The California buyer purchasing power index (BPPI) plunged to -10.33 in July 2013. first tuesday forecasts the BPPI will remain negative through mid-2014, when it will likely return to zero, stopping a year-long loss of buyer purchasing power.

A negative index figure translates to a reduced amount of mortgage funds available. The BPPI is calculated using the average 30-year fixed rate mortgage (FRM) rate from Freddie Mac (Western region) and the median income in California.

June’s dip represents a year-over-year decrease of 10.33% in mortgage funds available to today’s buyers. This is down from -5.91 in June and from +14.15 one year ago, when BPPI was at its highest.

The sudden drop is due to the recent steep rise in mortgage rates, which have likely passed their peak for this year. Further, due to a 12-month rise in home prices, buyer purchasing power is:

  • down 27% for buyers purchasing low-tier homes;
  • down 21% for buyers purchasing mid-tier homes; and
  • down 17% for buyers purchasing high-tier homes.

Thus, pricing conditions are temporarily positive for sellers. The upward home price momentum will persist a few more months, fueled by buyer expectations.

By the end of 2013, pricing will trend flat or down, a result of reduced purchasing power, price increases beyond the rate of consumer inflation (payrolls) and waning market participation by buyer occupants. To keep the home sales at the same pace, sellers will have to lower prices or pull their properties off the market. Around 0.25% of California’s 6.8 million owner-occupied SFR inventory are listed for sale monthly.

In 2015, the BPPI will descend below zero again, as long-term rates rise consistent with renewed growth in our dynamic economy. Sellers will experience downward pressure on prices, as buyers will be able to borrow less over the coming decades, with the same income.

BPI

Chart update 07/31/13

July 2013
June 2013 July 2012
Buyer purchasing power index (BPPI)
-10.33 -5.91 +14.95

About the BPPI

A positive index number means buyers can borrow more money this year than one year earlier.

A negative index figure translates to a reduced amount of mortgage funds available.

An index of zero means there is no year-over-year change in the amount a buyer can borrow. At a BPPI of zero, homebuyers cannot purchase at higher prices than one year before unless they resort to adjustable rate mortgages (ARMs) or have higher down payments.

first tuesday journal online is a real estate news source. It provides analyses and forecasts for the California real estate market, and has done so since 1978.