April Prices Outpaced Incomes, Pausing New-Car Affordability Improvement
May 18, 2016
The April Auto Buyer’s Affordability Index (ABAI) is 59.1, down 0.2 points from March 2016. The maximum affordable price rose $54 as the U.S. median household income (MHI) increased by $134. However, the income increase was outpaced by a $183 increase in the light-vehicle average transaction price (ATP). An ABAI of 59.1 indicates that a prudent, median-income household can only afford 59.1 percent of the new-car average price.
The ABAI has consistently trended up since January 2015 as a result of a rising MHI and an essentially flat ATP (see figure below). The ATP has remained below the January 2015 reference point except for a $14 December 2015 excursion. However, income growth has moderated over the last few months resulting in muted affordability gains.
Median-income households lost $129 of buying power this month (affordable price change minus the ATP change), as the ATP increase ($183) outpaced the affordable price increase ($54). However, median-income car buyers retain $2,355 in buying power gained since January 2015 (see figure below).
New-Car Prices Remain Under Pressure
New-car prices continue to be weighed down by market conditions. Incentives have increased 16 percent year-over-year as automakers compete for a share of waning auto sales growth. Moderating used-car prices continue to entice potential new-car buyers. Auto financing, however, continues to remain supportive.
Automaker competition may reach new heights in the near future, further impacting prices. The new-model launch rate is expected to accelerate to a 58-per-year average over the next four model years (MY2017-2020), according to the latest Bank of American Merrill Lynch Car Wars study (April 29, 2016). This is up 49 percent from the average for MY1997 to 2016 (39 per year).
Pricing pressure from used cars is likely to continue increasing as supply increases. According Black Book, the residuals on an average 3-year-old vehicle is forecast to decrease from 52.0 percent this year to 50.1 percent in 2017, and down to 47.8 percent by 2019.
Auto financing interest rates continue to remain low, providing some offsetting relief to new-car pricing pressure. In addition, availability of supportive financing terms continues to increase. Ford Motor Credit Company launched 84-month financing in April in a move to remain competitive. The financing environment should remain supportive in the near term.
New-Car Affordability Should Continue to Improve
Given the state of new-car pricing, affordability should continue to improve this year as long as U.S. economic growth continues.
Regardless of the state of overall affordability, each new-car buyer can preserve her own financial health by first ensuring that the purchase is affordable. Requisite Press recommends that consumers apply the 20-4-10 auto financing rule (see below) to more easily assess the affordability of a new-car purchase. Consumers can verify affordability throughout the car-buying process with AffordCheck℠, a free online tool based on the 20-4-10 rule. AffordCheck℠ can be used to determine an affordable price range, and it can also be used to assess specific offers as they are received.
20-4-10 Auto Financing Rule
The 20-4-10 auto financing rule consists of a minimum 20 percent down payment, a maximum 4-year loan term, and monthly payments of no more than 10 percent of gross household income (including insurance). The rule is widely recommended by personal finance experts to maintain financial security, avoid excessive interest costs, and preserve future investment opportunities.
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.