The Mortgage Buzz

Last week, the Case-Shiller Index reported home values up 0.8 percent across 20 tracked markets. The public-sector Federal Housing Finance Agency has reached a similar conclusion.

Reporting on a two-month lag, the government’s Home Price Index shows home values up 0.8 percent in April, buoyed by the expiring federal home buyer tax credit and low mortgage rates.  It’s a positive signal for a recovering housing market — in los angeles and everywhere else.

But just because the Home Price Index says home values are rising, that doesn’t mean they are. The Home Price Index methodology is flawed on multiple fronts.

First, the Home Price Index reports on a 60-day delay. This two-month lag turns the HPI a trailing indicator for the housing market instead of a forward-looking one. If you’re a home buyer looking for direction, HPI won’t give it to you — you’ll have to get that analysis from your real estate agent.

Second, HPI only accounts for home values in which the home’s attached mortgage is backed by Fannie Mae or Freddie Mac.  As the FHA market share grows, fewer homes get included in the HPI sample set, and HPI values may be skewed high or low.

And, third, HPI doesn’t account for new home sales — only repeat ones.  This, too, eliminates a major segment of the market.

All of that said, though, the Home Price Index remains important to housing.  It’s still the most comprehensive home valuation model in print and it’s been giving strong readings since the start of year.  You can’t ignore that on any level.

It’s July and you may have missed the “rock bottom” los angeles home prices from earlier in the year, but homes are still relatively inexpensive. Couple that with all-time low mortgage rates and home affordability looks excellent. Consider making an offer while the terms are right.

Home values rose in March, according to the Federal Home Finance Agency’s most recent Home Price Index. Values were reported higher by 0.3 percent, on average, from February.

We use the phrase “on average” because the Home Price Index is broad-reaching, national housing statistic. It ignores the dynamics of neighborhood real estate markets like chicago as well as citywide markets like chicago , too.

Instead, the Home Price Index focuses on state and regional statistics.

For example, in March 2010 as compared to February:

• Values in the East South Central region rose 2.5%
• Values in the Mountain states rose 1.1%
• Values in the Middle Atlantic states fell 1.0%

Of course, none of this data is especially helpful for today’s home buyers and sellers.

Real estate is a local phenomenon that can’t be summarized by state or region. What matters most to buyers and sellers is the economics of a neighborhood and that level of granularity can’t be served up by a national housing report like the Home Price Index.

The Home Price Index data is additionally unhelpful to buyers and sellers in that it reports on a 2-month delay.

In other words, Home Price Index is not even a fair reflection of today’s market — it highlights the real estate market as it existed 60 days ago.

So why is the Home Price Index even published? Because government, business and banks rely on the reports.  As a national indicator, the Home Price Index helps governments make policy, businesses make decisions, and banks make guidelines. This, in turn, trickles down to Main Street where it impacts every one of us — and eventually influences real estate.

Since peaking in April 2007, the Home Price Index is off 13.44 percent.

Home values fell again in January, according to the Federal Home Finance Agency’s Home Price Index. Values were reported down 0.6 percent, on average.

We say “on average” because the Home Price Index is a national report. It doesn’t capture the essence of a local market like los angeles , or even a city market like new york.

The most granular that the monthly Home Price Index gets is regional and January’s report shows that:

• Values in the Mountain states rose 2.0%
• Values in the Pacific states were flat
• Values in the East North Central states fell 1.8%

It’s hardly helpful for home buyers entering the market, or home sellers trying to properly price a home.  Furthermore, because the Home Price Index reports on a 2-month delay, its data fails to reflect the current market conditions.

Versus January — the period from which HPI data is collected — mortgage rates are lower, buyer activity is up, and the federal home buyer tax credit is closer to expiring.  These each can have an impact on housing.

Ultimately, national real estate data like the Home Price Index is best suited for lenders and policy-makers.  National data helps to identify trends that shape formal policy, but it doesn’t help you, specifically. 

Since peaking in April 2007, the Home Price Index is off 13.2 percent.

Earlier this week, the private-sector Case-Shiller Index showed home prices slightly lower between November and December.  Thursday, the public-sector Home Price Index showed the same.

Publishing on a 2-month lag, the Federal Home Finance Agency said home prices fell by 1.6 percent nationally in December.  And that’s an average, of course.  Some regions performed well in December as compared to November, others didn’t.

• Values in the Middle Atlantic states improved slightly
• Values in New England were essentially unchanged
• Values in the Mountain states sagged, down 3.5%

These aren’t just footnotes. They’re an important piece toward understanding what national real estate statistics really mean. In short, “national statistics” are just a compilation of a bunch of local statistics.

For example, if we dig deeper into the FHFA Home Price Index 70-page report, we find that cities like Terre Haute, IN, Buffalo, NY, and Amarillo, TX posted year-over-year home price gains. You won’t see that in a “national” report.

Furthermore, it’s a sure bet that those same cities, you could find neighborhoods that are thriving, and others that are not.  Just because the city shows higher home values overall, it won’t necessarily be the case for every home in the city.

Every street in every neighborhood of every town in America has its own “local real estate market” and, in the end, that’s what should be most important to today’s buyers and sellers.  National data helps identify trends and shape government policy but, to the layperson, it’s somewhat irrelevant.

So, when you need to know whether your home in chicago is gaining or losing value, you can’t look at the national data.  You have to look at your block — what’s selling and not selling — and start your valuations from there.

Reporting on a two-month lag, the government said home values rose 0.7 percent in November. 

National home prices are at their highest point since February 2009.

But before we look too much into the FHFA’s Home Price Index, it’s important that we’re cognizant of its shortcomings; the most important of which is its lack of real-time reporting.

According to the National Association of Realtors™, 80% of purchases close within 60 days. As a result, because of its two-month delay, the Home Price Index report actually trails today’s market data by an entire sales cycle.

This is one reason why home values appear to be rising even while new data shows that both Existing Home Sales and New Home Sales fell flat last month.  The home valuation report is using data from November; the sales reports are using data from December.

The Home Price Index is a trailing indicator and next month, as the Spring Market gets underway, the government will be reporting data from the holidays.

The same is true for the Case-Shiller Index. It, too, operates on a 2-month lag.

All of that said, however, long-term trends do matter in housing and the Home Price Index has shown consistent improvement over the last 10 months.  In many markets, home sales are up, home supplies are down, and values have increased.  This trend should continue into the early part of 2010, at least.

If you’re wondering whether now is a good time to buy a home in new york , consider low prices, cheap mortgages and an available tax credit as three good incentives.  By May, none of them will likely be available.