January New-Car Shoppers Regain a Portion of Lost Buying Power as Prices Decrease
February 17, 2016
The Auto Buyer’s Affordability Index (ABAI) increased to 58.4 in January, recovering a portion of the ground lost in December. December’s index was 57.9, down from a high of 59.0 in November. The January ABAI increase was largely driven by a $185 decrease in the light-vehicle average transaction price (ATP). An ABAI of 58.4 indicates that a prudent, median-income household can only afford 58.4 percent of the new-car average price.
Consumers have made considerable gains over the last year (January 2015 ABAI: 52.3) as reflected in a new-car buying power increase of $2,003 (affordable price change minus the ATP change). This increase is largely due to income gains pushing up the maximum affordable price while new-car prices remained essentially flat. This month’s maximum affordable price (see ABAI Methodology below) is $18,213, an increase of $1,832 YOY.
Continued pressure on new-car prices is expected as competition (versus used cars and between automakers) increases and as interest rates rise. New-car 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.