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Affordability Index Jumps to Record Level in May as Prices and Incomes Favor Consumers

June 28, 2017

The May 2017 Auto Buyer’s Affordability Index (ABAI) is 64.0—up 3.6 points from last month. The sharp increase was driven by a $1,261 drop in the light-vehicle average transaction price (ATP), supported by a $688 jump in the median household income (MHI). The MHI increase boosted the affordable price above $19,000 for the first time since the establishment of the index. An ABAI of 64.0 indicates that a prudent, median-income household can only afford 64.0 percent of the new-car average price.

The ATP fell in May to its lowest level ($29,826) in more than two years as prices slumped and incentives remained high. Additionally, the MHI reached a new high of $59,361. Both combined to push the ABAI up by 3.6 points—setting records for the largest monthly increase and highest index level. The index has increased 5.1 points so far this year after remaining essentially flat for most of 2016.

Buying power (affordable price change minus the ATP change) jumped $1,556 in May, increasing the cumulative buying power to $2,217 relative to January 2016. This month’s buying power increase more than doubled any previous monthly increase. (See figure below.)

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.

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

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