FHFA House Price Index: Real Index Level Last Seen in August 2007

The Federal Housing Finance Agency (FHFA) has released its U.S. House Price Index (HPI) for May. Here is the opening of the report:

Washington, DC – U.S. house prices rose in May, up 0.4 percent from the previous month, according to the Federal Housing Finance Agency (FHFA) seasonally adjusted monthly House Price Index (HPI). The previously reported 0.7 percent increase in April was revised downward to reflect a 0.6 percent increase.

The FHFA monthly HPI is calculated using home sales price information from mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac. From May 2016 to May 2017, house prices were up 6.9 percent.

For the nine census divisions, seasonally adjusted monthly price changes from April 2017 to May 2017 ranged from -0.5 percent in the Middle Atlantic division to +1.0 percent in the West South Central division. The 12-month changes were all positive, ranging from +4.0 percent in the Middle Atlantic division to +8.7 percent in the Pacific division. [Link to report]

The chart below illustrates the monthly HPI series, which is not adjusted for inflation, along with a real (inflation-adjusted) series using the Consumer Price Index: All Items Less Shelter.

House Price Index

In the chart above we see that the nominal HPI index has exceeded its pre-recession peak of what's generally regarded to have been a housing bubble. Adjusted for inflation, the index remains off its historic high.

The next chart shows the growth of the nominal and real index since the turn of the century.

HPI Growth since 2000

For an interesting comparison, let's overlay the HPI and the most closely matching subcomponent of the Consumer Price Index, Owners' Equivalent Rent of Residences (OER). Note: For an explanation of OER, see this PDF commentary from the Bureau of Labor Statistics.

HPI versus OER

HPI and OER moved in close parallel from the 1991 inception date of the former until early 1999, when the two parted company and HPI began accelerating into the housing bubble. HPI then fell 20.7% over the next 48 months to its March 2007 trough. Confirmation of the "bubble" designation for house prices is the 40.1% spread between HPI and OER in January 2006.

Is another housing bubble forming? The current spread is 21.6%.