The California buyer purchasing power index (BPPI) figure rose slightly to -11.44 in January 2014. first tuesday forecasts the BPPI is to remain negative through mid-2014, when it is likely return to zero due to relatively level interest rates. Rates are expected to rise again in 2015 once the Mortgage-Backed Bond market and the Federal Reserve (the Fed) begin to raise the fixed and adjustable mortgage rates (FRMs and ARMs) in reaction to the jobs recovery.

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.

The January 2014 index figure represents a year-over-year decrease of 11.44% in mortgage funds available to today’s buyers. This is up from -12.53 in December and down from +6.37 one year ago, when BPPI was near its height.

The drop experienced during the second half of 2013 was due to the steep rise in mortgage rates which continue to linger today. The average 30-year FRM rate remained a percentage point higher in January 2014 than one year earlier.

Buyer purchasing power is down a further 32% for buyers of low-tier homes, 24% for buyers of mid-tier homes and 19% for buyers of high-tier homes due to a 16-month rise in home prices. However, prices have begun to level off, particularly among high-tier home sales.

Once 2014 price reports come in, we will see pricing 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 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.

Chart update 1/30/14

Jan 2014
Dec 2013Jan 2013
Buyer purchasing power index (BPI)

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 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 greater down payment amounts.

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. Around 0.5% of California’s 6.8 million owner-occupied SFR inventory are listed for sale monthly.

As BPPI declines in the current trend, 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.