The Federal Housing Finance Agency (FHFA) has released its U.S. house price index (HPI) for March. The index reached a record high last month, coming in at 398.0. The latest reading represents a 0.6% increase in U.S. home prices from the previous month a 3.6% increase from one year ago. After adjusting for inflation, the real index is up 0.8% month-over-month and up 0.2% year-over-year.
Here is the opening of the press release:
Washington, D.C. – U.S. house prices rose 4.3 percent between the first quarters of 2022 and 2023, according to the Federal Housing Finance Agency (FHFA) House Price Index (FHFA HPI®). House prices were up 0.5 percent compared to the fourth quarter of 2022. FHFA’s seasonally adjusted monthly index for March was up 0.6 percent from February.
“U.S. house prices generally increased modestly in the first quarter” said Dr. Anju Vajja, Principal Associate Director in FHFA’s Division of Research and Statistics. “However, year over year prices in many western states have started to decline for the first time in over ten years.”
FHFA House Price Index
The House Price Index is a measure of the change in prices of single-family homes, using data from Fannie Mae and Freddie Mac. It helps to analyze the strength of the US housing market by watching the rise and fall of prices. As prices increase so does consumer confidence. Conversely, as prices decrease, consumer confidence declines as well.
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.
In the chart above we see that the nominal HPI index has reached a new all-time high while the real HPI index is still below its all-time high from last year. Both have exceeded their pre-recession peaks, of what's generally regarded to have been a housing bubble, for the past several years.
The next chart shows the growth of the nominal and real index since the turn of the century. The nominal index has grown 190.3% since 2000 while the real index has grown 70.9%.
House Price Index vs. Owners' Equivalent Rent of Residences
For an interesting comparison, let's overlay the HPI and the most closely matching sub-component of the CPI, owners' equivalent rent of residences (OER). OER measures how much monthly rent that would have to be paid in order to substitute a currently owned house as a rental property.
HPI and OER moved in close parallel from the 1991 inception date of the former until early 1999. At which point the two parted company and HPI began accelerating into the housing bubble. HPI then fell 21.2% over the next 48 months to its 2011-2012 trough. Confirmation of the "bubble" designation for house prices is the 39.3% spread between HPI and OER in January 2006.
Are we in another housing bubble? The current spread is 53.7%, exceeding the "bubble designation" just mentioned. The spread was the widest in May 2022 at 62.9% but has been narrowing ever since.
Here we compare the CPI for all urban consumers to both the nominal and real house price index, which is a similar comparison to what I do in our Case-Shiller update. Nominal HPI growth has clearly taken off since 2012. However, when adjusted for inflation, the house price index has been increasing at a much slower rate.
ETFs associated with residential real-estate include: iShares Residential and Multisector Real Estate ETF (REZ).
This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at VettaFi | Advisor Perspectives
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