Saturday, February 21, 2009

How HPI differs from S&P/Case-Shiller Indices

Annual rates of nominal and real price changes in the U.S. housing market as documented by the S&P/Case–Shiller indices differ from the housing price changes measured by the House Price Index(HPI) data published by the U.S. Federal Housing Finance Agency (an entity created in 2008 from the merging of the U.S. Office of Federal Housing Enterprise Oversight and the U.S. Federal Housing Finance Board). The HPI is a weighted, repeatsales index, meaning that it measures average price changes in repeat sales or refinancings on singlefamily properties with mortgages that have been purchased or securitized by Fannie Mae (Federal National Mortgage Association) or Freddie Mac(Federal Home Loan Mortgage Corporation). The HPI serves as a timely indicator of single-family house price trends in the 50 states and the District of Columbia and for the United States as a whole. Because of the breadth of the sample, the HPI gives a more broadly representative indication of housing price trends than the S&P/Case–Shiller indices for various metropolitan areas. An important reason for sometimes stark differences between the S&P/Case–Shiller indices and HPI data is that the HPI uses conforming loans that are less influenced by price effects tied to subprime mortgages or especially risky mortgage financing. Differences between housing price changes measured. The method used to calculate the S&P/Case–Shiller indices is a “repeat-sales” method; it is applied to properties that have sold at least twice to capture the appreciated value of homes of constant quality. Publicly available data at local recording offices across the country are collected on all transactions involving residential properties during the months in question. When a specific home is resold, months or years later, the new sale price is matched to the first price, which creates a sale pair. The difference in the value of this sale pair is measured and recorded. Sale pairs are screened for factors that would distort the index, including foreclosures, non-arms-length transactions (sales between family members), and suspected data errors. The S&P/Case–Shiller indices assign smaller weights to sale pairs that reflect large changes in sale prices relative to the community around them. The assumption is that this change is a result of remodeling or neglect. Sale pairs are also weighted on the basis of the length of the time interval between sales. Sale pairs with longer time intervals are given less weight than sale pairs with shorter intervals to account for the probability of physical changes in sale properties. All the qualified weighted sale pairs in a given MSA are aggregated into the corresponding MSA index.

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