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). The loan limit in 2007 was $417,000. The limit was raised temporarily in February 2008 to as much as $729,750 in high cost areas of the country. The loan limit for 2009 was $417,000 for one-unit homes in most areas, but could be up to $625,500 in certain high cost areas in the continental United States. 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. But markets focus on the report’s purchase-only index.
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 the 2000′s, 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.
Many economists believe that the U.S. economy and especially the depressed housing sector will not recover until home prices firm back up.