Several important housing indicators were released this week. The Federal Housing Finance Agency (or FHFA) Housing Price Index (or HPI) was released on Tuesday, February 25. This was followed by the new home sales data for January 2014, which was released on Wednesday, February 26, by the U.S. Department of Commerce Census Bureau. On Friday, February 28, the Pending Home Sales Index was 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 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. This means 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 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 doesn’t exceed the conforming loan limit.
What did Q4 2013 and December’s readings indicate?
U.S. house prices increased 0.8% in December compared to November on a seasonally adjusted basis, ahead of the estimated range of 0.1% to 0.4%. The index change of 1.2% in the quarter ended December 31, 2013, represented the tenth consecutive quarter-over-quarter increase in the Seasonally-Adjusted Purchase-Only Index, although the pace of growth was slower in the past two quarters. From December 2012 to December 2013, house prices rose 7.7%. In November 2013, the U.S. index was 8.3% below its April 2007 peak. There were some data revisions in the HPI, with November’s month-on-month gain of 0.1% revised to -0.1%.
What does the HPI mean for fixed income markets?
An increasing HPI means demand for housing is increasing relative to supply. This would imply 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. An increase in the HPI, therefore, would mean the economy is growing, and, other things remaining constant, the Fed would curtail its economic stimulus program. This would mean, other factors remaining constant, that interest rates would rise and bond prices would fall. A decline in the HPI would mean the opposite.
“We delivered more homes at higher prices this first quarter than one year ago. This higher delivery volume, coupled with price increases from late 2012 and early 2013, drove our first quarter growth in revenues, earnings and margins….The freezing, snowy weather of the past two months has impacted our business in the Northeast, Mid-Atlantic and Midwest markets, where about 50% of our selling communities are located. While it is still too early to draw conclusions about the Spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand and an industry still under-producing compared to both historical norms and current demographics.”
What will the new home sales releases mean for fixed income investors? To find out, move on to Part 7 of this series.