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.

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.

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, as well as a monthly report. 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.

The Bottom Line

The House Price Index (HPI) measures the movement of single-family home prices in the United States. It is reported monthly and measures the change from the previous month and year-over-year. It is an important economic indicator, shedding light on the state of the economy and housing affordability.