New-Car Affordability Pressured By Income and Price Changes
August 16, 2017
The July 2017 Auto Buyer’s Affordability Index (ABAI) is 59.4, down 2.3 points from last month. This month’s decrease was driven by a $1,088 drop in the median household income (MHI) estimate (see Note 1), and supported by a $264 increase in the light-vehicle average transaction price (ATP). An ABAI of 59.4 indicates that a prudent, median-income household can only afford 59.4 percent of the new-car average price.
The ABAI has retreated from previous highs and now registers only a 0.5 point gain since the first of the year. Both the MHI and ATP data have been marked by large month-to-month changes in recent months, making the current ABAI trend difficult to ascertain. Some of these jumps are due to data source changes (see Note 1), whereas others may be due to a noisy estimate (e.g. May 2017 ATP). Future ABAI data should better reflect the actual trend for 2017.
Preserving Personal Affordability
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. Shoppers 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 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.
Note 1. Sentier Research ended publication of the U.S. Median Household Income (MHI) calculation as of the June 22, 2017 (May 2017 HMI) release. The July ABAI is based on an MHI estimate by Political Calculations. See http://politicalcalculations.blogspot.com/2017/08/june-2017-median-household-income.html for more information regarding their methodology.Print