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Why home prices may continue to increase—Home Price Index

Phalguni Soni

Overview: This week's economic releases—relook at the consumer (Part 8 of 11)

(Continued from Part 7)

The Federal Housing Finance Agency Housing Price Index, April

The Federal Housing Finance Agency (or FHFA) Housing Price Index (or HPI) for April will be released on Tuesday, June 26. Unlike the S&P/Case Shiller Home Price Index, the FHFA HPI is based on actual transaction data for mortgages guaranteed by Freddie Mac and Fannie Mae. It includes refinancing transactions. There are other significant differences between the Case-Shiller HPI and the FHFA HPI. To learn about the major differences, please read the Market Realist series, Why this week’s key releases seem more about expectations .

Key takeaways from the March release

Last month, home prices as measured by the FHFA HPI, increased to their highest level since March, 2008, rising by 0.7% month-on-month (or MoM). This trend wasn’t limited to certain areas, but was prevalent nationwide as eight out of the nine reporting census regions felt the impact of home price increases. The East South Central Region was the only region reporting a decline in home prices. New England reported the highest monthly increase (4.6%), while the Pacific region reported the highest annual increase (12.4%).


Home prices are likely to trend upward at least in the near term. This is because there is a lag between when home construction starts and housing supply comes on to the market. Even if homebuilders respond to the demand, supply is likely to be slow coming on the market.

Also, housing starts have been depressed at the beginning of the year, due to the polar vortex. Although housing starts in April recorded a healthy spike of 12.7% MoM, May reported a drop of 6.5% which raised questions about the consistency of the recovery in the housing market.

As mentioned in the previous section, increases in home prices are likely to benefit homebuilders like those included in the iShares U.S. Home Construction ETF (ITB). Top ten holdings in ITB include homebuilders, Toll Brothers (TOL) and D.R. Horton (DHI).

Home price increases also increase homeowner equity, all else equal. This may have the impact of more fund flows into stock and bond markets, especially since both the S&P 500 Index (SPY) and long bond funds like the Vanguard Total Bond Market ETF (BND) have provided investors with positive returns this year.

What is the FHFA HPI Housing Price Index?

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 to 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 re-financings on the same properties.

The index is updated monthly using data provided by Fannie Mae and Freddie Mac. The HPI is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. It 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 doesn’t exceed the conforming loan limit.

To learn about what investors can expect from the major manufacturing indicators scheduled for release this week, please continue reading the next three sections in this series.


Continue to Part 9

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