:39 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am


Imagine a person with an annual salary of $60k and net income (after taxes etc.) of $46k, which is about $3,800/month. With living expenses of $1,500/month and retirement savings of $800 per month this person has roughly $1,500 in disposable income. If they spent roughly third of that disposable income on a car, that'd be about $500 per month or $6,000 per year. Subtract the "fixed annual" auto expense of $1,600, divide the remainder by 0.20, and you get an estimated car value of $22,000 under the assumption that the person had both the DESIRE and ability to spend 33% of their disposable income on a car.

Vary that desire and you get a varied price estimate, but either way you have concrete estimate with which to begin the decision making process.
Just look at that. I do not know a person working in my part of America (Oregon) that has living expenses of $1,500/month. Jesus, I must be rich. Who the f can live on that? Hello, we are not all retired here, we work too! Yeah, good luck with a car. If you have kids or are part of the working class (not retired), please chime in here and tell me if your living expenses are $1500 a month or lower.
My expenses are less than $1k/mo. I live in Metropolitan California.

On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
daveydoo wrote:The purchase price swamps everything else. The regression line looks awfully close to purchase price, divided by five years.
+1
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by mikeyzito22 » Tue Aug 14, 2018 10:47 pm

triceratop wrote:
Tue Aug 14, 2018 10:16 pm
mikeyzito22 wrote:
Mon Aug 13, 2018 9:39 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am


Imagine a person with an annual salary of $60k and net income (after taxes etc.) of $46k, which is about $3,800/month. With living expenses of $1,500/month and retirement savings of $800 per month this person has roughly $1,500 in disposable income. If they spent roughly third of that disposable income on a car, that'd be about $500 per month or $6,000 per year. Subtract the "fixed annual" auto expense of $1,600, divide the remainder by 0.20, and you get an estimated car value of $22,000 under the assumption that the person had both the DESIRE and ability to spend 33% of their disposable income on a car.

Vary that desire and you get a varied price estimate, but either way you have concrete estimate with which to begin the decision making process.
Just look at that. I do not know a person working in my part of America (Oregon) that has living expenses of $1,500/month. Jesus, I must be rich. Who the f can live on that? Hello, we are not all retired here, we work too! Yeah, good luck with a car. If you have kids or are part of the working class (not retired), please chime in here and tell me if your living expenses are $1500 a month or lower.
My expenses are less than $1k/mo. I live in Metropolitan California.

On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
daveydoo wrote:The purchase price swamps everything else. The regression line looks awfully close to purchase price, divided by five years.
+1
I could only wish to live on Triceratops less than 1000K a month. I can't think of a mortgage that wouldn't eclipse that.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by randomguy » Tue Aug 14, 2018 11:22 pm

SDLinguist wrote:
Tue Aug 14, 2018 7:12 am
randomguy wrote:
Mon Aug 13, 2018 1:50 pm
Ged wrote:
Mon Aug 13, 2018 1:42 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am

That means, over the first five years of ownership, you can expect the annual expense of an automobile to be approximately $1,622 + 20% of the initial purchase price.
I bet this calculation is dominated by depreciation.
Repairs and maintenance are about as large as factor
Honda Civic
TCO 34k.4k
depreciation 13.8k
FI 4k
gas 5k
insurance 4.8k
maintence 4k

E-Class
TCO 90k
deprec 45k
FI 10k
Gas 10k
Insurnane 5.9
maintence&repaire 15k

Yes depreciation is 3x as much. But repairs&maintence are also 3x as much and gas and Financing are 2x. If it was only depreciation the line would be a lot flatter.
Those numbers are just totally wonkadoodle.

If you look at the maintenance packages the "luxury" brands sell you could get all normal maintenance covered for about 5k over the first 5 years. Warranty covers the first 3 for unexpected repairs and you can buy extended warranty to cover the remaining time for less than another 3k usually.

Those "benefits" are not sold at a loss by the manufacturer. There is no way you could pretty much cover all your repair/maintenance expenses except tires from the manufacturer for roughly half the number listed if that were the true cost over 5 years.

Same with gas numbers even considering the difference in price between regular and premium.

The national average for regular last year was 2.35 and for premium 2.87. If we take those numbers the Civic would have used roughly 2125 gallons over 5 years and the E class would have used roughly 3500. If we take the average fuel economy of the base models from the government numbers for the 2014 model year, the Civic has a combined rating of 33mpg, the E class is 24mpg then the Civic would have driven ~70k miles in 5 years and the E class ~85k miles or 14k and 17k miles per year. The only way we would get to around $10k in gas over 70k miles is if we were driving an E550.

Lastly the depreciation numbers: if we take a 60% hit over 5 years the Civic would have been a mid range Civic with an MSRP of around 23k while the E class would again have to be a top of the line E550 loaded with an extra 15k in options.

Given the above the only logical conclusion is that the comparison is between a bread and butter range for Civic sales Civic and a top of the line E class which makes up ~10% of all E class sales in the US. That's not even an apples to oranges comparison let alone apples to apples.
Your logic is wrong since we are comparing a Honda Civic Touring (i.e. top of the line) to a E400 luxury 4 matic (mid range). Your logic is faulty:)

Lets check your math:)
eClass
5*15k = 75000 miles.
Gas mileage is 20/27 45% highway/55% city = 23 mpg
75k/23 = 3260 gallons of gas
Premium gas is 3.20/gallon at my zip code = 10.4k
I will assume they are using a cheaper gas station than the one I filled up at but yeah the edmunds math is pretty spot on.

Does the maintenance and repairs cost seem high? Yep but I would say the same thing about the civic as both are about 1/3 or so higher than my experience. Maybe I am better at getting a few more miles out of my tires..... The important part is that both use the same methdology to calculate costs.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by HornedToad » Tue Aug 14, 2018 11:50 pm

It's a higher due to depreciation and short life cycle of the car.

I prefer to separate out depreciation cost, which price approximates and maintenance cost of the car, which price doesn't necessarily approximate.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by Maverick3320 » Wed Aug 15, 2018 12:46 pm

mikeyzito22 wrote:
Tue Aug 14, 2018 10:47 pm
triceratop wrote:
Tue Aug 14, 2018 10:16 pm
mikeyzito22 wrote:
Mon Aug 13, 2018 9:39 pm
vineviz wrote:
Mon Aug 13, 2018 11:00 am


Imagine a person with an annual salary of $60k and net income (after taxes etc.) of $46k, which is about $3,800/month. With living expenses of $1,500/month and retirement savings of $800 per month this person has roughly $1,500 in disposable income. If they spent roughly third of that disposable income on a car, that'd be about $500 per month or $6,000 per year. Subtract the "fixed annual" auto expense of $1,600, divide the remainder by 0.20, and you get an estimated car value of $22,000 under the assumption that the person had both the DESIRE and ability to spend 33% of their disposable income on a car.

Vary that desire and you get a varied price estimate, but either way you have concrete estimate with which to begin the decision making process.
Just look at that. I do not know a person working in my part of America (Oregon) that has living expenses of $1,500/month. Jesus, I must be rich. Who the f can live on that? Hello, we are not all retired here, we work too! Yeah, good luck with a car. If you have kids or are part of the working class (not retired), please chime in here and tell me if your living expenses are $1500 a month or lower.
My expenses are less than $1k/mo. I live in Metropolitan California.

On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
daveydoo wrote:The purchase price swamps everything else. The regression line looks awfully close to purchase price, divided by five years.
+1
I could only wish to live on Triceratops less than 1000K a month. I can't think of a mortgage that wouldn't eclipse that.
I'm guessing 99.9% of Americans live on less than 1000K a month...

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by mikeyzito22 » Wed Aug 15, 2018 12:57 pm

Sorry, I meant 1K, not 1000K. This was confusing.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Wed Aug 15, 2018 1:22 pm

triceratop wrote:
Tue Aug 14, 2018 10:16 pm
On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
That analysis might be a good way to answer a different question but for better or worse financing and depreciation ARE major components of the annuals costs of buying a new car, at least in the first few years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by HornedToad » Wed Aug 15, 2018 1:25 pm

vineviz wrote:
Wed Aug 15, 2018 1:22 pm
triceratop wrote:
Tue Aug 14, 2018 10:16 pm
On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
That analysis might be a good way to answer a different question but for better or worse financing and depreciation ARE major components of the annuals costs of buying a new car, at least in the first few years.
Then there's no point in doing an analysis. More expensive cars cost more the first 3-5 years because..... they are more expensive and have a harder depreciation hit:)

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by vineviz » Wed Aug 15, 2018 1:37 pm

HornedToad wrote:
Wed Aug 15, 2018 1:25 pm
vineviz wrote:
Wed Aug 15, 2018 1:22 pm
triceratop wrote:
Tue Aug 14, 2018 10:16 pm
On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
That analysis might be a good way to answer a different question but for better or worse financing and depreciation ARE major components of the annuals costs of buying a new car, at least in the first few years.
Then there's no point in doing an analysis. More expensive cars cost more the first 3-5 years because..... they are more expensive and have a harder depreciation hit:)
If you see no point in it, feel free to read some other post.

But as I've said already, the relationship between the annualized costs of owning a car and the purchase price of that car isn't readily intuitable. Until you break down the component costs empirically, how confident could you be about the magnitude of each component and the rate at which the components increase or decrease? Not very.

Does it generally make sense that more expensive cars cost more annually? I suppose it does. But if you never bother to look at the data, you can't be sure that what you think is true actually IS true.

Some people like to guess, and other people like to know. I like to know. Sue me.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by jharkin » Wed Aug 15, 2018 1:39 pm

randomguy wrote:
Mon Aug 13, 2018 11:24 am
vineviz wrote:
Mon Aug 13, 2018 11:00 am


I found, unsurprisingly, that the annual "total" cost to own a vehicle is directly related to the initial "cash" cost. Unsurprising in part because many expenses of owning a vehicle are directly related to its value (depreciation, financing, insurance, taxes & fees) and in part because the market for automobiles is IMHO fairly efficient.
To some extent yeah. But you still end up with noticeable difference between some models. For example

Honda Pilot
Cash = 40.8
TCO 47.8k

BMW 3 series
cash = 41k
TCO = 56k
hmm.... Im not so sure about those comparisons. 40k for a pilot is buying nearly the top of the line (Touring), whereas a 40k 3 series is close to the bottom (you can spend north of 60 on a loaded 340i with all the options).

Id be interested to see the curves for say Acura, Lexus, Audi and BMW sedans all priced out around 45k. And run the TCO out beyond the end of warranty (say 10 years). I suspect that the delta will increase the farther out you go, given that the Germans depreciate faster and more of their expensive maintenance shows up after the 5 year mark.

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by HornedToad » Wed Aug 15, 2018 1:43 pm

vineviz wrote:
Wed Aug 15, 2018 1:37 pm
HornedToad wrote:
Wed Aug 15, 2018 1:25 pm
vineviz wrote:
Wed Aug 15, 2018 1:22 pm
triceratop wrote:
Tue Aug 14, 2018 10:16 pm
On the main topic of the thread, I would consider the real answer to be the above analysis done sans financing and depreciation costs. As it is everything is certainly swamped by that.
That analysis might be a good way to answer a different question but for better or worse financing and depreciation ARE major components of the annuals costs of buying a new car, at least in the first few years.
Then there's no point in doing an analysis. More expensive cars cost more the first 3-5 years because..... they are more expensive and have a harder depreciation hit:)
If you see no point in it, feel free to read some other post.

But as I've said already, the relationship between the annualized costs of owning a car and the purchase price of that car isn't readily intuitable. Until you break down the component costs empirically, how confident could you be about the magnitude of each component and the rate at which the components increase or decrease? Not very.

Does it generally make sense that more expensive cars cost more annually? I suppose it does. But if you never bother to look at the data, you can't be sure that what you think is true actually IS true.

Some people like to guess, and other people like to know. I like to know. Sue me.
I assumed you were going to separate out the depreciation from the maintenance and then potentially add the two for a total cost. It's not readily intuitable and might not even be true that more expensive cars cost more in maintenance/insurance/gas/etc. I don't know but it would be interesting as it could either offset or add to the cost of a more expensive car already.

For depreciation, if you start with the assumption that new cars lose ~50% of their value in the first 3 years, then it's self-evident that a car that costs $50k would cost more than a car that costs $25k over a 5 year period. For whatever reason, people generally separate car purchase costs from ongoing costs when they talk about yearly expense of ownership

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by triceratop » Wed Aug 15, 2018 1:48 pm

HornedToad wrote:
Wed Aug 15, 2018 1:43 pm
For depreciation, if you start with the assumption that new cars lose ~50% of their value in the first 3 years, then it's self-evident that a car that costs $50k would cost more than a car that costs $25k over a 5 year period. For whatever reason, people generally separate car purchase costs from ongoing costs when they talk about yearly expense of ownership
I think the reason is clear. The expense of owning a car is very different from its new car price. They're just different things. That fact is obvious from the fact you can buy used cars.

For example, the expense of owning my 2001 Honda Civic is very low because I get good gas mileage and requires little maintenance, but also has nothing to do with the new car price.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Is the price of a new car a good proxy for the expense of owning it?

Post by kotsp » Wed Aug 15, 2018 1:53 pm

vineviz wrote:
Mon Aug 13, 2018 11:39 am
MSRP is set by manufacturers, but the actual cash price is effectively set by the market (where buyer and seller come together to clear the inventory). That's why looking at the average transaction value, as Edmunds does, rather than MSRP is important.
What Edmunds does based on transaction value, is flawed in my opinion. My state Michigan levies registration fee based on Class Code of the vehical, which is based on original MSRP of the car back then. As I said in other reply, my 4K purchase price of 2005 Mercedes was calculated and levied its registration fee based on its MSRP of 85K back in 2005.

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