The California Buyer Purchasing Power Index (BPPI) figure increased in September 2016 to 6.37. This positive figure tells us homebuyers are able to borrow more today than a year ago at the same income. The BPPI figure increased as a result of a drop in year-over-year mortgage rates. FRM rates remain low due to the present lack of investment opportunities for the excess sums in bonds and on deposit with the Federal Reserve (the Fed).

As the rate of return on Treasuries fell due to rising foreign demand, mortgage rates followed a similar downward trajectory. At the same time, mortgage lenders let their margins increase rather than passing on the Treasury rate reductions to homebuyers, which dramatically increases lender profits.

There is a coming headwind to slipping mortgage rates: In December 2015, the Fed acted to raise short-term rates. For now, FRM rates will remain low for several months and likely begin to increase in 2017 following a second Fed-induced increase. The BPPI figure will go negative again as homebuyer purchasing power falls. Expect sales volume to continue its year-long decline, moved along by any mortgage rate rise, with prices following 9-12 months later.

The long-term outlook for the BPPI is a decades’ long period of descent as mortgage rates rise with renewed growth in our economy as it recovers from the Great Recession. Sellers can expect downward pressure on home prices in the coming years, as buyers are limited to borrowing less over the coming decades with the same income.

Chart update 10/05/16

Sep 2016
Aug 2016Sep 2015
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.

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 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.