Affordability has been an important issue for housing for a decade now. When I left real estate and joined Cox Automotive in early 2017, affordability was becoming a worry in the auto market as well. In my nearly four years following the auto industry, I’ve watched transaction prices climb relentlessly and just last month hit an all-time high. We’re now within reach of $40,000 being the reality for the average new-vehicle buyer.
The need for an affordability index has increased in recent years. Big leaps in transaction prices have caused many industry experts – including my team at Cox Automotive – to predict a shift away from the new-vehicle market and into used. There has been movement in that direction indeed, particularly seen in the strength of certified pre-owned vehicle sales, but the industry has hardly experienced the drastic shift many had expected. Such a misinterpretation can be partially attributed to a lack of visibility into consumer spending power from income and interest rate changes relative to the movement of new-vehicle prices. Incentives also play an important role.
That is why I am encouraged by the launch of the Cox Automotive/Moody’s Analytics Vehicle Affordability Index (VAI), a new monthly measure that will provide a deeper, more revealing look at vehicle affordability. On the Moody’s Analytics’ website, we’ve posted an in-depth explanation of the unique data sources we’re using to calculate the ability of a household earning the median income to afford an average-priced new vehicle.
Looking at eight years of data in the VAI, some might be surprised to see that affordability has in fact been improving since 2012, as vehicle price inflation has been offset by strong economic expansion, rising wages, low interest rates and growing incentive spend. And that may partially explain five straight years of 17-million-plus vehicle sales in the U.S. (2015-2019), including some record highs. Even in the pit of a pandemic this past spring vehicles were more affordable than ever, although for all the wrong reasons – a point more than explained by the Cox Automotive/Moody’s Analytics Vehicle Affordability Index.
When we begin to move beyond the COVID-19 crisis, affordability will continue to be a core metric for the auto industry. There will be significant headwinds for the consumer, as the drive for new and better technology will keep vehicle prices rising while wages will likely stay depressed due to high and ongoing unemployment. When it comes to new-vehicle affordability, the key factor will be the strength and breadth of the economic recovery: Will it reach a broad swath of household finances? If not, a new-vehicle purchase will remain a distant dream for many American households.
The Cox Automotive/Moody’s Analytics Vehicle Affordability Index incorporates a great new data set that will allow us to track these developments monthly, helping auto industry participants – and consumers – understand what is happening and make the best decisions possible going forward.