The California buyer purchasing power index (BPPI) increased slightly to -9.23 in August 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.

August’s dip represents a year-over-year decrease of 9.23% in mortgage funds available to today’s buyers. This is up slightly from -10.33 in July and down from +8.86 one year ago, when BPPI was near its peak.

The sudden drop is due to the recent steep rise in mortgage rates, which have likely topped out for the year. Buyer purchasing power is down a further 28% for buyers of low-tier homes, 20% for mid-tier homes and 18% for buyers of high-tier homes due to a 12-month rise in home prices. Pricing conditions are temporarily positive for sellers since the upward home price momentum will persist a few more months due to 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.

In 2015, the BPPI will continue on a decades’ long period of negative descent which began prematurely this June, as long-term rates rise consistent with renewed growth in our dynamic economy. Sellers will continue to experience downward pressure on prices, as buyers will be able to borrow less over the coming decades with the same income.

BPI

Chart update 08/31/13

Aug 2013
Jul 2013 Aug 2012
Buyer purchasing power index (BPPI)
-9.23 -10.33 +8.86

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 was no year-over-year change in the amount a buyer was able to 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 higher down payments.

To keep the homes-for-sale inventory moving at the same pace, sellers will have to lower prices or pull their properties off the market. Approximately 0.45% of California’s 6.8 million inventory of owner-occupied SFRs are listed for sale each month.

As the BPPI’s current trend is declining, the capacity of buyers to borrow purchase-assist funds is reduced. In turn, buyers needing purchase-assist financing can only pay a lesser price for a home.

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.