What Is the House Price Index (HPI)?

The House Price Index (HPI) is a wide indicator of single-family home price movement in the United States. It serves as an analytical tool for estimating changes in the rates of mortgage defaults, prepayments, and housing affordability, in addition to functioning as an indication of home price trends.

Understanding the House Price Index (HPI)

The Federal Housing Finance Agency (FHFA) compiles the HPI using data from the Federal National Mortgage Association (FNMA), also known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac.

The HPI is based on single-family transactions involving conventional and conforming mortgages. It’s a weighted repeat sales index that tracks average price changes across repeat sales or refinancings on the same properties.

Every quarter, an HPI report is released, however, from March 2008, a monthly report has also been released on a regular basis. Mortgages purchased or securitized by Fannie Mae and Freddie Mac are used to compile data.

How the House Price Index (HPI) Is Used

The HPI is one of many economic indicators used by investors to monitor broader economic trends and prospective stock market shifts.

The increase and decrease of housing values can have significant economic consequences. Price increases usually result in more jobs, increased confidence, and increased consumer spending. This creates more aggregate demand, which boosts GDP and overall economic growth.

When prices drop, the opposite usually occurs. Consumer confidence is weakening, and many corporations prospering from the real estate boom are laying off workers. This can occasionally lead to a slowdown in the economy.

The House Price Index (HPI) vs. the S&P CoreLogic Case-Shiller Home Price Indexes

The HPI isn’t the only way to keep track on home prices. The S&P CoreLogic Case-Shiller Home Price Indices are one of the more well-known alternatives.

These indexes use a variety of data and measurement approaches, resulting in a wide range of outcomes. The HPI, for example, gives equal weight to all homes, whereas the S&P CoreLogic Case-Shiller Home Price indexes give value to properties.

Furthermore, unlike the Case-Shiller indices, which solely include purchase prices, the HPI includes refinance appraisals as well. The HPI also covers a larger area.

Fannie Mae and Freddie Mac

As previously stated, the HPI examines mortgages purchased or secured by Fannie Mae or Freddie Mac to determine average price changes for properties that are sold or refinanced. That means it excludes loans and mortgages from other agencies, such as the US Department of Veterans Affairs and the Federal Housing Administration (FHA).

Fannie Mae

Fannie Mae is a government-sponsored business (GSE) that is publicly traded yet is governed by congressional legislation. The company’s objective is to keep the mortgage market alive. Fannie Mae accomplishes this by purchasing and guaranteeing mortgages from legitimate lenders, such as credit unions and local and national banks—it is unable to create loans.

By developing a secondary market, the FNMA increases the liquidity of mortgage markets and makes house ownership more accessible to low-, moderate-, and middle-income Americans. Fannie Mae was founded as part of the New Deal in 1938, during the Great Depression.

Freddie Mac

Like Fannie Mae, Freddie Mac, or the FHLMC, is also a GSE. Mortgage-backed securities (MBS) are created by purchasing, guaranteeing, and securitizing mortgages. It then issues liquid MBS with a credit rating similar to that of US Treasuries.

Freddie Mac can borrow money at interest rates that are often lower than those available to other financial institutions because of its ties to the US government.

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