The California Buyer Purchasing Power Index (BPPI) figure declined to +1.3 in June 2021. This positive figure tells us a homebuyer with the same income is able to borrow a slight 1.3% more today than a year ago. The BPPI figure has remained positive since 2019 as a result of consistently lower mortgage interest rates. However, this positive level has decreased consistently from the peak +13.4 BPPI figure seen at the end of Q4 2020, the result of gradually rising mortgage interest rates over the first half of 2021.

While homebuyers are able to borrow over 1.3% more today than a year earlier due to lower year-over-year interest rates, average California home prices have increased 18% from a year earlier as of April 2021. This discrepancy indicates today’s rising interest rates will inevitably check home prices. The reason: homebuyers are qualified to pay a certain monthly amount on their mortgages, and without a significant change in income or savings, interest rate movement is the biggest force exerted on the principal amount (the home price) this monthly payment allows each homebuyer to pay. Thus, lacking the support of falling interest rates, additional stimulus or income boosts, home prices are expected to fall back heading into 2022.

In 2020, interest rates descended to historic lows due to efforts to stimulate lending despite job losses and tightening access to credit. Beginning in Q1 2020, the Federal Reserve (the Fed) dropped their benchmark interest rate to zero and began purchasing mortgage-backed securities, fulfilling their role as the lender of last resort to ensure mortgage originations continued. The Fed intends to keep this rate at zero until at least 2023, thus interest rates won’t rise significantly until 2023 or later.

first tuesday expects mortgage interest rates to remain around their present level in the months ahead, causing the BPPI figure to flatten out and turn negative in the second half of 2021, a year after mortgage interest rates hit historic lows in Q4 2020.

While positive today, the long-term outlook for the BPPI is a decades’ long period of descent as mortgage rates rise when the economy starts to recover, likely to begin around 2024. Sellers can expect downward pressure on home prices in the coming months. Along with downward pressure from a negative BPPI, home prices will also feel the burden of the expiring foreclosure moratorium at the end of July 2021. The coming wave of foreclosures will drag down homebuyer enthusiasm along with prices. Without the support of a jobs recovery, home prices will remain tenuous in 2022.

Chart update 07/04/21

Jun 2021
May 2021Jun 2020
Buyer Purchasing Power Index (BPPI)

About the BPPI

The Buyer Purchasing Power Index (BPPI) is calculated using the average 30-year fixed rate mortgage (FRM) rate from Freddie Mac (Western region) and the median income in California.

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

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 can borrow with the same income. At a BPPI of zero, homebuyers cannot purchase at higher prices than one year before unless they resort to adjustable rate mortgages (ARMs) to extend their borrowing reach or greater down payment amounts.

As long-term BPPI trend declines, the capacity of buyers to borrow purchase-assist funds is reduced. In turn, buyers needing purchase-assist financing on average can only pay a lesser price for a home. To keep the inventory of homes for sale moving at the same pace, sellers will need to lower prices to accommodate buyer purchasing power or pull their properties off the market.

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.