California Buyer Purchasing Power Index (BPPI) Falls to New Low in Q2 2022

The California Buyer Purchasing Power Index (BPPI) figure declined to -26.6 in June 2022. This figure tells us 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. Q2 2022’s significantly negative BPPI figure reflects a worsening situation for homebuyers reliant on mortgage financing, as the BPPI had previously been in the positive during 2019-2021 due to consistently lower mortgage interest rates.

In the coming years, the BPPI will remain negative as interest rates continue to rise, in what has been an historic turnaround for interest rates. The impact to homebuyer’s wallets has been devastating — and, like a shockwave, the impending blow to home prices is fast approaching.

As the BPPI declines, so goes support for home prices. In today’s rising mortgage interest rate environment, both the BPPI and homebuyer participation in the home sales market are adversely affected.

As of April 2022, average California home prices are 19%-to-28% higher than one year earlier. However, homebuyers qualify for a maximum mortgage amount based on their incomes and shifting interest rates. Thus, any rise in mortgage rates instantly cuts the amount they can borrow, and the price they pay for a home is reduced.

Without the support of falling interest rates, additional stimulus or income boosts, home prices are expected to fall back heading into 2023. Today’s rapid mortgage rate increases have already begun to interfere with home sales volume, as market momentum is swiftly cooling.

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.