In November, new cars became more affordable for Americans than they have been in the past two years. Thanks to increasing incomes and higher discounts, the average price increase of new cars has become inconsequential.
Understanding the Affordability Index
The Cox Automotive/Moody’s Analytics Vehicle Affordability Index may sound like something only economists would care about. However, we believe it's the best indicator to gauge the cost of cars for the average American.
The index measures the amount of time an average earner would need to work in order to pay off a new car. Since most people cannot afford to buy a car outright, they rely on loans to finance their purchases. When cars become relatively cheaper, less of your working life is spent on financing your basic transportation needs.
Current Trends in Car Affordability
The index, which is a product of Kelley Blue Book parent company Cox Automotive, remained stable between 33 and 36 weeks for a significant part of the last decade. However, the COVID-19 pandemic disrupted the math behind car ownership and caused a peak of 44 weeks in December of last year.
Fortunately, recent data shows improvement with the index dropping to just 38.5 weeks in the past month. While it will take time to fully recover, the overall trend is promising.
Lower Interest Rates and Increased Incentives
For three consecutive months, 2023 new car prices have remained below those of 2022. Additionally, lenders are responding to this affordability shift by lowering their previously sky-high interest rates. Currently, the average new car loan rate has decreased from almost 10% in October to 9.6%. Similarly, the average used car loan rate has dropped from its mid-November peak of 14.4% to 14%.
Moreover, automakers have ramped up their incentives to entice buyers into their dealerships.
Rise in Median Incomes
The November data also reveals a 0.3% increase in median incomes. With Americans earning more, witnessing lower new car prices, and spending less on borrowing money, the overall affordability of new cars has significantly improved.
Monthly Payments and Affordability
As a result of these positive changes, the estimated typical monthly payment has experienced a slight decline of 0.1%, reaching $766 compared to October's figure of $767. It's worth noting that the average monthly payment had reached its peak at $796 in December 2022.