Buyer purchasing power determines home prices — always

The driving force in real estate pricing

Buyer purchasing power is the driving force behind real estate pricing.

On one side of the pricing scale sits the buyer with some down payment money. On the other is the seller with a property. Between them sits the all-powerful lender with funds necessary to close the transaction. As with a seesaw, the lender’s mortgage rate moves the pricing up and down.

Buyer Purchasing Power Index (BPPI). This index measures the year-over-year change in the amount of mortgage money available to a buyer based on average gross income. It varies based on the interest rate charged for a 30-year fixed rate mortgage (FRM).

An index number of zero translates to no year-over-year change in the amount a buyer can borrow. A positive index number, say 5, means the buyer can borrow 5% more money this year than one year earlier. The index is based on today’s incomes.

Finally, a negative index number translates to a reduced amount of mortgage funds available to a buyer compared to one year earlier.

At the end of 2022, the BPPI was -31. This figure tells us a homebuyer with the same income today is able to borrow 31% less purchase-assist mortgage money than a year ago when mortgage interest rates were still near historic lows.

Source: First Tuesday Journal Editorial Staffs