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August 2014 Auto Buyer’s Affordability Index

September 10, 2014

Discussion

The August 2014 Auto Buyer’s Affordability Index (ABAI) is 54.8 on a scale of 0 to 100. A score of 54.8 indicates that a U.S. median-income buyer following the 20-4-10 auto financing rule can only afford 54.8 percent of the August 2014 new-car average transaction price (ATP). This equates to a maximum affordable price of $16,255, assuming a median income of $54,045 and an ATP of $29,670.

The ABAI has trended up since its inception in April 2014, from 52.1 to the current 54.8, a 5.2% increase. The April 2014 affordable price of $15,795 increased to $16,255 in August 2014. This indicates improving new car affordability, and is a positive development for new car buyers. However, there has been little corresponding increase in the limited number of affordable models. In April 2014, there were 18 affordable models, or 6.9% of the 262 models priced under $35,000 based on the Manufacturer’s Suggested Retail Price (MSRP). As of August 2014, the number of affordable models has increased to 22, or 8.4%.

The increase in access to model selection has been the result of improving household incomes, flat new car prices, and low interest rates. However, while analysts expect incomes to slowly improve in the months ahead, it is likely that prices and interest rates will also rise. The growing economy is simply not enough to expand buyer access.

Consumer action, on the other hand, can have a much greater impact on increased model selection. Transaction prices for the same model can vary widely from buyer to buyer simply based on buyer information, methods, and dealership selection. Variations of 10%, 15%, or even 20% are not uncommon. Informed buyers that prepare for an immediate purchase and request best-price, nonnegotiable quotes, can have a significant impact on the final sales price and the corresponding number of affordable models. For example, in August a price reduction of 15% more than doubled the number of affordable models from 22 to 47. This includes some of the best-selling, top-rated models such as the Honda Civic and Toyota Corolla.

Information availability has increased significantly in recent years, improving the potential for increased buyer choice. However, much of the available information, beyond pricing data, is focused on tips and strategies for improving the outcome of a new-car negotiation. The result of this focus has been the general acceptance of the idea that obtaining a great price requires long hours, and the hassle of negotiation. Alternatively, online buying services and some dealers offer a “hassle-free” buying experience at a “fair price.” The new-car buyer is seemingly left with two unappealing options–obtain a great price and accept the hassle that goes with it, or settle for paying more for a better buying experience.

There is a third option. Negotiation with a few dealers is actually not an ideal strategy for getting the best deal on a new car. The majority of new cars are commodities–produced in large quantities and widely available. Given the commodity characteristics and the wide-spread industry acceptance of e-mail quote requests, consumers can easily benefit from the commodity effect–better prices, multiple quotes, and a better buying experience that comes from having options. However, the majority of consumers that regularly shop multiple sources for the best price on products like televisions and computers, are simply unaware they can do the same for their new Toyota Corolla or Ford Focus.

To fill this information gap, Requisite Press has launched a YouTube channel, the Auto Buyer’s Edge, an independent, consumer focused source of news, views, and information. The debut video, titled The Key to Great New-Car Prices without the Negotiation Hassle, is now available and provides an overview of the commodity affect and shows how buyers can use it to their benefit.

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 $54,045 and a monthly insurance premium of $130, the affordable monthly payment is $320.

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 $320, an interest rate of 3.97 percent, and a sales tax rate of 7.24 percent, the affordable price is $16,255.

The August 2014 ABAI was calculated by dividing the affordable price of $16,255 by the average transaction price of $29,670, and then multiplying by 100.

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

Option: Check a quote, Yearly Income: $54,045, Local Sales Tax: 7.24%, Monthly Cost of Additional Cars: $0, Term: 48 months, Interest Rate: 3.97%, Bottom-Line Price: 16,255, Down Payment: $3,251, Yearly Insurance Premium: $1560.

Returns a monthly payment of $320, and verifies a 20 percent down payment, 10 percent income, and corresponding Afford Score of 100.0.

Sources:

New Car Average Transaction Price

The Average Transaction Price reference used in the August 2014 index is $29,670 based on the estimate published by Cars.com on September 3, 2014. The ABAI was previously based on an average to two sources, including Cars.com, however, Cars.com has been selected to be the single source of average transaction price estimates for the foreseeable future. This one-time adjustment contributed approximately 0.9 percent to the August ABAI Increase.

U. S. Median Household Income

The median household income used for the August 2014 index is $54,045. 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 August index is from the July 2014 Current Population Survey and was derived and published by Sentier Research, LLC on September 3, 2014.

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

The interest rate used in the August 2014 index is 3.97 percent. The interest rate is the national average 48-month interest rate for August 14, 2014 published by Bankrate.com based on a weekly survey of large banks and thrifts. Bankrate.com does not keep an archive of past 2014 rates. However, the Bankrate.com rates for August 14th can be found at Yahoo.com.

U. S. Average Insurance Premium

The insurance premium used in the calculation of the August 2014 index 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, 2013, 2013 Population Estimates (ID PEPANNRES).

U. S Average Sales Tax Rate

The sales tax rate used in the calculation of the August 2014 index is 7.24 percent. This rate is based on state average combined sales tax rates published by the Tax Foundation for 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.