Press Release: Buyers’ Purchasing Power Index in Q3 2021 hits zero as interest rates rebound from bottom


California Buyer purchasing power index (BPPI) figure fell to zero in September 2021. This figure tells us that a home buyer with the same income is able to borrow the same amount of mortgage money as a year ago, when mortgage interest rates were roughly at the same level as today’s rates. While not yet negative, the neutral BPPI figure for Q3 2021 reflects a worsening situation for homebuyers reliant on mortgage financing as the BPPI was previously positive due to a steady decline. mortgage interest rate since 2019. Going forward, the BPPI will decline as interest rates inevitably rise.

Graphical update 01/10/21

Q3 2021
Q2 2021 Q3 2020
Buyer purchasing power index (BPPI)
0.0 +1.3 +10.6

As the BPPI declines, home price support will also decrease. In July 2021, average home prices in California rose 21% to 24% from the previous year. This spread indicates that today’s interest rate hike will inevitably hold back home prices. The reason: Homebuyers are qualified to pay a certain monthly amount on their mortgages, and without a significant change in their income or savings, the movement of interest rates is the greatest force on the market. the principal amount (the price of housing) this monthly payment allows each purchaser to pay.

Thus, in the absence of support from lower interest rates, additional stimulus or increased incomes, house prices are expected to fall back by 2022. House prices will still be controlled by the additional inventory which is expected to arrive in the fourth quarter of 2021 after the expiration of the moratorium on foreclosures.

Associated page:

Moratorium watch 2021

Interest rates are reported to have fallen to historic lows in 2020 due to efforts to boost 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 (MBBs), fulfilling its role as lender of last resort to ensure the continuation of mortgages. The Fed intends to keep this rate at zero until at least 2023, so interest rates will not rise. significantly until 2023 or later. However, interest rates will continue to rise as the Fed begins to reduce its obligations, gradually decreasing its purchases of MBBs and allowing rates to rise. In anticipation of this fall in bonds, investor activity has already started to push rates higher at the end of the third quarter of 2021.

first tuesday expects mortgage interest rates to rise slightly in the coming months, which will cause the BPPI figure to turn negative in the fourth quarter of 2021, a year after mortgage interest rates hit historic lows in Canada. fourth quarter 2020.

The long term outlook for BPPI is a long period of decades descent as mortgage rates continue to rise with the economic recovery, which is likely to strengthen around 2024. Thus, sellers can expect downward pressure on house prices. Without the support of a full recovery in employment, house prices will remain fragile in 2022.

About BPPI

The Purchasing power index of buyers (BPPI) is calculated using the average 30-year fixed rate mortgage rate (FRM) by Freddie Mac (Western region) and the median Income in California.

A positive index number means buyers can borrow more money this year than a year ago.

A negative index results in a reduced amount of mortgage funds available.

a zero index means there has been no year-over-year change in the amount a buyer can borrow with the same income. At zero BPPI, homebuyers cannot buy at higher prices than a year ago, unless they resort to Variable Rate Mortgages (ARM) to extend their borrowing scope or higher down payment amounts.

As the long-term trend of BPPI decreases, the ability of buyers to borrow purchase assistance funds is reduced. In turn, buyers who need purchase assistance financing on average can only pay a lower price for a home. To keep the inventory of homes for sale at the same rate, sellers will need to lower prices to account for the purchasing power of buyers or withdraw their properties from the market.

first Tuesday newspaper online is a source of real estate news. It has been providing analysis and forecasting for the California real estate market since 1978.

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