New-Car Affordability Inches Up in March as Prices Take a Hit
April 13, 2016
The Auto Buyer’s Affordability Index (ABAI) rose to 59.3 in March, up one tenth of a point since February. The U.S. median household income (MHI) decreased slightly, resulting in a $57 decrease in the maximum affordable price. However, the affordable price decrease was outpaced by a $145 drop in the light-vehicle average transaction price (ATP). An ABAI of 59.3 indicates that a prudent, median-income household can only afford 59.3 percent of the new-car average price.
The ABAI has consistently trended up since January 2015 as a result of a rising MHI and a flat-to-falling ATP (see figure below). The ATP has remained below the January 2015 reference point except for a $14 December 2015 excursion. This month’s ATP is $690 below the January 2015 value and marks the third consecutive drop since December.
Median-income households gained $88 of buying power this month (affordable price change minus the ATP change), even as the MHI decreased. Buying power is up $2,484 since the start of 2015. Both the HMI (+$1,794) and the ATP (-690) have moved in supportive directions (see figure below).
New-Car Prices Remain Under Pressure
New-car prices continue to be weighed down by market conditions. Incentives are on the rise as automakers compete for a share of waning auto sales growth. Moderating used-car prices continue to entice potential new-car buyers. Auto financing, on the other hand, remains supportive—for now.
The National Automobile Dealers Association (NADA) forecasts 17.7 million new-car sales this year, a 1.3 percent increase over 2015 (see figure below). However, this represents a nearly 80% drop in the growth rate from 2014 to 2015 (6.3 percent). The March seasonally adjusted sales rate (SAAR) fell to 16.5 million units—the lowest since February 2015 and below 17 million for the first time since last April (Wards Auto). NADA expects auto sales to peak in 2016 and then fall to 17.2 million in 2017.
Wholesale used-car prices fell in February breaking a 20-year streak of increases, according to the NADA Used Car Guide. Auction volume of 2014 and 2015 models increased by an average of roughly 20% from January to February—a four times greater like-model age increase compared to the prior two years. With new-car buyers choosing leasing at increasing rates (an all-time high of 28.9 percent, 2015 4th quarter, Experian Automotive) that trend is likely to continue for the foreseeable future.
Auto financing has been supportive of new-car pricing in recent years as interest rates have remained low and lending standards have eased. As a result, average loan amount, monthly payment, and loan duration have all reached record levels. Average credit scores have slipped to pre-recession levels. The financing environment should continue to be supportive in the near term; however, some warning signs can be seen. 60-day delinquencies are on the rise in both percentage of units and dollars, according to Experian Automotive. Fitch Ratings reported that January U.S. subprime auto asset-backed security (ABS) delinquencies reached a level not seen since 2009.
New-Car Affordability Should Continue to Improve
Given the state of new-car pricing, 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.