The California Buyer Purchasing Power Index (BPPI) figure was +13.4 in December 2020, the highest level since 2012. This positive figure tells us a homebuyer with the same income is able to borrow 13.4% more today than a year ago. The BPPI figure has remained positive throughout 2019-2020 as a result of consistently declining mortgage interest rates.

While homebuyers are able to borrow over 13% more today than a year earlier due to lower interest rates, average California home prices have increased roughly 8% from a year earlier as of September 2020. This discrepancy indicates demand has decreased in 2020, as sellers have been unable to take full advantage of buyers’ increased purchasing power.

Interest rates have 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 continue. As a result, interest rates will remain near today’s historic lows in 2021-2022.

first tuesday expects mortgage interest rates to remain at or below their present low level in the months ahead, causing the BPPI figure to remain positive through much of 2021, eventually flattening out once interest rates find a bottom. As we make our way through the 2020 recession, home sales volume will continue to decline, with prices following.

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 in 2023. Sellers can expect downward pressure on home prices in the coming months. First, with the expiration of the foreclosure moratorium, the coming wave of foreclosures will drag down homebuyer enthusiasm along with prices. Then, when interest rates begin to rise in 2023, home price growth will be dampened due to decreased buyer purchasing power.

Chart update 01/01/21

Dec 2020
Nov 2020 Dec 2019
Buyer Purchasing Power Index (BPPI)
+13.4 +12.0 +11.4

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.