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Auto Buyer’s Affordability Index:
December 2014

Released: January 14, 2014
Phil Kelton, Requisite Press, LLC

Discussion

The December 2014 Auto Buyer’s Affordability Index (ABAI) is 51.3 on a scale of 0 to 100. A score of 51.3 indicates that a U.S. median-income buyer following the 20-4-10 auto financing rule can only afford 51.3 percent of the December 2014 new-car average transaction price (ATP). This equates to a maximum affordable price of $16,188, assuming a median household income of $53,880 and an average transaction price (ATP) of $31,550.

The ABAI decreased 3.2 percent from the November index of 53.0. This decrease in new-car affordability was largely due a sharp increase in the ATP. The December ATP jumped $1,105 (3.6 percent) compared to November, recording both the largest increase and highest average price for 2014. The median household income, on the other hand, increased by only $167 (0.3 percent). As a result, December new-car buyers lost $938 in buying power.

Support for Higher December New-Car Prices

Support for higher new-car prices came from many sources throughout the holiday car-buying season.

Overall consumer confidence continued trending upward, and consumers were particularly positive about December’s economic climate. The Conference Board Consumer Confidence Present Situation index rose to 98.6 in December, up 5.2 percent from November’s index of 93.7. (Editor’s note: The percentage increase was previously reported incorrectly to be 4.9 percent.)

Gas prices began falling rapidly in October, and then dropped nearly 20 percent in December to a $2.26 national average, the lowest since 2009 according to the AAA. Falling gas prices were featured prominently in the news, including AAA’s count of days without an increase (97 days as of December 31st). Consumers, who were already feeling confident about current economic conditions, were given one more reason to purchase more costly and less fuel efficient vehicles, such as the popular crossover SUV.

New-car buyers entered the market expecting a supportive financing environment of long-term loans, high loan-to-value limits, and attractive lease deals. Auto makers added their stamp of approval to long-term loans late in the year, with Ford Motors Credit Company’s introduction of a 75-month loan program, and Chrysler Capital’s 84-month loan offering. Auto loan interest rates remained near record low levels, with a 48-month loan average interest rate near 4 percent, according to Bankrate.com.

New-Car Affordability Expected to Improve in 2015

New cars should become more affordable in 2015 if incomes continue to increase. Downward pressure on new-car prices is anticipated from multiple sources, including lower used-car prices and an eroding auto finance environment. As pricing pressures grow, new-car prices should return to the moderating trend of the last few years.

Used car prices will soften in 2015 as the supply continues to increase. With 2015 new-car sales growth expected to moderate, this increased price competition will likely result in increasing new-car incentives and lower transaction prices.

The auto finance environment continued to support increased consumer spending throughout 2014. Loan terms and amounts financed are both at record high levels. Delinquency rates increased in 2014, but continued to remain below pre-recession levels.

However, a recent Moody’s Analytics analysis preformed for the Wall Street Journal, indicated that early delinquency rates are approaching those last seen in 2008. The Office of the Comptroller of the Currency, in a December 17th release, indicated that eroding quality indicators have been masked by the rapid growth of auto loans, and warned against the further erosion of underwriting standards as competitive pressures increase.

These developments, along with an anticipated rise in interest rates in the latter part of 2015, will likely result in a less supportive auto financing environment. As credit tightens, consumer spending will moderate and the ATP will be negatively affected.

Other potential sources of new-car price pressure include manufacturer competition for market share as overall sales growth moderates, and increasing competition within new-car segments as some auto makers seek to build out their portfolios.

Recommendations

Consumers are encouraged to maximize their personal affordability score, thereby preserving household financial security. A personal affordability score, just like the ABAI, is calculated based on income, down payment amount, financing terms, and new-car pricing. A score of 100 indicates successful adherence to the 20-4-10 auto financing rule.

The easiest way for new-car buyers to drive up their personal affordability score is to obtain the best market price through competition. The hassle of back-and-forth competitive negotiations can be avoided by requesting best-price, nonnegotiable quotes from multiple dealers. This can easily be done via e-mail. Dealers must go directly to their best price or risk losing the sale, and consumers will obtain the best market price while avoiding the hassle of negotiations.

Adherence to the 20-4-10 auto financing rule will amplify the positive effects of obtaining the best market price. Consumers can keep an eye on their personal affordability throughout the car buying process by making use of AffordCheck℠, a free online tool developed by Requisite Press. Shoppers can begin using AffordCheck℠ early in the car-buying process to determine affordable price ranges, and then can easily assess the affordability of specific offers as they are received.

ABAI Methodology

The monthly ABAI was developed to enable buyers to easily view current new-car prices in the context of sound financial advice. 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. The rule is widely recommended by personal finance experts to maintain financial security, avoid excessive interest costs, and preserve future investment opportunities.

An affordable monthly payment (including principal and interest) was calculated by taking 10 percent of the U.S. monthly median household income, and subtracting a U.S. average monthly insurance premium. For an income of $53,880 and a monthly insurance premium of $130, the affordable monthly payment is $319.

An affordable price was 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 was assumed. For a payment of $319, an interest rate of 4.01 percent, and a sales tax rate of 7.26 percent, the affordable price is $16,188.

The December 2014 ABAI was calculated by dividing the affordable price of $16,188 by the average transaction price of $31,550 and then multiplying by 100.

The affordable price result can be easily recreated by using AffordCheck℠:

Option: Check a quote, Yearly Income: $53,880, Local Sales Tax: 7.26%, Monthly Cost of Additional Cars: $0, Term: 48 months, Interest Rate: 4.01%, Bottom-Line Price: $16,188, Down Payment: $3,238, Yearly Insurance Premium: $1,560.

Returns a monthly payment of $319, and verifies a 20 percent down payment, 10 percent income, and corresponding Afford Score of 100.0.

ABAI Sources

New-Car Average Transaction Price

The average transaction price reference used is $31,550. The average transaction price estimate was published by Cars.com on January 5, 2015.

U.S. Median Household Income

The median household income used is $53,880. The median household income is published by Sentier Research, LLC on a monthly basis based on the Current Population Survey data. There is a one-month lag in publishing the data, so the latest available data for the December index is from the November 2014 Current Population Survey and was derived and published by Sentier Research, LLC on December 23, 2014.

U.S. Average 48-Month Auto Loan Interest Rate

The interest rate used is 4.01 percent. The interest rate is the national average 48-month interest rate for December 18, 2014 published by Bankrate.com based on a weekly survey of large banks and thrifts. Bankrate.com does not keep an archive of past rates. However, the Bankrate.com rates for December 18th can be found at Yahoo.com.

U.S. Average Insurance Premium

The insurance premium used is $130 per month. The premium is based on state average insurance premiums published by Insure.com for 2014, and then weighted by state population to develop a national average. The state population estimates are from the Census Bureau’s Population Estimates Program, Annual Estimates of the Resident Population: April 1, 2010 to July 1, 2014, 2014 Population Estimates (NST-EST2014-01).

U.S Average Sales Tax Rate

The sales tax rate used is 7.26 percent. This rate is based on state average combined sales tax rates published by the Tax Foundation for the Midyear Update 2014, and then weighted by state population to develop a national average. Population numbers used were identical to those used for the insurance premium calculation.