Obama Fuel Economy Standards Could Price Almost 7 Million Drivers out of New Car Market – NADA

by Marlo Lewis on April 12, 2012

in Features

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In a report released today, the National Auto Dealers Association (NADA) estimates that the Obama administration’s model year (MY) 2011-2025 fuel economy standards could price nearly 7 million consumers out of the market for new motor vehicles.

Based on the National Highway Traffic Safety Administration’s (NHTSA’s) estimate that federal fuel economy standards will add $2,937 to the average cost of new vehicles during MYs 2011-2025, NADA estimates the standards will “remove 3.1-4.2 million households or 5.8-6.8 million licensed drivers from the new motor vehicle market by 2025.” If, as another recent NADA report concludes, the administration’s estimate is unrealistically low, and the actual additional cost due to regulation is $4,803, the standards will “remove 5.4-5.9 million households or 10.0-11.0 licensed drivers from the new vehicle market by 2025.”

The ‘theory’ underpinning NADA’s disturbing conclusions is straightforward. Lower-income households typically cannot purchase a new vehicle without a loan. To qualify for a loan, borrowers must meet minimal lending standards. The most important consideration is the household’s debt service to income (DTI) ratio. By increasing the cost of new vehicles, fuel economy standards can “increase DTI ratios and cause some consumers to no longer qualify for a loan on the least expensive new vehicle, thus removing them from the new car market.”

Currently, the least expensive new vehicle is the 2011 Chevrolet Aveo, which costs approximately $12,750 in 2010 dollars. An estimated 93% of all households “have a financial profile that would allow them to meet the 40% maximum debt to income ratio” and qualify for a loan to purchase a new Aveo. But if fuel economy standards add another, say, $4,000 to the cost, the portion of consumers eligible for financing would drop from 92.8% to 88.5% — a decrease of “5 million households, or 10.6 million of the 245 million licensed drivers expected for MY 2025.”

The Obama administration contends that paying an extra $3,000 for a 54.5 mpg vehicle will be well worth it, because consumers will save $8,000 on fuel over the vehicle’s lifetime. Skepticism is justified. According to a recent New York Times analysis, most of today’s high-mpg vehicles do not yield net savings in six-to-eight years:

Except for two hybrids, the Prius and Lincoln MKZ, and the diesel-powered Volkswagen Jetta TDI, the added cost of the fuel-efficient technologies is so high that it would take the average driver many years — in some cases more than a decade — to save money over comparable new models with conventional internal-combustion engines.

That is true at today’s pump prices, around $4, and also if gas were to climb to $5 a gallon, the data shows.

Gas would have to approach $8 a gallon before many of the cars could be expected to pay off in the six years an average person owns a car.

If the administration’s proposed standards are as beneficial to consumers and automakers as the agencies contend, why wouldn‘t consumers demand and profit-seeking manufacturers produce vehicles built to the same or similar standards without regulatory compulsion? Fuel economy regulation assumes that auto buyers do not want to avoid pain at the pump and automakers do not want to get rich!

In any event, to benefit from high-mpg vehicles, one must first be able to buy them. Fuel economy standards that price lower-income households out of the new car market hurt those most harmed by high gas prices. As Don Chalmers, a New Mexico auto dealer and chairman of NADA’s Government Relations Committee, told Greenwire (subscription required):

While you can mandate what automakers must build, you can’t dictate what customers will buy, nor can you dictate if a bank will make a loan. If my customers can’t buy what I’ve got to sell, there are no savings at the gas pump and there is no environmental benefit. If car and truck buyers do not purchase these new products, we all lose.


Eric Simpson April 12, 2012 at 8:59 pm

Kind of on topic, here’s my Real Science comment earlier on Energy Secretary Chu saying sea level is rising faster than predicted:

The Little Chu Chu Who Couldn’t…
The sea level isn’t rising at all, Mr. Chu. There’s been nothing, or effectively nothing, no discernable rise in sea level in 20 years, and more. Go to the beach and see for yourself. What undisguised trash, criminal baloney.
The diminutive Mr. Chu, or I like Chu Chu, the Little Chu Chu Who Couldn’t, couldn’t keep gas prices from skyrocketing, couldn’t resist but to give himself an A grade for this obvious failure, couldn’t tell the truth about the sea level remaining the same, as we can all see with our own eyes.
This is the little chu chu who said he’d like gas at a European $9 a gallon, but that’s an understatement for sure, as we know Chu would relish $15 or $20 a gallon. And Chu would also get ecstatic over electricity at a $2 a kilowatt hour (vs. apx 10 cents per KW hour now).
$2 per KWhour?? and $20 gas? Then, as the leftists dream, we are headed back to the stone age, because at these prices a lot of people just wouldn’t bother having electricity at all, or a car. Of course, the economy would tank, incomes shriveling, jobs vanishing by the scores of millions, industrial production cratering.
Civilization doomed, no exaggeration. No change in climate, though. A hungry dirty diseased violent world. These people like Chu are criminal.

Bill Noack April 13, 2012 at 9:13 am

Marlo: The lack of media coverage of the high CAFE standards proposal is part of the Obama/media alliance. Very few ordinary people — certainly no one in the main stream media — have any idea of what’s about to descend on the auto industry. But they will find out.

Sean April 13, 2012 at 9:17 am

I’ve seen these types of analysis but I also have a great deal of faith in the people who manufacture things. Unlike some things, manufacturing, particularly autos, does indeed get cheaper as you do more of it. I am a harsh skeptic of much of the climate science but I also believe in efficiency because more efficiency means you can be more competitive. I’ve seen the horsepower of new cars go through roof over the last 15 years while the mileage has held constant. Looking ahead, I see engine sizes getting smaller and more efficient, weights of cars coming down, better aerodynamics around the grill and engine and who know, maybe side mirrors will be replaced by small cameras and video screens. I don’t see autocompanies strugging to meet these mandates, even for the low end. Given the strength of global competition I expect much more efficient cars to possibly move ahead of the mandates at prices that people can afford.

nowsane April 14, 2012 at 9:52 pm

Sean, I agree with most of what you said, but don’t forget the smoothing of the bottom of the car as another area in which could be improved for wind streamlining.

klem April 13, 2012 at 10:23 am

I’ve said this many times. The increase in energy costs due to subsidized wind and solar power, plus the added costs of legislated gas mileage standards will hurt low income people the most. It won’t reduce our overall carbon emissions, it will simply take poor people off the roads and only richer people will have cars.

I don’t know why the lefty’s like to kick poor people around so much but what can you do?

nowsane April 14, 2012 at 9:45 pm

Well, so much for jumpstarting the economy, with the stimulus plan and the “Cash-For-Clunkers” project! What more insane ideas does he have?

klem April 16, 2012 at 5:50 pm

I heard horror stories that in the cash for clunkers debacle to ensure a car was truly taken off the road, sand was poured into the engine. This supposedly was done to old Farraris, Rolls, and classic muscle cars. If true, someone should have been taken out and horse whipped for such a travesty.

nowsane April 14, 2012 at 10:02 pm

Let’s face it, the President is no Economist. What kind of idiotic Keynesian theoretician came up with this idea?

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