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Why did Tuesday's key releases drive financial markets higher?

Part 4
Why did Tuesday's key releases drive financial markets higher? (Part 4 of 7)

Why are we seeing broad-based house price gains across the US?

The Federal Housing Finance Agency Housing Price Index reports higher home prices in March

The Federal Housing Finance Agency Housing Price Index for March was released on Tuesday, May 27. This release also included quarterly data comparisons for Q1 2014. Home prices increased by 0.7% month-over-month in March, compared to 0.6% in February. The increase spurred the monthly HPI to its highest level since March 2008. Price gains were broad-based, with eight out of the nine reporting census regions recording an increase. Excluding the East South Central Region, all other regions reported an increase, with New England posting the highest monthly increase (at 4.6%). Home prices in the Pacific region rose the most since last year (at 12.44%).

“Although the first quarter saw relatively weak real estate transaction activity—in part due to seasonal factors—home prices continued to push higher in the first quarter,” said FHFA Principal Economist Andrew Leventis. “Modest inventories of homes available for sale likely played a significant role in driving the price increase, which was similar to appreciation in the preceding quarter.”

The supply imbalance drove price increases that should prove beneficial to homebuilders. The iShares US Home Construction ETF (ITB) invests primarily in U.S.-based home construction companies. The top ten holdings in ITB include homebuilders Toll Brothers (TOL) and D.R. Horton (DHI).

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What is the Federal Housing Finance Agency Housing Price Index?

The Federal Housing Finance Agency Housing Price Index (or 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 the 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 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 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 doesn’t exceed the conforming loan limit.

There are significant differences between the Case-Shiller Home Price Index and the FHFA House Price Index. To find out about the major differences, please see the Market Realist series, Why this week’s key releases seem more about expectations.

Key takeaways from the March release

  • House prices rose 1.3% in Q1 2014 compared to Q4 2013—the 11th consecutive quarterly increase. The annual gain was reported at 6.6% (compared to Q1 2013).
  • Freddie Mac (FMCC) and Fannie Mae’s (FNMA) share of distressed sales financing fell over 10% from the past year.
  • The HPI reported increases in 42 states and the District of Columbia in Q1 2014, compared to 38 states in Q4 2014, with Nevada reporting the highest price appreciation.
  • In terms of regions, prices in the Pacific region rose the most in Q1 2014—by 2.1% and 13.2% quarter-over-quarter and year-over-year, respectively. The mid-Atlantic region was the weakest in terms of price rise (0.1% quarter-over-quarter).
  • The pace of house price increases appears to be moderating. The year-over-year increase in March dropped to 6.4%, compared to 6.9% in February. This trend should continue in the housing sector over the course of the year as new supply comes to the market.

The next two parts of this series will cover manufacturing indicators released by the Federal Reserve Banks of Dallas and Richmond. Please read on.

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