The House Price Index (HPI) is a wide indicator of the movement of prices for single-family homes in the United States. It also works 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.

A Guide to the House Price Index (HPI)

The Federal Housing Finance Agency (FHFA) assembles the HPI utilizing information provided by the Federal National Mortgage Association (FNMA), also known as Fannie Mae, and the Federal Home Loan Mortgage Corp. (FHLMC), also known as Freddie Mac.

The HPI is based on transactions for single-family homes with conventional and conforming mortgages. It is a weighted repeat sales index that looks at how much prices change when the same properties are sold again or refinanced.

Every three months, a report on the HPI is released, and since March 2008, a report is also released every month. The data is put together by looking at the mortgages that Fannie Mae and Freddie Mac bought or turned into bonds.

How to Use the House Price Index (HPI)

Investors use the HPI and other economic indicators to keep an eye on broader economic trends and possible changes in the stock market.

When house prices go up or down, it can have a big effect on the economy. Price increases usually lead to more jobs, more consumer spending, and more confidence. This makes it possible for aggregate demand to grow, which boosts gross domestic product (GDP) and economic growth as a whole.

When prices go down, the opposite is usually true. Consumer confidence is going down, and companies that make money from the high demand for real estate are letting people go. This can sometimes lead to a downturn in the economy.

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

Home prices are tracked by more than just the HPI. The S&P CoreLogic Case-Shiller Home Price indexes are one of the most well-known alternatives.

These indexes use different data and different ways to measure, so their results are different. For example, the S&P CoreLogic Case-Shiller Home Price indexes are value-weighted, while the HPI gives all homes the same amount of weight. The all-transactions HPI also includes appraisals for refinancing, while the Case-Shiller indexes only use purchase prices. The HPI also has a wider coverage.

Fannie Mae and Freddie Mac

As was already said, the HPI looks at mortgages bought or secured by Fannie Mae or Freddie Mac to figure out how much the average price of homes changes when they are sold or refinanced. This means that loans and mortgages from other sources, like the US Department of Veterans Affairs and the Federal Housing Administration (FHA), are not included in its data.

Fannie Mae

Fannie Mae is a government-sponsored enterprise (GSE) that is listed on the stock market and runs under a congressional charter. The goal of the company is to keep the mortgage markets open. It does this by buying and backing mortgages from the actual lenders, like credit unions and local and national banks. Fannie Mae can't make loans on its own, so it buys and backs mortgages from other lenders.

By making a secondary market, the FNMA makes mortgage markets more liquid and helps low-, moderate-, and middle-income Americans buy homes. As part of the New Deal, Fannie Mae was set up in 1938, during the Great Depression.

Freddie Mac

Freddie Mac, or the FHLMC, is also a GSE, like Fannie Mae. It buys mortgages, guarantees them, and turns them into mortgage-backed securities (MBS). It then gives out liquid MBS with a credit rating that is usually close to that of U.S. Treasuries. Because it is connected to the U.S. government, Freddie Mac can usually borrow money at lower interest rates than other financial institutions.