Fri. Jun 14th, 2024

All You Need To Know About The House Price Index And How It Is Used

By Harry Harvey Mar2,2023

The House Price Index (HPI) is an economic indicator that measures the rise and fall of housing values across the United States. It’s a useful tool for homebuyers and investors.

It is also used by government agencies to assess broader trends in the economy. Rising house prices generally stimulate consumer confidence and prompt higher spending, which contributes to economic growth.

What is a House Price Index?

A House Price Index, also known as HPI, is a quarterly economic indicator of house prices in the United States. It tracks prices of single-family homes and is published by the Federal Housing Finance Agency (FHFA).

The HPI reports are free and publicly available. They are helpful for journalists and researchers who want to track changes in the housing market or other broader economic trends.

In addition, the HPI provides a timely, accurate estimate of home prices in different regions and smaller areas within the country. It also helps economists estimate changes in mortgage defaults, prepayments and housing affordability.

The HPI is a weighted repeat sales index, which means it measures average price changes in repeat sales and refinances on single-family homes. It is based on transactions involving conventional and conforming mortgages purchased or securitized by Fannie Mae and Freddie Mac.

How is a House Price Index Calculated?

The US Federal Housing Finance Agency publishes a House Price Index (HPI) that tracks the movement of single-family home prices. It is a broad economic indicator that measures price fluctuations at the national, census division, state, metro area, county, and ZIP code levels.

The FHFA HPI uses a weighted repeat sales technique to capture changes in the average price of repeat sales and refinances of single-family properties. This method helps to control for differences in the quality of housing being purchased and sold.

Our Real House Price Index (RHPI) adjusts for consumer house-buying power by considering how incomes and mortgage rates influence the amount of money a buyer can borrow to purchase a home. This helps to better reflect consumers’ purchasing power and captures the true cost of housing.

The traditional view of house prices is fixated on the actual price, but often ignores how changing incomes and mortgage rates impact the purchasing power of consumers. This can result in house price booms and busts that do not reflect underlying housing market fundamentals.

How is a House Price Index Used?

The home price index is a measure of the change in home prices. It is based on data that tracks the purchase or refinance of single-family homes whose mortgages are purchased or securitized by Fannie Mae and Freddie Mac.

It can be used as a tool to assess changes in the housing market and adjust for quality variations. It also helps economists and academics who use the index to study demographic issues, dangers to the environment or human health, local government budgets, emigration, wealth development, and other important topics.

The FHFA HPI suite is based on tens of millions of home sales and offers insights about house price fluctuations at the national, regional, divisional, state, metro area, county, ZIP code, and census tract levels. It uses a weighted, repeat-sales statistical technique to analyze transaction data from Fannie Mae and Freddie Mac. This method allows the index to be referred to as a “constant quality” index because it controls for differences in the quality of the houses that make up the sample.

What is the Difference Between a House Price Index and a Real Estate Price Index?

There are a number of housing indexes that track the price of homes around the country, some with more accuracy than others. Understanding how they work can help you understand what the market is doing in your area.

The Case-Shiller and Federal Housing Finance Agency (FHFA) housing indices use repeat sales to determine changes in home prices. They both maintain large data bases of individual home sales for 20 major U.S. metro areas, and update with recent sales prices to determine the index values.

They are value-weighted indices because the trends for more expensive homes are more influential than those of less-expensive homes. The FHFA uses sales prices from homes financed with conventional mortgages insured by Fannie Mae and Freddie Mac, whereas the Case-Shiller index does not.

Changes in income and interest rates affect the amount of leverage a consumer can use to purchase a house. Rising incomes increase a consumer’s buying power, while falling rates decrease it.

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