Must know: Impact of this week’s economic releases on debt markets (Part 5 of 8)
Several important housing indicators are due for release this week. The Federal Housing Finance Agency (or FHFA) Housing Price Index (or HPI) is due to release on Tuesday, February 25. This will be followed by the new home sales data for January 2014, to be released on Wednesday, February 26, by the U.S. Department of Commerce, Census Bureau. On Friday, February 28, the Pending Home Sales Index will be released by the National Association of Realtors.
What is the Federal Housing Finance Agency (or FHFA) Housing Price Index (or HPI)?
The FHFA HPI is calculated using home sales price information from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac. The index measures the change in prices of single-family houses in various geographies in the U.S. It also helps estimate changes in the rates of mortgage defaults, prepayments, and housing affordability in specific geographic areas. The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancing on the same properties.
The index is updated monthly using data provided by Fannie Mae and Freddie Mac. The House Price Index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac and includes only mortgage transactions on single-family properties. Conforming refers to a mortgage that both meets the underwriting guidelines of Fannie Mae or Freddie Mac and that does not exceed the conforming loan limit.
What did November’s reading indicate?
The U.S. house prices increased slightly by 0.1% in November compared to October on a seasonally adjusted basis, which was a slowing trend. The November HPI 0.1% change was the twenty-second consecutive monthly price increase recorded in the seasonally adjusted index. From November 2012 to November 2013, house prices rose 7.6%. In November 2013, the U.S. index was 8.9% below its April 2007 peak and is roughly the same as the April 2005 index level.
What does the HPI mean for fixed income markets?
One of the implications of an increasing HPI is that demand for housing is increasing relative to supply. This would mean an increase in construction activity going forward in response to increased demand which would provide an uptick to the overall economy. Housing, being a large investment, is a very important gauge of consumer confidence. So, an increase in the HPI would mean that the economy is growing, and other things remaining constant, the Fed would curtail its economic stimulus program. This would mean, with other factors remaining constant, that interest rates would rise and bond prices would fall. A decline in the HPI would mean the opposite.
Browse this series on Market Realist:
- Part 1 - Must know: Impact of this week’s economic releases on debt markets
- Part 2 - Chicago Fed National Activity Index: Will the bond market benefit?
- Part 3 - Dallas Fed TMOS: Production rose despite low business optimism
- Real Estate
- Federal Housing Finance Agency
- Freddie Mac
- Fannie Mae
- U.S. Department of Commerce