Freddie Mac Home Price Index: A Simple GuideDec 10, 2023
Ok. Nerd alert. 🤓
You know me. My main goal is to make the complex real estate market easy to understand.
This article is going to ratchet it up a little, though. 🏋️♂️
I'm going under the hood on a home price index so we can understand it better.
But why are there so many of them? And how are they different? 🤔
Today, we'll walk through an example to see how the Freddie Mac Home Price Index differs from average sales price.
Real estate professionals will find it very valuable to understand this.
And if you're a data junkie like me, you'll enjoy seeing how the story can totally change depending on how you measure it.
So, without further ado, I give you the inside scoop on home price indices...
The Freddie Mac Home Price Index
The map above visualizes how home prices have changed in the top 380 metro areas in the USA according to the Freddie Mac Home Price Index.
Only 21 metro markets are experiencing price declines (which is incredible).
Looking closer at Florida, we can see a decent range in home price appreciation. 🔍
The Villages clocks in as the only metro area in the state with price decreases (-1.4%). 📉
On the other side of the spectrum, Sebring is growing at the fastest pace (+11.0%). 📈
It's interesting how these numbers can change depending on how you measure them.
Let's look at an example together:
**These are all comparing October 2023 to October 2022
Why are these changes so different?
The difference comes from how each is being measured.
First, average price is from Florida Realtors.
It compares the average sales price from sold properties this October to last October.
This is a year-over-year (YOY) comparison.
Second, Freddie Mac is also a year-over-year comparison, but with some differences.
Here's a few:
- 🏡 Appraisal Values. Freddie factors in appraisal values on refinances and purchase involving a conventional loan.
- 🔁 Repeat Transactions. Freddie only uses properties that have multiple valuations over time.
This presents us with some advantages and disadvantages.
- ⚖️ Sale Price vs. Appraisal Value. Many times, the appraisal value is different than the sales price (usually higher these days). Going off appraisal value could be more accurate since it's the value from a licensed expert on property valuation.
- 💵 Refinance Values Included. Using refinance appraisals gives Freddie's index an extra layer of depth. You could argue a refinance appraisal value is more accurate. That's because there's no contract with a purchase price leading the appraiser when doing the report.
- 🍎 Apples-to-Apples. By only considering the same houses over time, values aren't as impacted by a change in what's for sale. For example, if only really cheap homes were selling in an area the average price would fall. But that doesn't mean values truly are declining. It could be that only cheap houses are being listed for sale and everyone else is holding on to the nice houses.
- 🧩 Missing Properties. Average price is going to capture a wider range of transactions. Freddie's index does not include new construction or cash deals which is a large chunk of the market right now. Further, it only goes off conventional loan purchases and refinances which leaves out all other loan types.
- 🎢 Bigger Swings. In markets that have much fewer transactions taking place, this index can produce bigger swings. It's like when you look at values in a neighborhood. One or two sales can move the needle a lot if total transactions are low.
Congratulations on making it this far. 👏
I know this was a deeper dive than normal, but the payoff is so worth it.
Our clients expect us to be real estate experts and this type of information helps you exceed that expectation.
I'm sure you're still wondering: Which number should I use? Which index is better?
You guessed it... it depends! 🤷♂️
I'd argue Average Sale Price is much easier for everyone to understand.
However, it's still possible to miss some of the underlying changes in the market.
This is why you'll see people take multiple home price indices and average the change across all of them.
Each property is unique and, at the end of the day, these metrics are indicating if the tide is coming in or going out. 🌊
Most importantly, the opportunity here is in mastering your craft.
Knowing these details let's you stand head-and-shoulders over the crowd on your path to mastering the market. 🦸♀️
There's 2 weeks to Christmas! Let's make them count.
You've got this! 🚀
Dr. Alex Stewart
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