The Federal Housing Finance Agency (FHFA) has released a new working paper analyzing the effects of distressed sales – i.e., REOs and short sales – on the FHFA House Price Index (HPI).
The study details recent and historical price discounts associated with such sales and provides statistical evidence supporting the validity of the approach FHFA has used to form its "distress-free" HPIs. Such indices, which were first released in the summer of 2012, show price trends free of the direct effects of distressed sales.
The working paper is designed to address the following questions:
- To what extent have distressed sales had an influence on the measured house price trends?
- Is the methodology FHFA currently uses for identifying – and removing – distressed sales from its "distress-free" indices reliable?
- How can price discounts associated with distressed sales be tracked over time and how large have such discounts been?
‘By comparing FHFA's standard HPIs – which incorporate sales price data from short sales and REO transactions – to FHFA's 'distress-free' indices (which remove such sales from the underlying data sample) – this working paper confirms that distressed sales have had a significant effect on the FHFA HPI,’ the agency states in its preamble to the report. ‘Focusing on price measures for Miami and Tampa, Fla., the paper reveals that FHFA's distress-free indices showed more modest price declines than FHFA's standard price indices during the early part of the housing bust. In other words, the presence of distressed sales in the standard HPI had a depressing effect on measured price changes.’
‘In more recent periods, when distressed sales comprised a shrinking percentage of real estate transactions, the working paper reveals the opposite effect,’ FHFA adds. ‘As the 'weight' of distressed sales on the standard index decreased in recent periods, the depressing effect lessened over time. This meant that the price appreciation observed in the standard FHFA index was somewhat above what the distress-free measures reported.’
The paper, "Working Paper 13-01: Distressed Sales and the FHFA House Price Index," was authored by FHFA Principal Economist Andrew Leventis and FHFA Economist Will Doerner in FHFA's department of Housing Finance Research and Analysis.
The FHFA stressed that its working papers ‘are preliminary products circulated to stimulate discussion and critical comment. The analysis and conclusions are those of the authors and do not imply concurrence by other staff at the Federal Housing Finance Agency or its director.’
To download a copy of the working paper, click here.
