US: FHFA House Price Index

Thu Mar 22 08:00:00 CDT 2018

Actual Previous Revised
M/M change 0.8% 0.3% 0.4%
Y/Y change 7.3% 6.5% 6.7%

Yesterday Federal Reserve Chair Jerome Powell said there was no risk of excess value in the housing market but today's FHFA data do hint at unusual acceleration. The house price index shot up a far stronger-than-expected 0.8 percent in data for January with the year-on-year rate jumping 6 tenths from an upwardly revised December and hitting a 3-1/2 year high at 7.3 percent.

Questions of a possible bubble are centered in the western states with the Mountain region in this dataset at a year-on-year 10.0 percent and the Pacific region at 9.4 percent. Yet three other regions are 7 percent and over: South Atlantic up 7.8 percent, New England up 7.1 percent, and the East North Central at 7.0 percent.

Low supply of homes on the market is a key factor giving prices a boost though strength in the labor market and high levels of consumer confidence are also at work. Watch tomorrow for new home sales and related price data followed on Tuesday next week with the Case-Shiller report where expectations, following today's FHFA report, are very likely to move higher.

The Federal Housing Finance Agency (FHFA) House Price Index (HPI) covers single-family housing, using data provided by Fannie Mae and Freddie Mac. The House Price Index is derived from transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. In contrast to other house price indexes, the sample is limited by the ceiling amount for conforming loans purchased by these government-sponsored enterprises (GSE). Mortgages insured by the FHA, VA, or other federal entities are excluded because they are not "conventional" loans. The FHFA House Price Index is a repeat transactions measure. It compares prices or appraised values for similar houses.

Home values affect much in the economy - especially the housing and consumer sectors. Periods of rising home values encourage new construction while periods of soft home prices can damp housing starts. Changes in home values play key roles in consumer spending and in consumer financial health. During the first half of this decade sharply rising home prices boosted how much home equity households held. In turn, this increased consumers' ability to spend, based on wealth effects and from being able to draw upon expanding home equity lines of credit.

With the onset of the credit crunch in mid-2007, weakness in home prices has had the reverse impact on the economy. New housing construction has been impaired and consumers have not been able to draw on home equity lines of credit as in recent years. But an additional problem for consumers is that a decline in home values reduces the ability of a home owner to refinance. During 2007, 2008, and into 2009 this became a major problem for subprime mortgage borrowers as adjustable rate mortgages reached the end of the low, "teaser rate" phase and ratcheted upward. Many subprime borrowers had bet on higher home values to lead to refinancing into an affordable fixed rate mortgage but with home equity values down, some lenders balked at refinancing subprime borrowers.