The California Buyer Purchasing Power Index (BPPI) figure decreased in December 2016 to -2.36. This negative figure tells us homebuyers are able to borrow less today than a year ago at the same income. The BPPI figure decreased as a result of an increase in year-over-year mortgage rates. FRM rates rose in the fourth quarter (Q4) of 2016 as part of the “Trump jump” that occurred due to post-election investor activity.

The Federal Reserve’s (the Fed’s) decision to increase the short-term borrowing rate in December 2016 also contributed to the sudden rate increase. Prior to Q4 2016’s rate jump, interest rates remained low in 2016 and buyer purchasing power was mostly positive due to bond market activity and near-zero short-term borrowing rates set by the Fed.

Buyer purchasing power will likely remain negative for much of 2017. Fixed rate mortgage (FRM) rates have already begun to cool slightly in January 2017, and the slow decrease is expected to continue through much of 2017 as members of the bond market cautiously adjust their economic expectations. The increase will resume going into the next economic expansion period of 2019-2021.

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 01/16/17

Dec 2016
Nov 2016Dec 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.