The FHFA House Price Index increased in December



The Federal Housing Finance Agency (FHFA) House Price Index 

The FHFA House Price Index (or HPI) differs from other house price indices such as Case-Shiller and Radar Logic. HPI only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac. This means the home prices are below the conforming threshold of $417,000. It also means the borrower has a mortgage that eliminates cash-only transactions. Finally, the FHFA House Price Index eliminates jumbos, making it more of a central tendency index.

In December 2014, home prices grew 0.8% month-over-month, up 5.4% year-over-year. Prices are now within 4% of their April 2007 peak, which corresponds to November 2005 levels.

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Real estate values drive consumer confidence and spending. In fact, asset price appreciation was a big driver of consumption during the bubble years, and it masked wage stagnation. Now that people are having a difficult time funding consumption through equity expansion, a dialog about (the lack of) wage growth has begun. In fact, one of the unstated purposes of quantitative easing was to increase asset prices so as to spur spending.

Implications for REITs and real estate companies

For real estate companies like Colony Financial (CLNY) and Northstar Realty Finance (NRF), increasing real estate prices are good for the real estate securities they own. These companies are not like Annaly Capital (NLY), which primarily invests in agency (or government-insured) mortgage-backed securities. Instead, they take credit risk, and if the borrower defaults, they are stuck with the collateral.

Investors interested in trading the real estate sector via an ETF should look at the iShares Mortgage Real Estate ETF (REM). If you want to isolate interest rate risk, consider the iShares 20+ Year Treasury Bond (TLT).


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