New Title Header Black r1 c
Print Print

New-Car Affordability Down Slightly in July, But Upward Trend is Largely Undiminished

August 12, 2015

The Auto Buyer’s Affordability Index (ABAI) decreased to 57.0 in July 2015, a reduction of less than 1 percent from the June value (57.4). The U.S. median household income (MHI) decreased by $60 and the average transaction price (ATP) increased by $110—both contributing to the ABAI decrease. As a result, median-income shoppers lost $153 of buying power in July (the maximum affordable price change minus the ATP change). However, the upward ABAI trend—up more than 11 percent since December 2014—was largely undiminished by July’s decrease.

ABAI Data Items July 2015

Affordability Trend July 2015 600This year’s trend of improving affordability has been enabled by moderating new-car prices. Prices should continue to moderate throughout the rest of the year and into 2016 as automakers compete in an environment of waning sales growth. The growth rate is expected to fall by 70 percent between 2014 and 2016 based on the latest National Automobile Dealers Association (NADA) forecast (2015: 17.17, 2016: 17.46).

Sales by Year as of August 2015

New-car affordability should continue to improve into 2016 as long as U.S. economic growth continues. However, regardless of the state of overall affordability, new-car buyers can preserve their own financial health by making sure the purchase is affordable. Requisite Press recommends that consumers use a rule of thumb, such as 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.

ABAI Sources

ABAI Data Sources July 2015