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Auto Affordability Hits New High in February as Income Growth Continues 

March 16, 2016

The Auto Buyer’s Affordability Index (ABAI) hit a new high of 59.2 in February as both the U.S. median household income (MHI) and the light-vehicle average transaction price (ATP) moved in a supportive direction. However, the increase was somewhat muted by a nearly 3 percent increase in the average insurance premium (updated annually). An ABAI of 59.2 indicates that a prudent, median-income household can only afford 59.2 percent of the new-car average price.

Affordability 2016 February 590

Rising incomes have driven up the maximum affordable price by more than 11 percent since February 2015, whereas the ATP has increased by only 0.4 percent. Increasing incomes and essentially flat prices have led to a $1,721 year-over-year gain in new-car buying power (affordable price change minus the ATP change) for median-income households.

New-car price pressure is expected to continue for the foreseeable future as competition (versus used cars and between automakers) increases and as interest rates rise. New-car affordability should continue to improve as long as U.S. economic growth is sustained.

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.

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 2016 February 530

ABAI Sources 2016 February 590 2

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