The California Buyer Purchasing Power Index (BPPI) figure was -7.97 in December 2018. This negative figure tells us a homebuyer with the same income is able to borrow 7.97% less today than a year ago. The BPPI figure is negative as a result of higher year-over-year mortgage rates. FRM rates jumped in January 2018 and have increased steadily since then, averaging 4.55% in December 2018.

While the Federal Reserve (the Fed) continues to take action to raise short-term rates, which influence FRM rates, another obstacle comes from the Fed selling off its substantial portfolio, which includes mortgage-backed bonds. This will cause FRM rates to edge higher.

FRM rates will likely continue to increase in the first half of 2019, causing the BPPI figure to remain in negative territory as homebuyer purchasing power falls. The Fed is expected to reign in interest rate increases going into the next recession, forecasted to arrive in 2020. By then, home sales volume will have continued its decline started in 2018, with prices following this decrease in 2019. Already, lower sales volume and higher interest rates have started to pull home prices down in Q4 2018.

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 12/30/18

Dec 2018
Nov 2018 Dec 2017
Buyer Purchasing Power Index (BPPI)
-7.97 -10.16 +2.42

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.