The FHFA House Price Index is within 4% of Peak Levels



Home prices are approaching peak levels

A 5.1% year-over-year gain has put the Federal Housing Finance Agency (or FHFA) House Price Index (or HPI) back at December 2005 levels. The rate of price appreciation appears to be slowing. While most indices showed the housing market bottoming out around February 2012, the FHFA House Price Index showed it bottoming out around May 2011.

Perhaps distressed sales dominated at the end of 2011. This pushed the other indices lower. As you can see from the chart above, prices are within 5% of their prior peak.

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Real estate prices are beginning to flatten. This makes sense because wages have not kept up with real estate prices since the downturn. Historically, real estate prices and incomes have correlated pretty closely. After the real estate market bottomed, professional investor demand pushed up prices, but wages did not move. This made further home price appreciation difficult.

Implications for mortgage REITs

The big agency REITs like American Capital Agency (AGNC), Annaly Capital (NLY), and MFA Financial (MFA) invest in MBS (or mortgage-backed securities) that the government guarantees, but that doesn’t mean these companies don’t care about real estate prices. As home prices rise, previously underwater homeowners gain the ability to refinance. This increases prepayment speeds. Since they’re underwater, many hold 2006- and 2007-vintage mortgage-backed securities that have high coupons and low prepayment rates. As home prices appreciate, these loans will pay off.

Investors with an interest in trading the real estate sector as a whole should look at the iShares Mortgage Real Estate ETF (REM). If you’re concerned about interest rates only, consider the iShares 20+ Year Treasury Bond ETF (TLT).


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