Understanding the House Price Index (HPI) and How It Is Used

What Is the House Price Index (HPI)?

The House Price Index (HPI) is a broad measure of the movement of single-family property prices in the United States. Aside from serving as an indicator of house price trends, it also functions as an analytical tool for estimating changes in the rates of mortgage defaults, prepayments, and housing affordability.

Key Takeaways

  • The House Price Index (HPI) is a broad measure of the movement of single-family house prices in the United States.
  • It is published by the Federal Housing Finance Agency (FHFA), using monthly and quarterly data supplied by Fannie Mae and Freddie Mac.
  • The HPI is one of many economic indicators that investors use to keep a pulse on broader economic trends and potential shifts in the stock market.

Understanding the House Price Index (HPI)

The HPI is pieced together by the Federal Housing Finance Agency (FHFA), using data supplied by the Federal National Mortgage Association (FNMA), typically known as Fannie Mae, and the Federal Home Loan Mortgage Corp. (FHLMC), commonly known as Freddie Mac.

12.4%

The rise in home prices year-over-year from the third quarter of 2021 to the third quarter of 2022, as reported by the FHFA on Nov. 29, 2022.

The HPI is based on transactions involving conventional and conforming mortgages on single-family properties. It is a weighted repeat sales index, measuring average price changes in repeat sales or refinancings on the same properties.

An HPI report is published every quarter, although a monthly report has also been published regularly since March 2008. Data is compiled by reviewing mortgages purchased or securitized by Fannie Mae and Freddie Mac.

How the House Price Index (HPI) Is Used

The HPI is one of many economic indicators that investors use to keep a pulse on broader economic trends and potential shifts in the stock market.

The rise and fall of house prices can have big implications for the economy. Price increases generally create more jobs, stimulate confidence, and prompt higher consumer spending. This paves the way for greater aggregate demand, boosting gross domestic product (GDP) and overall economic growth.

When prices fall, the opposite tends to happen. Consumer confidence is eroded and the companies profiting from the demand for real estate lay off staff. This can sometimes trigger an economic recession.

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

The HPI is one of many trackers of home prices. Some of the most well-known alternatives are the S&P CoreLogic Case-Shiller Home Price indexes.

These indexes utilize different data and measuring techniques and, therefore, produce varying results. For example, the HPI weights all homes equally, while the S&P CoreLogic Case-Shiller Home Price indexes are value-weighted.

Moreover, while the Case-Shiller indexes only use purchase prices, the all-transactions HPI includes refinancing appraisals as well. The HPI also provides wider coverage.

Fannie Mae and Freddie Mac

As already mentioned, the HPI measures average price changes for homes that are sold or refinanced by looking at mortgages purchased or secured by Fannie Mae or Freddie Mac. That means loans and mortgages from other sources, such as the United States Department of Veterans Affairs and the Federal Housing Administration (FHA), do not feature in its data.

Fannie Mae

Fannie Mae is a government-sponsored enterprise (GSE) that is listed on the public market yet operates under a congressional charter. The company's goal is to keep mortgage markets liquid. It does this by purchasing and guaranteeing mortgages from the actual lenders, such as credit unions, and local and national banks—Fannie Mae cannot originate loans directly.

The FNMA expands the liquidity of mortgage markets and facilitates homeownership for low-, moderate-, and middle-income Americans by creating a secondary market. Fannie Mae was created in 1938 during the Great Depression as part of the New Deal.

Freddie Mac

Like Fannie Mae, Freddie Mac, or the FHLMC, is also a GSE. It purchases, guarantees, and securitizes mortgages to form mortgage-backed securities (MBS). It then issues liquid MBS that generally carry a credit rating close to that of U.S. Treasuries.

Given its connection with the U.S. government, Freddie Mac can borrow money at interest rates that are generally lower than those available to other financial institutions.

How Do You Tell if a House Is a Good Price?

To determine if a house is a good price, you can check the sale prices of recently sold properties in the neighborhood, compare the price with other properties for sale in the market, speak with a real estate agent, and consider the appreciation value.

Should I Offer the Full Asking Price on a House?

Knowing whether or not you should offer the full asking price on a house will come down to a few factors. One of the main factors is if the property being sold is in a buyer's market or a seller's market. If it is a seller's market, you may have to offer the full asking price or above, whereas, in a buyer's market, you may be able to offer a lower price. If you need to offer the full asking price or more, it is generally recommended to offer 1% to 3% more.

What Brings Down the Value of a House?

Many factors bring down the value of a house, such as any new planned construction in the area that would be seen as less than desirable, such as a highway. Foreclosures in the neighborhood would bring down prices as well as the increased likelihood of natural disasters in the area or a greater impact due to climate change. Even rising interest rates can bring down the value of a house, as the increase in mortgage rates makes homes more expensive, which reduces the demand.

Article Sources
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  1. Federal Housing Finance Agency. "U.S. House Prices Rise 12.4% Over the Last Year; Up 0.1% From the Second Quarter."

  2. S&P Dow Jones Indices. "S&P CoreLogic Case-Schiller Home Price Indices Methodology."

  3. Federal Housing Finance Agency. "Home Price Index Frequently Asked Questions."

  4. Fannie Mae. "What We Do."

  5. Fannie Mae. "History."

  6. USA.gov. "Federal Home Loan Mortgage Corporation."

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