The purchasing power index of buyers for the first quarter of 2022 falls again into negative territory

California Buyer Purchasing Power Index (BPPI) this figure has fallen to -12.7 in March 2022. This figure tells us that a homebuyer with the same income is able to borrow 12.7% less mortgage money than a year ago , when mortgage interest rates were still near historic lows. The negative BPPI figure in the first quarter of 2022 reflects a rapidly deteriorating situation for homebuyers dependent on mortgage finance, as the BPPI had previously been positive during the period 2019-2021 due to a constant decline. mortgage interest rate.

Looking ahead, BPPI will continue to decline as interest rates continue to rise, in what has been the fastest interest rate rally since the 1990s. Already, BPPI has stumbled further no longer in negative territory at the time of this report in April 2022.

Chart updated 04/19/22

Q1 2022
Q4 2021 Q1 2021
Buyer Purchasing Power Index (BPPI)
-12.7 -5.0 +5.2

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 January 2022, average home prices in California were 19% to 22% higher than a year earlier. However, rapid increases in mortgage rates in 2022 are beginning to interfere with home prices as market momentum quickly slows. Since homebuyers are entitled to a maximum mortgage amount based on their income, any increase in mortgage rates instantly reduces the amount they can borrow. Thus, the price they pay for a house is reduced.

Absent support from lower interest rates, additional stimulus or rising incomes, home prices are expected to fall back in 2022. Home prices will still be controlled by additional inventory expected to arrive in 2022 after the moratorium on foreclosures expires in 2021.

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 their benchmark interest rate to zero and began buying mortgage-backed bonds (MBBs), fulfilling their role as lender of last resort to ensure mortgage originations continued.

In March 2022, the Fed finally raised its benchmark rate and announced that it would soon begin selling its MBB holdings.

Interest rates will continue to rise as the Fed raises its benchmark rate further in 2022-23 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, likely to strengthen towards 2024. Thus, sellers can expect downward pressure on house prices. Without the support of a full employment recovery, house prices will remain subdued in 2022, and are expected to decline by 2023.

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.

first tuesday newspaper online is a source for real estate news. It has provided analysis and forecasts for the California real estate market since 1978.

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