How to Calculate Your Purchasing Power

There are multiple terms that get used in the mortgage industry. One term that is used is “buyer purchasing power.” Purchasing power is the value represented by how much money can buy. Buyer purchasing power is the driving force behind the pricing in real estate. On one side of the table is the buyer with the money for the property, on the other side is the seller with the property. Between the buyer and the seller is the lender.

How Purchasing Power is Calculated

For example, 10 dollars bought more in 1990 than it does now. Purchase power is calculated based on the Consumer Price Index (CPI) which starts at a period of 100.00 then measures the fluctuation of purchasing power after adjustments in the index.  To calculate your purchase power, follow these five easy steps:

  1. Choose your base and target year. For example, the base year is 1990 and the target year is 2016.
  2. Find the average CPI data for the base year and target year. The average for the base year is 130.7 and the average for the target year is 240.007.
  3. Take the base year’s CPI and divide it by the target year’s CPI, then multiply your answer by 100 (130.7 / 240.007 = 0.5446 x 100 = 54.46).
  4. Subtract 100 from your total and that will give you the purchasing power (100 – 54.46 = 45.54). This means the purchasing power of the dollar has decreased by 45.54 percent between 1990 and 2016.
  5. If you want to look at this from a dollar stand point, follow the above equation in reverse and multiply a dollar amount of your choosing. For example, divide the target year’s CPI (240.007) by the base year’s CPI (130.7) and multiple the dollar amount ($60), (240.007 / 130.7 = 1.84 x 60 = 110.18). This shows that something that costs 60 dollars in 1990 would have cost 110.18 dollars in 2016.

If you want to calculate your purchase power online, click here.

If you want more information and want to be more informed about other mortgage related terms, contact us with questions Housing Buzz Blog.