New-Car Affordability Idles, Even as Incentives Rise to Record Levels
November 17, 2016
The October 2016 Auto Buyer’s Affordability Index (ABAI) is 59.1—up from 59.0 in September. An incremental increase in the light-vehicle average transaction price (ATP) (0.29 percent) was marginally outpaced by gains in the affordable price (0.43 percent) as the median household income (MHI) rose by $236. An ABAI of 59.1 indicates that a prudent, median-income household can only afford 59.1 percent of the new-car average price.
After rising rapidly in 2015, the index has stalled at around 59 for most of 2016. This is primarily due to a slowdown in MHI growth—up only $795 since January. By comparison, the MHI rose $1,862 over the same period last year. Fortunately for median-income car buyers, prices have continued to be relatively flat due to ongoing market pressures.
Buying power (affordable price change minus the ATP change) decreased $11 in October, further eroding gains of the last year and a half. Buying power has increased by only $264 since January. However, median-income consumers still retain $2,267 of the buying power accumulated since January 2015. (See figure below.)
New Car Prices Remain Under Pressure
New-car prices continue to be pressured by plateauing new-car sales and increasing late-model used-car supply. However, an ongoing, supportive auto finance environment provides some relief to auto makers.
New-car sales forecasts universally predict, at best, a minimal increase this year—the smallest gain since the great recession. Through October, year-to-date sales are down by nearly 40,000 units compared to 2015. This comes after six years of growth in excess of 5 percent. With little overall growth to be had, automakers continue to increase incentives (16 percent YOY in October) in a push for sales growth and additional market share.
Earlier this year, NADA Used Car Guide indicated that a significant increase in the supply of nearly new vehicles (+800,000) would likely lead to a decline in used car prices. Accordingly, the RVI Used Vehicle Price Index (Real) decreased by 0.5 percent in September, and is down by 4.3 percent year-over-year. Moderating used-car prices are now enticing potential new-car buyers, putting additional pressure on new-car prices.
Fortunately for automakers, a favorable auto financing environment continues to mute the effects of price pressure—for now. The average monthly payment amount, loan term, and loan amount remain at record highs, and interest rates continue at record lows. However, some warning signs exist. For example, according to Transunion’s Q3 2016 Industry Insights Review, the vintage year cumulative 60 day or more auto loan delinquency rate has once again increased at a faster pace in successive years (2015 vs. 2014). This trend, largely driven by non-prime originations, has continued every year since 2010.
Informed Car Buyers, Buy Cars Better
Given the current state of new-car pricing, income growth should lead to an improvement in affordability. However, the current U.S. economic outlook is mixed, so the potential for a near-term increase in incomes is uncertain.
Regardless of the state of overall affordability, each new-car buyer can significantly improve the affordability of her own purchase through robust dealer competition. Given the right strategy, competition can be achieved without the typical hassle.
The strategy for success is quite simple and is easy for any new-car buyer to implement—regardless of income level.
First, prepare to make an immediate purchase. Immediate buyers are hot prospects and quick sales for dealers and represent maximum potential value.
Next, directly contact multiple dealers and request best-price, nonnegotiable quotes—you’ll ensure robust competition and eliminate the hassle of back-and-forth negotiation.
Finally, select the winning quote, but retain competing quotes until the purchase is final. Dealers are more likely to provide an improved car-buying experience when they know you have alternatives.
Requisite Press has detailed this simple strategy, along with instruction and rational 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.