There are three reasons I don’t own a car. The first is that when I was about to buy one for the first time, someone in my extended family needed help with her school fees and I decided that was a more compelling need. The second is that I live in an urban neighborhood where I really don’t need one.
The third? I figured a car would blow a half million dollar hole in my retirement savings, and I decided it wasn’t worth it.
Half a million dollars? Yep. The Automobile Association of America estimates the average cost of owning a new car works out at around $9,000 a year and change. That includes buying and depreciating the actual car itself, money spent on gasoline, insurance, and so on. (It doesn’t include parking.)
Take that $9,000 a year and invest it in the stock market, and even if you only earn 5% a year over 30 years you’d have about $600,000.
OK, so that’s a new car, and you can shave thousands off the price by buying a used car.
On the other hand, most people buy their first car in their 20s and they will need money lasting into their 70s, 80s or more. Invest that money at 5% for the full 50 years and you’re not looking a half a million dollars, but just under $2 million.
Not any more.
There is now a stampede out of the cities and into the suburbs and the countryside. Some blame the urban unrest. Others blame the pandemic, the lockdowns, and the sudden, desperate need for more space. Others say everyone will soon be working remotely from their homes, so why spend all that money living in the city?
(Historians point out that the same thing happened hundreds of years ago during the plagues, which often had a mortality rate above 70%.)
And with that stampede has come a stampede for cars. No wonder stocks in car-dealer companies such as Car-Max
have skyrocketed since the crisis broke, beating the S&P 500
by a clear margin.
There are many good reasons to live in the suburbs or the countryside, and plenty of reasons to move at the moment. But for those hoping to save a ton of money, it may be a false economy. Once you leave the city you need a car for each adult in the household—so for a married couple you may be looking at as much as $20,000 a year, and you’re certainly going to be hard pressed to get two cars, all-in, for less than $10,000 a year.
A friend told me if I moved to the countryside I’d save more than that on real estate. But I don’t think so. I’m currently refinancing my condo at a fixed 30-year rate of…2.5%.
So instead of spending $10,000 a year on cars I can borrow…$400,000. Adjust the numbers as appropriate.
When I bought my condo15 years ago there were very few neighborhoods in the U.S. where you didn’t need to own a car. Today, thanks to online deliveries, Uber
and Zipcar, that’s all changed.
Cars are wasting assets. They depreciate to nothing. Real estate isn’t. Barring catastrophe, your home’s value should rise at least in line with inflation, and probably by more than that.
Personally, I’m willing to bet that this current panic will abate. We will either have a vaccine or herd immunity, or both, within short order. Once the lockdowns are over, people will stop going stir crazy at home—and that’s going to be good for civil order (Note: I’m not talking about protests per se.) No, I don’t think everyone is going to “work from home,” and I think cities will continue to flourish because the face-to-face social interaction is absolutely essential to any kind of creative, “knowledge” economy.
I have been incredibly grateful during this crisis to live in a walkable neighborhood where I see friends every day, face to face and not on Zoom
People cannot live by Twitter
and TikTok alone.
But everyone will have their own opinions and these things, and make their own guesses.
The one thing I know for sure is cash flow. And before leaving the city and moving to the suburbs, do the math.