No Progress in January, but New-Car Affordability has a Promising Future
February 15, 2017
The January 2017 Auto Buyer’s Affordability Index (ABAI) is 58.9—unchanged from last month. The light-vehicle average transaction price (ATP) decreased by 1 percent ($303) to $31,333 in January. However, the median household income (MHI) also decreased, leading to an offsetting 1 percent ($177) reduction in the affordable price. An ABAI of 58.9 indicates that a prudent, median-income household can only afford 58.9 percent of the new-car average price.
This is the third consecutive month with an index value of 58.9, and the twelfth consecutive month (beginning February 2016) the index has remained within a 0.4 point range (58.9 to 59.3). By comparison, the index increased by more than 5 points in 2015. The MHI made significant gains during the latter part of 2016, but affordability gains were absent as the ATP rose in lockstep. Both the MHI and ATP retreated this month from the 2016 highs reached in December.
Buying power (affordable price change minus the ATP change) increased $126 in January after decreasing $75 last month. Buying power has increased by only $80 year-over year. By comparison, buying power increased by more than $2000 in 2015.
New-car affordability shows promise of improvement in 2017. Potential wage gains should lead to an increasing MHI, and pricing pressures should limit ATP increases. However, significant uncertainty remains as the new presidential administration rolls out policy changes.
The MHI ended 2016 on an upward trend and that trend could continue this year. In testimony before the Senate Banking Committee on February 14, 2017, Fed Chair Janet Yellen indicated that wages should continue growing in 2017 and could increase at a faster rate than in 2016. If wages grow as forecast, the MHI is likely to see gains.
The ATP hit an all-time high of $31,636 in December, but price growth was slow throughout 2016. The January 2017 year-over-year ATP increase is only 0.5 percent. New-car prices should remained under pressure in 2017 as sales growth remains flat and off-lease volumes continue increasing. Automaker actions, such as Fiat Chrysler’s dealership expansion, as reported by Automotive News, could further increase pricing pressure.
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.