Key highlights from October 2014's home price report (Part 1 of 3)
The Federal Housing Finance Agency’s (FHFA) House Price Index
The FHFA House Price Index (or HPI) differs from other house price indices such as Case-Shiller and Radar Logic. HPI only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac. This means the home prices are below the conforming threshold of $417,000. It also means the borrower has a mortgage that eliminates cash-only transactions. Finally, the FHFA HPI eliminates jumbos. This makes it more of a central tendency index.
In October, home prices grew 0.6% on a month-over-month basis. They’re up 4.5% year-over-year. Prices are now within 5.1% of their April 2007 peak. They correspond to September 2005 levels.
Real estate values drive consumer confidence and spending. They have an enormous impact on the economy. The phenomenon of “underwater” homeowners—homeowners who owe more than their mortgage is worth—has been a major drag on economic growth. Underwater homeowners are reluctant to spend. They can’t relocate to where the jobs are. So, real estate and mortgage professionals watch the real estate indices closely.
Real estate prices also drive credit availability in the economy. Mortgages and loans secured by real estate are major risk areas for banks. When real estate prices start falling, banks become conservative. They reserve funds for losses. Increasing real estate prices makes the collateral worth more than the loan. This encourages banks to lend more.
Implications for homebuilders
Rising real estate prices are helpful for builders like Lennar Corporation (LEN), PulteGroup, Inc. (PHM), D.R. Horton, Inc. (DHI), and Toll Brothers Inc. (TOL). Rising home prices make it possible for these companies to raise their prices and increase their gross margins. That said, it appears that buyers are beginning to experience sticker shock. Prices and mortgage rates increased over the past year. Builders are noticing a drop-off in traffic. This could mean the days of double-digit average selling prices (or ASPs) are over.
Investors who are interested in trading in the homebuilding sector should look at the SPDR S&P Homebuilders ETF (XHB).
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