California Buyer Purchasing Power Index (BPPI) this figure has fallen to -26.6 in June 2022. This figure tells us that a homebuyer with the same income is able to borrow 26.6% less mortgage money than a year ago , when mortgage interest rates were still near historic lows. The significantly negative BPPI figure for Q2 2022 reflects a deterioration in the situation of homebuyers dependent on mortgage finance, as BPPI had previously been positive during the period 2019-2021 due to a constant decline mortgage interest rate.
Looking ahead, the BPPI will remain negative as interest rates continue to rise, in what has been a historic reversal in interest rates. The impact on homebuyers’ wallets has been devastating – and, like a shock wave, the impending hit to home prices is fast approaching.
Chart updated 08/07/22
||Q1 2022||Q2 2021
|Buyer Purchasing Power Index (BPPI)
As the BPPI declines, the house price support also declines. In the current environment of rising mortgage interest rates, the participation of BPPI and home buyers in the home sales market is negatively affected.
In April 2022, average home prices in California were 19% to 28% higher than a year earlier. However, homebuyers are eligible for a maximum mortgage amount based on their income and changing interest rates. So any rise in mortgage rates instantly reduces the amount they can borrow, and the price they pay for a home is reduced.
Without the support of lower interest rates, additional stimulus or rising incomes, house prices are expected to decline by 2023. Today’s rapid increases in mortgage rates have already started to interfere with the volume of home sales, as market momentum is rapidly slowing.
In some context, interest rates have reached historic lows in 2020 due to efforts to stimulate lending despite job losses and tighter access to credit. From the first quarter of 2020, the Federal Reserve (the Fed) lowered its benchmark interest rate to zero and started buying mortgage-backed bonds (MBB)fulfilling their role as lender of last resort to ensure the continuation of mortgage arrangements.
In March 2022, the Fed finally raised its benchmark rate and announced the gradual sale of its MBB holdings.
Interest rates continue to rise in 2022-23 as the Fed raises its benchmark rate further and gradually releases more MBBs into the market. In anticipation of the Fed’s bond cut, investor activity began to push rates up slightly in the third and fourth quarters of 2021, with rates surging in the first quarter of 2022.
first tuesday expects mortgage interest rates to continue to rise in the coming months, which will cause the BPPI figure to remain negative throughout 2022.
The long-term outlook for BPPI is a long period of decades descent as mortgage rates continue to rise with the economic recovery, and are expected to strengthen towards 2024. Thus, sellers can expect continued downward pressure on house prices.
As the Fed takes steps to calm inflation, steering the economy into an economic slowdown, expect the second act of the 2020 recession to arrive around 2023. The housing market will see a decline in sales volume in 2022-2024, with prices reaching their lowest around 2025. Watch for a return of property speculators to provide a boost during the coming crisis, with a sustainable recovery that takes off with the return of end-user buyers around 2026-2027.
About the BPPI
The Buyer Purchasing Power Index (BPPI) is calculated using the average 30 Year Fixed Rate Mortgage Rate (FRM) of Freddie Mac (Western region) and the median Income in California.
A positive index means buyers can borrow more money this year than a year earlier.
A negative index results in a reduction in the amount of available mortgage funds.
A zero index means that there has been no year-to-year variation in the amount a buyer can borrow with the same income. At zero BPPI, buyers cannot buy at prices higher than a year ago, unless they resort to adjustable rate mortgages (ARMs) to expand their borrowing reach or larger down payment amounts.
As the long-term trend in BPPI decreases, the ability of buyers to borrow funds for purchase assistance is reduced. In turn, buyers who need purchase assistance financing can on average only pay a lower price for a home. To keep the inventory of homes for sale at the same rate, sellers will have to lower prices to take into account the purchasing power of buyers or take their properties off the market.
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