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.”