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.