House Price Index

Article byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is House Price Index (HPI)? 

The House Price Index(HPI) is a collection of data published on price changes of single-family detached properties in the U.S., denoting the movement of prices in a specific date range. It helps forecast prepayment speeds for financial securities and assess variations in housing affordability in particular geographic locations.

House Price Index (HPI

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The Office of Federal Housing Enterprise Oversight (OFHEO) estimates the HPI using data on conventional conforming mortgage transactions. This is derived from the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. In addition, the OFHEO publishes the House Price Index quarterly and monthly.

Key Takeaways

  • House price indexes (HPI) are data on single-family independent homes in the United States by the Office of Federal Housing Enterprise Oversight (OFHEO under FHFA).
  • It collects data by examining recurring mortgage events on single-family homes with mortgages that Fannie Mae or Freddie Mac have bought or securitized.
  • The index helps buyers and sellers determine the changes in property values and adjust for home quality variations.
  • It also assists economists and academics by giving information for studies on demographic issues, dangers to the environment or human health, emigration, wealth development, etc.

House Price Index (HPI) Explained 

House price indexes (HPI) are data collected on single-family detached properties in the United States measuring the movement of property prices. It estimates and publishes the report utilizing data regarding conventional conforming mortgage transactions from the Federal Home Loan Mortgage Corporation (in short, Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).

OFHEO first published the HPI in March 1996. OFHEO is now a part of the Federal Housing Finance Agency (FHFA), which was formed in 2008. As a result, the index is now referred to as the FHFA HPI.

The FHFA HPI broadly measures the movement of single-family home values. It is a weighted repeat-sales index, which calculates the average price changes in subsequent repeat sales or refinancings of the same properties. It gathers information by analyzing repeat mortgage events on single-family homes with mortgages that Fannie Mae or Freddie Mac have acquired or securitized since January 1975.

As a result, the index is reliable and is a timely indication of regional variations in house price trends. Moreover, compared to other house price indices, it offers more information because of the sample’s diversity.

Additionally, it serves as a better analytical tool that is beneficial for forecasting changes in the rates of mortgage defaults and updating the existing value of residential property assets. It also helps forecast prepayment speeds for financial securities and assesses variations in housing affordability in particular geographic locations. Furthermore, the index also helps economists and researchers by providing data for studying demographic concerns. These hazards could affect the environment or human health, local government budgets, emigration, wealth creation, etc.

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Benefits

The repeated observations of housing values for the same property units help in accounting for variations in the quality of the houses that make up the sample used for statistical estimation. Because of this, many refer to the HPI as a “constant quality” House Price Index. 

HPI offers extensive geographic coverage as the data is derived from two government-sponsored housing enterprises that operate on a national level. Thus, being an index built using enterprise data is one of HPI’s biggest advantages. However, like most other measurements, a nationwide house price index has some limitations. HPI utilizes the data on single-family independent homes funded by conforming conventional mortgages.

As a result, mortgage transactions on attached and multi-unit buildings, those financed by government-insured loans, and those with mortgages that exceed the conforming loan limitations that determine eligibility for acquisition by Freddie or Fannie are not included. People can use HPI to identify more repeat transactions for the latest and previous quarters. The nationwide house price index is updated for each quarter as enterprises acquire more mortgages

Chart 

Check out the following chart to get a better idea about HPI.

Housing Price Index Chart

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The data represented on the chart is the HPI index of the U.S in Q1 2021: 484.05, Q2 2021: 511.01, Q3 2021: 539.48, and Q4 2021: 558.11, where the index base price 1980 Q1 is taken as 100.  

With each passing quarter, it is clear that there is a growing trend of rising house prices. The data, when represented graphically, can aid in making quick decisions.

Measuring average price changes in recurrent sales or refinancing of the same properties utilizes various statistical methods, including moving averages, to arrive at specific results. One can also use a house price index calculator to make things easier.

Example 

Let’s consider an example to understand how HPI works.

Let us consider the HPI index values for the U.S. in the year 2020. They are Q1 2020: 450.13, Q2 2020: 454.60, Q3 2020: 462.51, and Q4 2020: 472.69, where the index base price for 1980 and Q1 is 100. Here, the value has been increasing over a year, meaning single-family house prices are rising across the nation.

This data has helped buyers, sellers, and investors determine property value and whether prices are rising or declining across the nation. It also helped them decide whether or not investing in a single-family home would yield a profit. In addition, the HPI gives the sellers an estimation of the market value and helps them determine the price at which they have to market it, whether at a high or a low price. Overall, this report shows an area’s average value or price appreciation.   

Frequently Asked Questions (FAQs)

1. How to use the house price index?

The usage depends on the motive of the user. For example, to an investor, HPI provides clarity on whether the investments will bring profits in the future by looking at the increase in prices over a period. For a seller, it helps to price a property deal accurately.

2. How is the house price index calculated?

The FHFA measures the typical price changes in sales or refinancings of the same properties. Then, it determines repeat transactions for the most recent period. The FHFA also considers mortgage acquisitions. The repeat sales approach uses subsequent sales of the same property units to calculate price changes over time. A house price index calculator can also make the job easier.

3. How does the house price index work? 

HPI provides a glimpse of the market, showing which regions are experiencing growing house prices and those experiencing declines. Data on residential real estate sales completed by direct payment or mortgages financed by a housing loan are used to collect the data that will be analyzed.

This article has been a guide to what is House Price Index. Here, we explain the topic in detail, including its chart and an example. You can learn more about it from the following articles –

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