The House Price Index (HPI) is a broad measure of the movement of single-family property prices in the United States. Published and updated by the Federal Housing Finance Agency (FHFA), the HPI not only serves as an indicator of house price trends but also functions as an analytical tool for estimating changes in rates of mortgage defaults, prepayments, and housing affordability.
Key Takeaways
- The House Price Index is a comprehensive measure of fluctuations in single-family home prices in the United States.
- It is updated by the Federal Housing Finance Agency using data supplied monthly and quarterly by Fannie Mae and Freddie Mac.
- As one of many economic indicators, the HPI helps investors gauge broader economic trends and potential stock market shifts.
Exploring the House Price Index (HPI)
The HPI is meticulously compiled by the FHFA, drawing data from the Federal National Mortgage Association (commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (recognized as Freddie Mac). The index is based on transactions involving conventional and conforming mortgages on single-family properties.
As a weighted repeat sales index, the HPI measures average price changes in repeat sales or refinancing on the same properties. Reports are published quarterly and monthly, involving an analytical review of mortgages either purchased or securitized by Fannie Mae and Freddie Mac.
Monthly Data
For instance, in February 2024, the HPI reflected a 1.2% monthly increase from January 2024, with a significant annual rise of 7% compared to February 2023.
The Role and Use of the House Price Index (HPI)
The HPI is an essential economic indicator used by investors to stay informed about wider economic trends and anticipate potential stock market movements.
Fluctuating house prices profoundly impact the economy. Price increases typically lead to job creation, elevated consumer confidence, and higher spending, thereby boosting aggregate demand, GDP, and economic growth. Conversely, falling prices can dampen consumer confidence, lead to job losses in real estate-focused industries, and potentially trigger an economic recession.
Comparing the HPI with S&P CoreLogic Case-Shiller Home Price Indexes
While the HPI is a key measure of home prices, several other indexes exist, such as the S&P CoreLogic Case-Shiller Home Price Indexes. Each index employs different data and calculation methods, leading to varying outcomes. For example, the HPI weighs all homes equally, whereas the Case-Shiller indexes are value-weighted, using purchase prices only, and eschewing refinancing appraisals, unlike the extensive coverage in the HPI.
In February 2024, the U.S. CoreLogic S&P Case-Shiller index rose by 0.6% from the previous month and by 6.4% annually.
Key Contributors: Fannie Mae and Freddie Mac
As explained, the HPI averages price changes for homes sold or refinanced by focusing on mortgages purchased or secured by Fannie Mae or Freddie Mac. Thus, it excludes loans or mortgages from other sources not affiliated with these entities, such as those from the United States Department of Veterans Affairs or the Federal Housing Administration (FHA).
Fannie Mae
Fannie Mae is a government-sponsored enterprise (GSE) operating under a congressional charter. It fosters liquidity in the mortgage markets by acquiring and guaranteeing mortgages from lenders, promoting homeownership for low to middle-income Americans. Created during the Great Depression as part of the New Deal in 1938, Fannie Mae continues to facilitate a robust secondary mortgage market.
Freddie Mac
Freddie Mac, another GSE like Fannie Mae, also secures and guarantees mortgages, converting them into mortgage-backed securities (MBS). These securities often carry a credit rating comparable to U.S. Treasuries. Due to its government affiliation, Freddie Mac benefits from lower borrowing interest rates than other financial institutions.
How to Assess a Fair House Price
To determine if a house is reasonably priced, you can review the sale prices of recently sold properties in the vicinity, compare the listing with other properties on the market, consult with real estate agents, and evaluate its appreciation potential in the neighborhood.
Should You Offer the Full Asking Price?
Deciding whether to offer the full asking price hinges on the market condition. In a seller’s market, you’ll often need to bid higher, sometimes by 1% to 3%. However, in a buyer’s market, there’s scope for negotiating a lower price.
Factors that Can Lower House Prices
Several elements can drive down house values, including nearby construction projects deemed undesirable (like a new highway), local foreclosures, rising natural disaster risks, and increasing interest rates, which make mortgages less affordable and reduce housing demand.
The Bottom Line
The House Price Index offers valuable insights into the movement of single-family home prices in the United States. With regular monthly updates, the HPI is a crucial economic indicator, shedding light on the broader economic landscape and housing affordability.
Related Terms: Fannie Mae, Freddie Mac, mortgage, economic indicators, housing affordability.
References
- Federal Housing Finance Agency. “House Price Indexes: HPI Technical Description”.
- Federal Housing Finance Agency. “FHFA House Price Index”.
- Federal Housing Finance Agency. “U.S. House Price Index - April 2024”.
- Federal Housing Finance Agency. “FHFA House Price Index Frequently Asked Questions: Methodology”, Select How Does the FHFA HPI Differ From the Case-Shiller Index?
- Core Logic. “US CoreLogic S&P Case-Shiller Index Bucks Trend, Reaccelerates to 6.4% in February”.
- Federal Housing Finance Agency. “FHFA House Price Index Frequently Asked Questions: Methodology”, Select What Transactions Are Covered in the FHFA HPI?
- Fannie Mae. “What We Do”.
- Fannie Mae. “History”, Select 1938.
- Fitch Ratings. “United States of America”.
- Freddie Mac. “Credit Ratings”.
- Freddie Mac. “Our Business”.
