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New-Car Prices Are Likely to Stall this Year, Offering Savvy Shoppers a Buying Opportunity

January 13, 2016

The Auto Buyer’s Affordability Index (ABAI) closed out 2015 at 57.9, down from the November peak of 59.0, but up 6.6 points from December 2014. An ABAI of 57.9 indicates that a prudent, median-income household can only afford 57.9 percent of the new-car average price.

The improvement in new-car affordability was largely driven by a $2,866 YOY increase in the median household income and by downward pressure on new-car prices. The average transaction price (ATP) increased two percent in December, but remained below the December 2014 peak value throughout 2015.

Affordability 2015 December

New-Car Prices Are Likely to Stall this Year

The average transaction price is unlikely to advance this year as manufacturers face increasing price pressure.

A slowdown in new-vehicle sales growth is likely to intensify automaker market-share competition, pushing prices lower. The growth rate is expected to fall by more than 65 percent in 2016 according to National Automobile Dealers Association (NADA) figures (2015: 5.8 percent, 2016 forecast: 2 percent).

Leasing maturities will accelerate this year (up 33 percent according to J.D. Power), driving used-car prices lower. New-car price pressure will intensify as buyers increasingly defect to used cars.

Interest rates began to rise last year, and are expected to continue rising this year. As a result, monthly payments will increase—particularly in the case of long-term loans—causing additional price pressure. The impact of rising interest rates may be greater than anticipated considering that 71 percent of loan terms now exceed 60 months, according to Experian Automotive.

Informed Consumers Can Boost Their Savings

New-car affordability should continue to improve this year if recession is avoided and income growth remains on track. Car buyers will benefit from improving affordability, and can gain additional savings if properly informed.

Consumers fare best in an environment of robust competition. However, the new-car marketplace has (and continues) to resist open completion. This has given rise to online, third-party car-buying services that promise improved marketplace access, but tend to mute competition and prop up prices due to marketplace dependencies.

Fortunately, direct access to multiple dealers is now easier than ever before. The auto industry recognizes the vast market potential of internet shoppers, enabling new-car buyers to easily obtain price quotes from multiple dealers. With a simple negotiation-free strategy, as described in the book Power Shift (published by Requisite Press), shoppers can gain the benefit of vigorous competition without the historical hassle.

ABAI Methodology

The affordable monthly payment (including principal and interest) is calculated by taking 10 percent of the U.S. monthly median household income and subtracting a U.S. average monthly insurance premium. The affordable price is then calculated using the affordable payment, along with a U.S. average 48-month auto loan interest rate and a U.S. average sales tax rate. A 20 percent down payment is assumed. The ABAI is calculated by dividing the affordable price by the average transaction price and then multiplying by 100.

DATA

ABAI Results 2015 December 530

ABAI Sources 2015 December final

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