US autos: Still affordable

by SR on September 14, 2012

Auto affordability index in weeks of median US household income

New cars have seldom been more affordable

With US unemployment still at high levels, it’s natural to worry about the sustainability of the strong demand in the US for new cars we’ve been seeing in 2012 (see this post for a summary of August sales). Unemployment must be exerting drag on the economy, but something that is helping auto sales is affordability. Comerica has for many years compiled an “auto affordability index” that estimates the average transaction price of a new auto and calculates how many weeks of US median household income would be required to buy such a car. The figure for the June 2012 quarter was announced on 13 September 2012.

What strikes me about the chart above is how cheap cars are compared to 2005-2007 let alone the early part of the last decade. This is presumably due to lower financing costs. During the depths of the global financial crisis of 2008-2009, the index fell to 22.0 weeks of income as auto OEMs tried to shift product. In the June 2012 quarter we were still a little above that at 22.9, but when viewed in a historical context, that’s pretty inexpensive. In fact, over the past 30 years there have been only 6 quarters when then index has been less than 23 weeks of income, and the June 2012 quarter was one of them.

Despite the stock’s solid performance so far in 2012, Toyota still looks like the right auto stock to own in Japan. It has some good product globally, it has plans for launches in China, it has momentum in the US and is taking market share there. Confirmation that autos are easy to buy in the US adds support to our investment thesis.

Share prices of Japanese OEMs and the Topix market index

Auto loans getting easier, even subprime recovering

One obvious question is how US households on tight budgets can actually afford cars, which really means how can they get credit. The answer is that credit is freely available and lenders are becoming more aggressive, as widely noted in the US auto trade press. Experian Automotive estimates that average credit score on new car loans in the June 2012 quarter was 760, compared to 766 for the same quarter in 2011 and 776 for the same quarter in 2010. At the same time, delinquencies on auto loans for the quarter were down year-on-year for the tenth consecutive quarter and remain at record low levels.

Subprime loans (those where the borrower has a credit score of less than 680) are also rising at a healthy rate, with Experian Automotive concluding that in the June 2012 quarter loans to subprime customers rose by 14% year-on-year. However, these customers are typically buying used cars, not new cars, so the main impact of rising subprime loans should be to allow more people to buy used cars, keeping prices high and narrowing the gap between “nearly new” used vehicles and new cars.

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