It’s a Consensus—New Cars Are Unaffordable
January 18, 2017
The December 2016 Auto Buyer’s Affordability Index (ABAI) is 58.9—unchanged from last month. The median household income (MHI) increased, bumping up the December affordable price by 0.5 percent ($88) to $18,636. However, the affordable price increase was offset by a 0.5 percent increase ($163) in the light-vehicle average transaction price (ATP). An ABAI of 58.9 indicates that a prudent, median-income household can only afford 58.9 percent of the new-car average price.
The index rose by only 0.5 points from January through December of 2016 after rising 5.6 points over the same period in 2015. Affordability gains in 2016 were limited as increases in the MHI, and the corresponding affordable price (2.3%), were largely offset by ATP increases (1.5%).
Buying power (affordable price change minus the ATP change) decreased $75 in December, leading to an overall decrease for the year. Buying power decreased by $46 in 2016, relative to January. (See figure below.)
New Cars are Generally Unaffordable
There’s a growing consensus that new cars are largely unaffordable.
According to National Automobile Dealers Association (NADA), Peter Welch, NADA President and CEO, challenged the industry “to confront affordability problem” at the 2017 Automotive News World Congress earlier this month. Additionally, industry analysts are increasingly indicating that affordability issues have contributed to plateauing new-car sales. The American consumer agrees. In survey release last month, Requisite Press found that 74.6 percent say that new cars and trucks are generally unaffordable.
Welsh told attendees that “Over the past 20 years, the single biggest driver of vehicle price increases has been excessive government regulation and mandates.” However, it’s clear that automakers have also pushed up prices by developing and promoting more profitable (and higher priced) models (SUVs and light trucks). In addition, they have added costly technology (e.g., autonomous safety and navigation features, in-car entertainment enhancements) in a reach for additional market share and new income streams.
To date, a supportive financing environment—low interest rates and long-term loans—has served to soften the impact of high prices. However, the effectiveness of that support may be dwindling as interest rates are on the rise and trade-in debt has reached record levels.
New-Car Affordability Outlook
Gains in the MHI were mediocre for most of 2016. However, steady increases were seen in the closing months of the year—a positive development in support of affordability. Given the uncertainty of the economic outlook, it’s unclear at this time whether income growth will be sustained throughout 2017.
The price impacts of Government regulation, model profitability, and costly technology are likely remain in 2017. The pace of Government regulation growth may slow with a Trump administration, but it’s unlikely that current safety regulations and fuel economy requirements will be rolled back. In addition, automakers will continue to seek a competitive advantage by incorporating costly technology.
If incomes remain stable, affordability will likely turn on the industry’s response to plateauing new-car sales. Most sales forecasts indicate a small reduction in new-car sales for the first time since the Great Recession. If automakers limit production accordingly, and the financing environment remains largely supportive, prices may continue at current levels. However, it’s certainly possible that some will reach for additional market share, pushing down prices.
Regardless of the overall state of affordability, individual car buyers can actively improve the affordability of a new-vehicle purchase. Requisite Press recommends four key actions that are likely to reduce the total cost of a purchase: Obtain preapproved financing, sell a trade-in separately, avoid costly add-ons, and obtain a market price. In aggregate, these actions can save consumers thousands of dollars and significantly improve the affordability of a new-vehicle purchase.
Details of these money-saving tips, and much more, is included in a newly release e-book titled The 15-Minute Guide to Negotiation-Free New Car Buying: Simple Save More and Stress Less. The e-book is available for preview and purchase at https://carswithease.com.
20-4-10 Auto Financing Rule
The ABAI is based on the 20-4-10 auto financing rule. The 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.