Let’s take a closer look at how the House Price Index (HPI) is calculated, and how it serves as an economic indicator by identifying trends in the housing market.
Definition and Examples of The House Price Index
The House Price Index (HPI) is a gauge of changes in single-family home values dating from the mid-1970s to the present by using a weighted analysis. It measures the average price change in repeat sales or refinancing of the same property. The House Price Index is considered a “constant quality” index because the difference in the quality of housing is controlled by tracking the same properties over time. The HPI is not adjusted for inflation, so it reflects nominal gains. The data includes tens of millions of home sales in the U.S. Since the index tracks home sales over time, it provides insight into house price changes at the national, census, state, metro, county, and ZIP code levels. For example, the fourth-quarter 2021 HPI report revealed that the five states with the highest annual price appreciation as of December 2021 were 1) Arizona 27.4 percent; 2) Utah 27.1 percent; 3) Idaho 27.0 percent; 4) Florida 25.6 percent; and 5) Tennessee 24.1%.
How Does the House Price Index Work?
The HPI is a free, publicly available gauge of housing prices in the U.S. from the FHFA. The index is calculated based on single-family mortgages that are purchased or securitized through Fannie Mae and Freddie Mac, which are the largest mortgage finance institutions in the United States. The HPI index reports are released on a monthly, quarterly, and annual basis. The HPI provides a tool for understanding housing market trends, which play a significant role in the economy. For example, researchers may use the HPI to understand changes in housing affordability, prepayments, and mortgage defaults. In the chart below, you can see the HPI trends over the decades since its inception.
How Home Prices Affect Inflation
Home prices have an effect on overall inflation and deflation. The consumer price index (CPI) is one of the most widely used measures of inflation and deflation in the United States. Home prices are among the factors that go into the CPI.
The Home Price Index vs. the Case-Shiller Index
The HPI is similar to the S&P/Case-Shiller U.S. National Home Price Index, but it has some differences. The HPI is an index maintained by the Federal Housing Finance Agency and includes loans purchased or securitized through Fannie Mae and Freddie Mac. The Case-Shiller Index is a value-weighted index because the price trends for more-expensive homes have a greater influence on estimated price changes than lower-priced homes. In contrast, the HPI is unweighted and treats all homes equally. While these indices are different, they both provide a gauge for the general rise and fall of housing prices, and are both economic indicators.
