Weaker New-Car Prices Could Signal End to 35-Year Price Premium, Requisite Press Reports
LOS ANGELES, Nov. 12, 2014 /PRNewswire/ -- Requisite Press, LLC reported today an October 2014 Auto Buyer's Affordability Index (ABAI) of 54.1, indicating that a prudent, median-income household can only afford 54.1 percent of the new-car average price. New-car sales and transaction prices have largely recovered since the Great Recession. However, transaction prices have recently begun to weaken under ideal conditions for strength. This may indicate the end to 35 years of prices outpacing incomes -- a premium the American consumer can no longer afford. New-car affordability is likely to improve in the near-term if the current rate of income growth continues.
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U.S. light vehicle sales and average transaction prices have made significant gains since the depths of the Great Recession. However, a closer look at the data since 2011*, well after the initial price recovery, shows a slowdown in the rate of price increase, potentially leading to a decrease for 2014.
New-car prices are weakening under ideal conditions for price strength. Auto loan interest rates are near record lows. Consumers have maximized spending by extending loan terms and by choosing leasing instead of buying--both at record levels this year.
These supportive conditions will not last forever. Interest rates will go up from current low levels. Financing risk is growing, and credit will tighten as post-recession risk limits are reached, reducing consumer spending. The increasing used-car supply will put downward pressure on new-car prices.
The current price trend, taken in context of historical data (1970 – present), may signal the end of 35 years of prices out pacing incomes that began in 1980. With the U.S. personal savings rate down nearly 50% over the same period, combined with a wave of baby-boomer retirements and the financial challenges of millennials, the American consumer may no longer be able afford the new-car price premium.
"New-car affordability is likely to improve in the coming days if we can avoid an income slowdown," said Phil Kelton (@Phil_Kelton), president of Requisite Press. "The selection of affordable models is best increased by competition, but a sustained improvement in affordability will certainly give it a boost."
Requisite Press recommends that consumers maximize their buying power with nonnegotiable competition at every step in the car buying process—sales price, trade-in, financing, and add-ons—and preserve financial security by follow the 20-4-10 auto financing rule.
The October ABAI of 54.1 is based on a median household income of $54,457 a light-vehicle average transaction price of $30,382, and adherence to the 20-4-10 auto financing rule. This equates to an affordable monthly payment of $324 and price of $16,448.
The monthly ABAI was developed to enable buyers to easily view current new-car prices in the context of sound financial advice. 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. The rule is widely recommended by personal finance experts to maintain financial security, avoid excessive interest costs, and preserve future investment opportunities.
For additional information:
http://www.requisitepress.com/ABAI
*New-car average expenditure data from the U.S. Bureau of Economic Analysis.
Requisite Press, LLC was founded in 2012 to publish select expert information with great potential for consumer quality-of-life improvement. In addition to the monthly Auto Buyer's Affordability Index, Requisite Press, LLC also provides AffordCheck (SM), an online 20-4-10 rule calculator, and produces the Auto Buyer's Edge YouTube channel.
Contact:
Phil Kelton
@Phil_Kelton
Email
310-896-2302
SOURCE Requisite Press, LLC
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