Affordability Index Sets New Record (Again) in March as Consumers Get an Income Boost
April 19, 2017
The March 2017 Auto Buyer’s Affordability Index (ABAI) is 61.0—up 1 point from last month. This increase was driven by a $658 jump in the U.S. median household income (MHI) and supported by a $78 decrease in the U.S. light-vehicle average transaction price (ATP). The MHI increase boosted the affordable price by 1.4 percent to $18,807. An ABAI of 61.0 indicates that a prudent, median-income household can only afford 61 percent of the new-car average price.
This month’s index increase pushed the ABAI to a new high and a cumulative increase of 2.1 points—so far—this year. This increase is in stark contrast to the cumulative index performance for 2016 (+0.5 points). Both the HMI and the ATP have trended in a supportive direction in recent months. The MHI has risen $887 since January, while the ATP has retreated $805 from December’s record level.
Buying power (affordable price change minus the ATP change) rose $334 in March, boosting the cumulative buying power to $943 (relative to January 2016). This comes after a cumulative buying power low point of -$46 in December. (See figure below.)
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.