Why do increasing home prices matter to REITs and homebuilders? (Part 2 of 4)
The Federal Housing Finance Agency (FHFA) House Price Index
The FHFA House Price Index differs from the other house price indices like Case-Shiller and Radar Logic in that it only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac. This means all the home prices are below the conforming threshold, which is $417,000. It also means the borrower has a mortgage, which eliminates cash-only transactions. And finally, the FHFA House Price Index eliminates jumbos. This makes it more of a central tendency index.
Looking at which index matters more economically, the FHFA Index probably captures the real-economy better than indices like Case-Shiller. For example, we’ve seen that the biggest increases in price have been at the highest price points. If a millionaire’s McMansion increases in price by 10%, that’s all well and good, but it probably doesn’t have the same economic effect as a 10% increase in the median home price. If you’re trying to model out consumption patterns going forward, you’re going to focus on the typical homeowner, not necessarily the very high end. For that matter, Case-Shiller also counts distressed properties, which are typically bought by professional investors for cash. Again, these sales don’t tell us that much about asset price appreciation in general. Since FHFA strips these out, it more represents the economy as a whole.
22 consecutive months of year-over-year gains
The 7.3% year-over-year gain harkens back to the glory days of mid-2006, and it puts the index back at May 2005 levels, or about 8% below the April 2007 peak. The rate of price appreciation appears to be slowing. While most indices showed the housing market bottoming about February of 2012, FHFA shows the bottom around May of 2011. Perhaps distressed sales dominated at the end of 2011, which pushed the other indices lower.
Note that with Case-Shiller, we’re further from the peak and have been experiencing higher price appreciation. That makes sense when you consider that distressed properties and the ultra-high priced properties experienced the biggest drops in value. In other words, Case-Shiller is a much more volatile index than FHFA.
In the next couple pieces, we’ll discuss how increasing home prices affect REITs like Annaly (NLY), American Capital Agency (AGNC), and Redwood Trust (RWT). Later, we’ll discuss how price increases matter to homebuilders like Lennar (LEN) and D.R. Horton (DHI).
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