New-Car Prices Outpaced (Again) By Improving Median Income
November 18, 2015
The light-vehicle average transaction (ATP) rose $279 to $30,919 in October, but was outpaced by a $485 jump in the U.S. median household income (MHI). As a result, the October Auto Buyer’s Affordability Index (ABAI) rose to 58.1 from the September value of 58.0. An ABAI of 58.1 indicates that a prudent, median-income household can only afford 58.1 percent of the new-car average price.
While affordability (a ratio of the affordable price to the average price) increased in October, buying power (the affordable price change minus the ATP change) decreased by $80 reflecting the larger magnitude ATP increase ($279 vs. $199). However, buying power has increased nearly $2,500 since the December 2014 price spike. Relative to December, both the affordable price (a function of income, insurance, interest rate, and sales tax rate) and the ATP have moved in supportive directions.
Pressure on new car prices is anticipated to continue as competition (versus used cars and between automakers) increases and as interest rates rise. New-car affordability should continue to improve into 2016 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.