The Auto Affordability Roadblock

by Jim Woods | March 4, 2013 6:00 am

February U.S. auto sales figures are out, and the data shows that consumers are driving more new cars and trucks off the lot than they did a year ago.

American powerhouse Ford (NYSE:F[1]) saw a 9.3% sales increase during the month (year over year), while General Motors (NYSE:GM[2]) experienced a 7.2% sales boost. Chrysler Group saw a more modest 4.1% sales jump during the month. Japanese auto giant Toyota (NYSE:TM[3]) also saw a sales gain, with a 4.3% rise in the U.S. market, while German auto giant Volkswagen (PINK:VLKAY[4]) said its namesake brand had a U.S. sales increase of 2.9%.

Now, even though sales climbed year over year during February, the pace of growth was actually slower than last year’s. So, what’s the probable reason for the slowdown?

Well, some speculate that the economic uncertainty is to blame. Higher taxes, looming federal budget cuts from the so-called sequestration in Washington, and a general sense that the economy is actually slowing down could be responsible for the slower pace of new auto sales. And while I suspect all of these reasons have contributed to the slowing pace of sales growth, another probable reason is that new cars just cost too much.

Lending support to the “lack of availability” thesis is a recent study showing that medium-income families in all but one major city can’t actually afford to buy the average new car[5].

According to the 2013 Car Affordability Study by, the average cost of a new car in 2012 was $30,550 — well above the calculation of affordability in 24 of the top 25 U.S. auto markets.

The calculation of affordability is based primarily on three factors, commonly known in the auto industry as the “20/4/10” rule. This metric assumes a down payment of at least 20%; auto financing lasting no longer than four years; and principal, interest and insurance not exceeding 10% of a household’s gross income. Based on this measure, only residents in Washington, D.C. — where the median income is nearly $87,000 per annum — can actually afford to buy a $30,550 new vehicle.

Residents of San Francisco, which boasts a median income of just under $72,000, can only afford to buy a new vehicle costing $26,786, while Bostonians with a medium-income of $69,455, can realistically afford a new car costing just $26,025.

The affordability study really gets dicey for automakers in the lower tier of medium-income cities. For example, Detroit’s median income of $48,968 translates into an affordability index factor of just $17,093, or little more than half of the cost of the average new car. (Ironic, considering Detroit is the “Motor City.”) Further south are two Florida cities at the bottom of the list. Miami residents, with a median income of $45,407, can only afford a new car costing $15,188, while Tampa residents at a median income of $43,832 have the lowest affordability metric of just $14,516.

The affordability index is just one measure of how new cars are out of the price range of many consumers, and it’s a measure that has become a growing source of concern for automakers.

To make new vehicles more appealing to buyers, car manufacturers are putting in a host of high-price features such as power windows, dual airbags, air conditioning and a host of digital information and entertainment options. In the past, many of these features could only be found on high-end autos. Now, they come at increased costs to the manufacturer that gets passed on to the consumer.

I suspect that if the affordability issue continues to get worse for consumers, automakers will respond by offering more stripped-down, affordable models. The company that can do that most successfully will, in my opinion, be in the driver’s seat to control the low-priced new car segment.

Traditionally, Toyota has been outstanding at offering quality vehicles at a low price, but Ford also has proven a nimble player in this segment.

The bottom line here is that, in order to continue increasing sales, automakers are going to have to make their cars accessible to the average auto buyer — and that means more offerings of quality vehicles at an affordable price.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

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  5. can’t actually afford to buy the average new car:

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