FHFA Housing Price Index: Will it be 24-in-a-row for home prices?

What is the Federal Housing Finance Agency Housing Price Index?

The Federal Housing Finance Agency (or FHFA) Housing Price Index (or HPI) for the month of March, will release on Tuesday, April 22.

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 refinances on the same properties.

FHFA Housing Price Index: Will it be 24-in-a-row for home prices?

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 that does not exceed the conforming loan limit.

Highlights from February’s release

  • The U.S. house prices increased for the 23rd consecutive month in January, 0.5% month-on-month on a seasonally-adjusted basis, ahead of consensus estimates of 0.4%.
  • The Index reading at 209.14 for February, was also the highest since April, 2008.
  • The HPI increased by 7.4% on an annual basis, marginally down from January’s 7.5% increase.
  • Out of the nine census regions, eight recorded an increase with the Pacific region clocking the largest year-on-year increase at 14%, while the Mid-Atlantic region recorded the lowest year-on-year increase at 3.2%. In the West South Central region prices declined by 0.3%.

Future trends

  • House prices appear to be increasing at a slower pace, compared to previous months. This trend should continue in the overall housing market over the course of the year as new supply comes on the market.
  • Mortgage rates have increased marginally in March compared to February (4.34% compared to 4.3%), so this factor should cool demand for housing finance slightly and also for re-financing mortgages. This will consequently impact the FHFA HPI which is a repeat sales index and includes refinancing appraisal data.

An increase or decrease in mortgage financing is likely to impact ETFs like the iShares Barclays MBS Fixed-Rate Bond Fund (MBB) and the Vanguard Mortgage-Backed Securities Index Fund (VMBS). Both MBB and VMBS track the Barclays Capital U.S. MBS Index which measures the performance of investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

Increasing home prices should also benefit homebuilders like D.R. Horton (DHI) and KB Home (KBH) as they trend for higher prices should induce new supply. The iShares U.S. Home Construction ETF (ITB), which tracks the performance of the Dow Jones U.S. Select Home Construction Index, provides exposure to both D.R. Horton (DHI) and KB Home (KBH).

To read about other housing sector releases due for release this week, move on to Part 7.