Notice of Establishment of Housing Price Index, 30237-30246 [2015-12781]
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Federal Register / Vol. 80, No. 101 / Wednesday, May 27, 2015 / Notices
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Federal Communications Commission.
Marlene H. Dortch,
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[FR Doc. 2015–12658 Filed 5–26–15; 8:45 am]
BILLING CODE 6712–01–P
FEDERAL HOUSING FINANCE
AGENCY
[No. 2015–N–03]
Notice of Establishment of Housing
Price Index
AGENCY:
Federal Housing Finance
Agency.
Notice and Request for Input.
ACTION:
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The Federal Housing Finance
Agency (FHFA) is establishing and shall
maintain a method for assessing the
national average single-family house
price for use in adjusting the
conforming loan limits of Fannie Mae
and Freddie Mac (the ‘‘Enterprises’’).
For these purposes, FHFA has
considered a number of different
measures, including the House Price
Index maintained by the Office of
Federal Housing Enterprise Oversight
(OFHEO) of the Department of Housing
and Urban Development before the
effective date of the Federal Housing
Finance Regulatory Reform Act of
2008.1 FHFA also considered house
price indexes of the Bureau of the
Census of the Department of Commerce
as well as other privately-produced
indexes.2
FHFA intends to use the FHFA
‘‘expanded-data’’ house price index
(HPI)—an index it publishes on a
quarterly basis—to adjust the
conforming loan limit. This Notice
solicits public input. Once public input
is reviewed, another Notice will be
published describing FHFA’s final
determination.
DATES: FHFA will accept input on the
Notice on or before July 27, 2015. For
additional information, see
SUPPLEMENTARY INFORMATION.
ADDRESSES: You may submit your input
on the Notice, identified by ‘‘Notice No.
2015–N–03,’’ by any of the following
methods:
• Agency Web site: https://www.fhfa.
gov/AboutUs/Contact/Pages/Requestfor-Information-Form.aspx.
• Hand Delivery/Courier to: Alfred M.
Pollard, General Counsel, Attention:
Input/Notice No. 2015–N–03, Federal
Housing Finance Agency, Constitution
Center, 400 Seventh Street SW., Eighth
Floor, Washington, DC 20024. Deliver
the package to the Seventh Street
Entrance Guard Desk, First Floor, on
business days between 9 a.m. and 3 p.m.
• U.S. Mail Service, United Parcel
Service, Federal Express, or other
commercial delivery service to: Alfred
M. Pollard, General Counsel, Attention:
Input/Notice No. 2015–N–03, Federal
Housing Finance Agency, Constitution
Center, 400 Seventh Street SW., Eighth
Floor, Washington, DC 20024.
FOR FURTHER INFORMATION CONTACT:
Andrew Leventis, Principal Economist,
202–649–3199, Andrew.Leventis@
fhfa.gov, or Jamie Schwing, Associate
SUMMARY:
1 Division A of the Housing and Economic
Recovery Act of 2008, Pub. L. No 110–289, 122 Stat.
2654, 2659 (2008). Note that OFHEO was one of the
predecessor agencies to FHFA.
2 The S&P/Case-Shiller and CoreLogic house
prices indexes, for instance, were considered.
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Federal Register / Vol. 80, No. 101 / Wednesday, May 27, 2015 / Notices
General Counsel, 202–649–3085,
Jamie.Schwing@fhfa.gov, (not toll-free
numbers), Federal Housing Finance
Agency, 400 Seventh Street SW.,
Washington, DC 20024.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Input
II. Statutory and Regulatory Background
III. House Price Index for Loan Limit
Adjustments
A. Summary
B. Background
1. Safety and Soundness Act Section 1322
2. Evaluating Existing Measures of Price
Changes
i. Available Measures
ii. Evaluation Criteria
C. Basics of the Proposed Methodology
D. Other Measures of Home Prices
E. Implementation Issues—Details
F. Empirical Estimates of Price Changes:
Expanded-Data HPI vs. Other Measures
IV. Conclusion
I. Input
FHFA invites input on all aspects of
the Notice and will take all relevant
input into consideration. A final Notice
will be published after FHFA considers
public feedback.
Copies of all submissions received
will be posted without change,
including any personal information you
provide such as your name, address,
email address and phone number, on
the FHFA internet Web site, https://
www.fhfa.gov. In addition, copies of all
submissions received will be available
for examination by the public on
business days between the hours of 10
a.m. and 3 p.m. at the Federal Housing
Finance Agency, Constitution Center,
400 Seventh Street SW., Washington,
DC 20024. To make an appointment to
inspect submissions, please call the
Office of General Counsel at (202) 649–
3804.
II. Statutory and Regulatory
Background
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The Housing and Economic Recovery
Act of 2008 (HERA), Public Law 110–
289, 122 Stat. 2654 (July 30, 2008),
amended the Federal Housing
Enterprises Financial Safety and
Soundness Act of 1992 (12 U.S.C. 4501
et seq.) (Safety and Soundness Act) to
establish FHFA as an independent
agency of the Federal Government.3
3 Division A of HERA titled, the Federal Housing
Finance Regulatory Reform Act of 2008, established
FHFA to oversee the operations of the Federal
National Mortgage Association, the Federal Home
Loan Mortgage Corporation (collectively,
Enterprises), and the Federal Home Loan Banks
(Banks) (collectively, regulated entities). FHFA is to
ensure that the regulated entities operate in a safe
and sound manner including being capitalized
adequately; that their operations foster liquid,
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Pursuant to section 1322 (12 U.S.C.
4542) of the Safety and Soundness Act,
as amended by section 1124(d) of
HERA, 122 Stat. 2693,4 FHFA is
required to establish and maintain a
House Price Index for use in adjusting
the conforming loan limits of the
Enterprises.5 A number existing metrics,
including those identified in section
1322, could serve this purpose. Also,
HERA sections 1124(a) and (b), 122 Stat.
2691–2692, amended sections 302(b)(2)
of the Federal National Mortgage
Association Charter Act (12 U.S.C.
1717(b)(2), and 305(a)(2) of the Federal
Home Loan Mortgage Corporation Act
(12 U.S.C. 1454(a)(2) (together, the
Charter Acts), to specify that the
baseline national loan limit should be
changed annually by the percentage
change in the established index.
index, which is already produced by
FHFA on a quarterly basis, uses data
from a number of different sources and
employs the well-established ‘‘repeattransactions’’ methodology for
measuring price changes. A number of
privately-produced indexes in fact use
the same fundamental methodology, but
have not been selected. The expandeddata index is deemed to be relatively
attractive because of the lengthy
publication track record of the FHFA
(and OFHEO) price indexes and the
methodological control that production
of the relied-upon index allows.
Public input is sought on the relative
merits of the selected index. Feedback is
also desired on technical
implementation matters addressed in
this Notice.
III. House Price Index for Loan Limit
Adjustments
1. Safety and Soundness Act Section
1322
A. Summary
Section 1322 of the Safety and
Soundness Act requires that FHFA
‘‘establish and maintain a method of
assessing the national average 1-family
house price for use in adjusting the
conforming loan limitations.’’ 12 U.S.C.
4542. The conforming loan limit is the
maximum size of mortgage that the
Enterprises are allowed to acquire in a
given year. With some exceptions, the
Safety and Soundness Act requires that
FHFA annually adjust the maximum
loan size by the percentage change in
the index over the preceding year.
After reviewing the landscape of
available measures and analyzing
candidate new methodologies, FHFA
has chosen its ‘‘expanded-data’’ HPI for
tracking average home values and
adjusting the conforming loan limit. The
Under section 1322 of the Safety and
Soundness Act, the FHFA Director is
required to ‘‘establish and maintain’’ a
measure of average U.S. home prices. In
doing so, the Safety and Soundness Act
requires that FHFA ‘‘take into
consideration’’ various measures of
home prices when developing the
index. The reference measures include
the FHFA HPI,6 data from the Census
Bureau, information from a
contemplated FHFA survey of national
lenders, and ‘‘any other indexes or
measures that the Director considers
appropriate.’’ 12 U.S.C 4542.
In the context of the Safety and
Soundness Act, the purpose of the
established index is to adjust the
conforming loan limit. Specifically, it is
used to adjust the baseline loan limit
that applies in most of the country. This
limit applies everywhere except for
areas where median home values are
high or are otherwise designated as
‘‘high-cost’’ areas. Loan limits in highcost areas will be addressed later in this
Notice.
Sections 302(b)(2) and 305(a)(2) of the
Charter Acts specify that the baseline
national loan limit should be changed
annually by the percentage change in
the established index. The change in the
baseline limit is constrained when price
declines occur, however. Specifically,
the national loan limit is not permitted
to decline when the national average
price declines. Also, after a period of
price declines, when the national
efficient, competitive and resilient national housing
finance markets; that they comply with the Safety
and Soundness Act and their authorizing statutes,
and with rules, regulations, guidelines and orders
issued under those statutes; that they carry out their
missions through activities authorized and
consistent with the Safety and Soundness Act and
their authorizing statutes; and that the activities and
operations of the entities are consistent with the
public interest. See 122 Stat. 2659, 2663–2664
(2008).
4 Original section 1322 was repealed by section
1121(2) of HERA, (122 Stat. 2689).
5 Section 1322 states in relevant part that ‘‘the
Director shall take into consideration the monthly
survey of all major lenders conducted by the
Federal Housing Finance Agency to determine the
national average 1-family house price, the House
Price Index maintained by the Office of Federal
Housing Enterprise Oversight of the Department of
Housing and Urban Development before the
effective date of the Federal Housing Finance
Regulatory Reform Act of 2008, any appropriate
house price indexes of the Bureau of the Census of
the Department of Commerce, and any other
indexes or measures that the Director considers
appropriate.’’
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B. Background
6 The Safety and Soundness Act describes the
FHFA HPI as ‘‘the House Price Index maintained by
the Office of Federal Housing Enterprise Oversight
of the Department of Housing and Urban
Development before the effective date of the Federal
Housing Finance Regulatory Reform Act of 2008.’’
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average home value finally does
increase, the loan limit cannot increase
until prices regain all of their prior
losses.
Prior to and immediately following
the enactment of HERA, the national
average home price declined
significantly. FHFA’s house price
indexes and all other reliable measures
of home price movements evidenced
substantial declines. FHFA’s expandeddata house price index, for instance,
declined by more than twenty percent
between the third quarter of 2007 and
the third quarter of 2011. Given the
Safety and Soundness Act’s prohibition
against declines in the baseline loan
limit, declining U.S. home prices meant
that the selection of a specific index for
adjusting the loan limit under the Safety
and Soundness Act was of little
practical import; the baseline loan limit
would be the same irrespective of the
index used. With each year’s
publication of the conforming loan
limits for the following year, FHFA
noted this and kept the baseline loan
limit the same ($417,000 for one-unit
properties in most of the country).7
Housing markets have improved
substantially over the last few years and
home values are getter closer to where
they were just before HERA’s
enactment. Indeed, FHFA’s expandeddata house price index is within a few
percentage points of its level in 2007.8
Given the rising prices, it is now
important that FHFA formally establish
the specific methodology it will use for
tracking prices and adjusting the
baseline loan limit.
It should be noted that sections
302(b)(2) and 305(a)(2) of the Charter
Acts specify that in locations where the
115 percent of the local median home
value is above the baseline loan limit
(‘‘high-cost’’ areas) the local limit is set
at 115 percent of the median value. In
no case, however, can the local loan
limit be more than 150 percent of the
baseline limit. The baseline loan limit
thus acts as both a ‘‘floor’’ on loan limits
and as a determinant of a ‘‘ceiling’’ on
loan limits. The methodology for
adjusting the baseline loan limits thus
plays an indirect role in setting limits in
these areas.
The adjustment process for setting the
baseline loan limit is also important to
7 The announcement for 2015, for example, can
be found on FHFA’s Web site at https://www.fhfa.
gov/Media/PublicAffairs/Pages/FHFA-Announces2015-Conforming-Loan-Limits-Unchanged-in-Mostof-the-U-S.aspx. See, in particular, the second page
of the Addendum to the release: https://www.fhfa.
gov/DataTools/Downloads/Documents/ConformingLoan-Limits/CLLAddendum_CY2015.pdf.
8 As of the fourth quarter of 2014, the seasonally
adjusted version of the index was about 7.3 percent
below the 2007Q3 level.
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certain statutorily-defined areas.
Legislation enacted prior to HERA set
out Alaska, Hawaii, Guam, and the U.S.
Virgin Islands as areas with higher loan
limits.9 In these statutorily-defined
areas, the local ‘‘floor’’ on loan limits is
150 percent of the baseline loan limit in
the rest of the country. If area median
home values are sufficiently high in
these areas, the local limit can be even
higher, as it can rise to a maximum of
150 percent of the ceiling in the rest of
the country (which in turn is 150 of the
baseline loan limit). Today, the highest
possible loan limit for one-unit
properties in the statutorily defined
areas is $938,250 (i.e., 225 percent of the
baseline loan limit of $417,000). The
baseline loan limit establishes the floor
and ceiling limits in these statutorilydefined areas and thus the index used
for adjusting the baseline plays a role in
determining limits in the statutorilydefined areas.
2. Evaluating Existing Measures of Price
Changes
i. Available Measures
A significant number of home price
measures are available and could be
used for adjusting the baseline
conforming loan limit. Available metrics
include:
D Any of FHFA’s existing price
indexes, including the purchase-only
HPI, the all-transactions HPI, and the
expanded-data HPI;
D The Census Bureau’s Constant
Quality House Price Index;
D The CoreLogic HPI;
D The S&P/Case-Shiller Indexes; and
D The National Association of
Realtors’ Average or Median Home
Prices.
The first two of these are specifically
identified in section 1322. The other
listed measures are produced by private
data suppliers. When deciding which
metric to be used for measuring price
changes, FHFA considered all of the
measures above.
In 2010, FHFA published a Research
Paper titled ‘‘An Approach for
Calculating Reliable State and National
House Price Statistics.’’ The paper,
which is available for download on the
FHFA Web site,10 described a
methodology that might be used for
measuring the national average home
price. The methodology will generally
produce estimates of average price
changes that are similar to those
9 The higher limit in the U.S. Virgin Islands, for
example, was established in PL 102–550.
10 The paper, authored by Andrew Leventis, is
available at: https://www.fhfa.gov/PolicyPrograms
Research/Research/PaperDocuments/20100930_
RP_CalculatingStateNationalHousePriceStatistics_
508.pdf.
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estimated by FHFA’s expanded-data
HPI, but involves the addition of
supplemental data. This morecomplicated methodology may be
considered as an option in the future,
but is not considered here.
ii. Evaluation Criteria
In evaluating various measures of
home prices changes that might be used
for section 1322, FHFA considered a
number of factors. The most important
factor was whether price changes
reflected in the measure would correlate
closely with changes in the U.S. average
home price. The purpose of the index
referenced in the Safety and Soundness
Act is to adjust the conforming loan
limit, and thus the reliable measurement
of price changes is of the highest
importance. As closely as possible,
changes in the selected index should
reflect changes in the average value of
homes.
Section 1322 indicates that the
measure should ‘‘assess’’ average U.S.
home prices. Whether or not the
measure needs to show the actual level
of the average U.S. home prices is of
little practical import for the Safety and
Soundness Act’s purposes. The critical
use of the metric is to measure the price
change and for FHFA to adjust the loan
limit accordingly.11
The absence of any real need to
measure the level of prices is notable
because many existing house price
measures do not actually report
statistics on the absolute level of home
prices; rather, they report indexes that
can be used for measuring changes. No
average or median house prices are
currently published for the FHFA HPI,
for instance. Similarly, other measures
(e.g. the S&P/Case-Shiller index, the
CoreLogic index) are not generally
accompanied by level estimates. All of
these measures, despite the absence of
the estimated level of home prices, thus
can act as reasonable candidates for the
index to be used for loan limit
adjustment.
Before the next evaluation criteria is
discussed, it is important to briefly
address the target of the index—the
‘‘average’’ price. Interestingly, the Safety
and Soundness Act references the
average price in the context of
measuring changes in national home
price and adjusting the baseline
conforming loan limit, but references
median home values in the setting of
loan limits in high-cost areas.
Ultimately, the practical impact of the
average-median distinction is modest:
11 The Safety and Soundness Act implicitly
recognizes that primacy of the change estimate by
describing the measure as an index as opposed to
merely the average value.
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the long-term growth rates in average
and median home prices are very
similar and thus the choice of the target
statistic (average vs. median) likely will
have only a minimal impact on longterm loan limits. Even in the shorter
term—during the recent housing bust—
there was no dramatic difference in the
measured declines for the median and
mean U.S. prices.12 The index FHFA
intends to use for loan limit adjustment
tracks the geometric average U.S. home
price—a measure that tends to correlate
closely with median and average home
prices.13
Aside from the issue of the relevance
of the statistic and the target (the
average vs. median), the methodological
transparency is also deemed to be a key
attribute for evaluating various
alternatives for the index. Details
concerning how the statistics are
constructed are important, as is
information about methodological
changes that might be made over time.
In the landscape of available home
prices, FHFA found vast differences in
the amount of background information
available.
Beyond relevance and transparency,
FHFA also values reliability and
control. The selected index should have
a historical ‘‘track record’’ to minimize
the risk that the relied-upon metric
would be discontinued.
Agency production of the index also
is important, not only because it would
ensure continued publication of the
important statistic, but also because
production of the index enables the
agency to make appropriate
enhancements. The scope of available
house price information has expanded
sharply over the last several years and
new developments may soon make more
and better transactions information
available. Agency production of the
index will mean that new information
can be added in a way that improves the
precision of estimates, while not being
disruptive to the setting of loan limits.
Finally, cost considerations were
taken into account when evaluating
candidate measures. While use of the
expanded-data HPI and a number of
externally-produced indexes would
entail no incremental cost, one option
would be for FHFA to develop and
maintain a new index (for example, the
one considered in the 2010 FHFA
Research Paper). Efforts spent on
maintaining a new measure, which
12 According to estimates from the National
Association of Realtors’ Existing Home Sales series,
for instance, the decline between September of 2007
and September of 2011 was roughly 20.7 percent for
average prices and 16.9 percent for median prices.
13 The geometric mean of N numbers is computed
as the product of the numbers taken to the 1/N root.
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would be yet another variant of FHFA’s
already-expansive suite of available
price indexes, would entail a substantial
expenditure of resources. The benefits
of any increased precision of the
estimates would need to be weighed
against these costs.
C. Basics of the Proposed Methodology
FHFA intends to use the ‘‘expandeddata’’ HPI for the purpose of tracking
average U.S. home prices as
contemplated in section 1322. While
any of a number of existing measures
might produce similar results, FHFA’s
expanded-data HPI for the U.S. is found
to be particularly attractive under the
evaluation criteria discussed above.
The index, which has been published
by FHFA since August of 2011, is
constructed using the same ‘‘repeattransactions’’ methodology as is used to
construct the traditional FHFA HPI. The
basic approach has been used by FHFA
and OFHEO, one of FHFA’s predecessor
agencies, since 1996 when the HPI was
first publicly released. The details on
how the index is constructed are found
in a technical primer available on
FHFA’s Web site.14 15
The technical elements of the
methodology are not detailed in this
Notice, but the basic statistical model
was first developed in the 1960s and
was refined by Karl Case and Robert
Shiller more than twenty years ago. The
fundamental approach entails finding
homes that have been sold two or more
times in the past and calibrating a set of
numbers—index values—to broadly
reflect changes in value observed for
such homes. Using millions of historical
real estate transactions, the model
begins by creating transaction ‘‘pairs,’’
where each pair reflects the price
growth (or decline) that occurred for a
given property over a specific interval of
time. For example, if a hypothetical
home was sold two times in the past—
once for $100,000 in the first quarter of
2001 and again for $225,000 in the
fourth quarter of 2014—then a pair
would be created showing appreciation
of 125 percent between 2001Q1 and
2014Q4.16 Using this pair and millions
14 See Charles Calhoun, ‘‘OFHEO House Price
Indexes: HPI Technical Description,’’ available at
https://www.fhfa.gov/PolicyProgramsResearch/
Research/PaperDocuments/1996–03_HPI_
TechDescription_N508.pdf. Hereafter, this paper is
referred to as the HPI Technical Primer.
15 Other publicly-available measures, including
notably the S&P/Case-Shiller and the CoreLogic
suite of indexes, employ the same basic
methodology, although some details concerning
their construction are not publicly available. The
methodologies used in forming those indexes and
decisions related to the release of the measures are
not within FHFA’s control.
16 A home with three historical sales will produce
two pairs. The first pair will reflect the price change
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of other pairs for other properties, the
basic model entails estimating a
regression model 17 that ‘‘explains’’
observed price changes using only
information about when the individual
property transactions occurred. The
statistical model attempts to explain
price changes (as opposed to price
levels), a feature that makes it less
susceptible to certain biases when
measuring overall price movements in
the marketplace.18 The output of the
model is a series of index values whose
changes broadly mimic the price
changes observed for the millions of
properties in the dataset.
The FHFA expanded-data HPI uses
the repeat-transaction model for
estimating price changes in individual
cities, all 50 states (and Washington,
DC), and in the U.S. as a whole.
Consistent with the way other FHFA
indexes, for example the ‘‘purchaseonly’’ and ‘‘all-transactions’’ indexes,
are formed, the change in the expandeddata U.S. index is constructed to reflect
the weighted average changes across the
50 states and Washington, DC. This
ensures that changes in relative real
estate volumes across states do not bias
the measurement of the change in U.S.
prices. If the expanded-data U.S. index
was estimated by simply pooling
transactions data from all states together
and directly estimating it, the measured
price change would be susceptible to
biases when relative transaction
volumes shift across states. In an
environment in which prices are rising
and transaction activity increases
dramatically in those states with the
most extreme price increases, for
instance, the weighting ensures that the
volume shifts do not inflate the
measured price measure for the U.S. as
a whole.19
Although the expanded-data HPI
employs the same basic methodology as
is used for forming FHFA’s two
Enterprise-only datasets (the ‘‘alltransactions’’ and ‘‘purchase-only’’
indexes), it uses slightly different
historical transactions data. Like
between the first and second transactions and the
second pair will show the change in selling price
between the second and third transactions.
17 A regression model is a well-established
method for showing the statistical relationship
between variables.
18 For instance, if a large number of expensive
homes transact in any given quarter, then the
average and median transaction values will rise for
a given area, even if there is no underlying home
price appreciation. The repeat-transactions index,
by contrast, will generally not reflect spurious price
‘‘increases’ in such situations.
19 During market downturns (when transaction
volumes tend to shrink in areas with the most
extreme price declines), the constant weighting
approach prevents the index from reporting
undersized price declines.
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FHFA’s other measures, the expandeddata index incorporates sales price
information for homes with Enterprisepurchased mortgages. Unlike FHFA’s
‘‘all-transactions’’ index, however,
appraisal values from refinance
mortgages are not used in the data
sample. Also, importantly, unlike both
of the other two measures, the
expanded-data indexes incorporate
transaction prices for homes with FHAendorsed loans and homes whose
transactions have been recorded at
various county recorder offices through
the country. FHFA works with an
outside data vendor—currently
CoreLogic—to obtain the county records
data from hundreds of counties
throughout the country.
The addition of the two supplemental
data sources (FHA and CoreLogic) to the
Enterprise data provides for a better
estimate of the overall change in the
U.S. average home price than is
available from the other indexes. To be
sure, price changes reported in FHFA’s
other datasets will often closely
resemble those reported by the
expanded-data index. However, as has
been discussed in prior OFHEO and
FHFA publications, trends in home
values sometimes have been
demonstrably different for homeowners
with different types of financing.20 The
expanded-data HPI is well-suited for
capturing and incorporating those
trends into its estimate of aggregate
home price movements, unlike the other
FHFA indexes.
Changes in the expanded-data HPI do
not perfectly measure changes in the
average or median U.S. home prices, to
be sure. As discussed in the technical
primer that details the FHFA
methodology 21 and in the academic
literature on the subject of price
indexes,22 FHFA’s basic methodology
tracks the geometric average home price.
In most cases, however, the index will
very closely correlate with any index
that would specifically track the median
(and often the average) price.
In the context of the estimation of
house price indexes, a robust debate has
occurred over the last several years
regarding whether ‘‘distressed sales’’
should be included in the calibration
20 See, for example, ‘‘Recent Trends in Home
Prices: Differences across Mortgage and Borrower
Characteristics,’’ August 2008, available at https://
www.fhfa.gov/PolicyProgramsResearch/Research/
PaperDocuments/20080825_RP_
RecentTrendsHomePrices_N508.pdf.
21 See the HPI Technical Primer available at
https://www.fhfa.gov/PolicyProgramsResearch/
Research/PaperDocuments/1996–03_HPI_
TechDescription_N508.pdf.
22 For a lengthy discussion, see Shiller, Robert,
‘‘Arithmetic Repeat Sales Price Estimators’’ Journal
of Housing Economics 1, pp. 110–125, 1991.
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data sample. Distressed sales, which
include sales of bank Real Estate Owned
(REO) properties as well as short sales,23
tend to have lower prices than other
transactions. These lower prices
generally result from two factors: poor
property condition and greater-thanaverage seller motivation.
Like other FHFA indexes and house
price metrics produced by many others,
FHFA’s expanded-data HPI incorporates
price data from distressed sales. As with
all transactions, the distressed sales are
included in the calibration of the
expanded-data HPI as long as the buyer
obtained an Enterprise or FHA loan or
the property is in one of the counties for
which FHFA has licensed county
recorder information.
The primary justification for
including such distress transactions is
that they provide indications of value in
situations where, without such data,
price declines may be understated. It is
well established that, during housing
market downturns, sellers commonly
pull their properties from the market,
preferring to ‘‘wait out’’ declines rather
than selling at a loss. In such
environments, transaction volumes may
shrink dramatically and the few
observed transactions that do occur may
show relatively limited price declines.24
One final note about the expandeddata HPI is important: as new
opportunities arise for the addition of
transactions data to the modeling
dataset, FHFA may take advantage of
those to improve the index. Since the
inaugural release of the expanded-data
HPI in 2011, the term ‘‘expanded’’ has
referred to the addition of FHA and
county recorder data to the standard
Enterprise dataset. There is no reason
that additional data sources may not be
included into the calibration dataset in
the future. For instance, transaction
prices embedded within property
appraisal data 25 might supplement the
existing data sources. As with all
significant changes in FHFA indexes,
23 Short sales are transaction for which: (a) The
homeowner was in financial distress and (b) the
transaction price was an amount lower than the
loan balance. In such situations, to avoid the costs
associated with foreclosure, lenders allow the
distressed homeowner to sell the property for less
than the loan amount.
24 Another reason for including the transactions is
pragmatic: it is often difficult to identify distressed
sales using available data. FHFA has done so in the
past and it does produce a set of ‘‘distress-free’’
indexes for select cities. The distress-free indexes
take advantage of a unique dataset that aids in the
identification of distress only in select cities,
however.
25 To be clear—this would not entail the inclusion
of appraisal values, but rather property sales prices
(e.g., sales prices for ‘‘comparable’’ properties)
found in electronic appraisal records.
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30241
FHFA would notify the public of any
such data enhancements.
D. Other Measures of Home Prices
While other existing (and potential)
measures had some attractive qualities,
given the criteria used, FHFA believes
that the expanded-data HPI is the best
option for the purpose of adjusting the
loan limit.
The data sources that the Safety and
Soundness Act explicitly requires the
Director to consider are the FHFA’s
‘‘monthly survey of all major lenders’’
and any ‘‘appropriate house price
indexes’’ published by the Census
Bureau. Viable options for measuring
appropriate price changes are not
available from either. In the case of the
monthly survey, the requisite data fields
are currently under development, and
therefore FHFA has not yet conducted
the survey. Statistics from the Census
Bureau are comprehensive for tracking
the prices of new homes that are sold,
but generally do not show price changes
for existing homes. Price trends for new
homes can differ substantially from
price trends for existing homes, and
thus the new home focus of the Census
Bureau data is deemed to be a
significant drawback in this context.
In theory, one might track changes in
the average or median U.S. home prices
by looking at statistics published
monthly by the National Association of
Realtors (NAR). The NAR’s estimates
focus on prices for existing homes, as
direct estimates of the average and
median transactions prices are reported
using data from a large number of local
Multiple Listing Services. NAR’s
estimates are attractive in their
simplicity (no statistical models are
employed in their derivation) and in the
fact that the statistics have been
published consistently for decades. The
major problem with their use, however,
is that—like all summary statistics—
they are susceptible to short-term biases
caused by fluctuations in the types of
properties that transact in any given
quarter. If a substantial number of
expensive homes transact in any given
quarter, for instance, the reported
average and median home values will
tend to rise even if no real market
appreciation was present. If the
‘‘quality’’ of transacting homes is not
held constant from quarter to quarter,
the resulting statistic can produce
volatile measures and may bias
estimates of price changes (particularly
in the short run). As has been discussed
at length in academic and practitioner
literature, other indexes—for example
those that rely on the repeat-transaction
methodology (e.g., the expanded-data
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HPI)—are less susceptible to these
biases.26
U.S. house price indexes published by
S&P/Case-Shiller and CoreLogic use the
repeat-transactions approach for
measuring price changes and thus
would not be susceptible to these biases.
Use of either of these indexes—or other
external measures of house price
movements—in the context of setting
loan limits would entail substantial
operational risks, however. The external
measures do not generally have track
records that rival the lengthy
publication history of the FHFA HPI.
Reliance on an external measure would
mean that FHFA would be dependent
on its continued publication and on the
methodological decisions made by the
producer. If the producer opted to
discontinue publication or to make
undesirable methodological changes,
significant complications would arise,
and the publication of the conforming
loan limits ultimately could be
disrupted. Separately, ignoring the issue
of continued publication risks, details
concerning the methodology employed
in the production of external indexes
are not always publicly available and,
therefore, have less transparency than
FHFA’s indexes. The prospect that
FHFA would rely on an index having
little public descriptive material for the
important function of setting loan limits
is not appealing to the agency.
E. Implementation Issues—Details
While it will be enlightening to
compare price trends for the expandeddata HPI to trends for other measures, it
is useful to first address details
concerning implementation timing. In
particular, this section describes the
‘‘when’’ and ‘‘how’’ of loan limit
changes under the use of the expandeddata HPI.
The Safety and Soundness Act
requires that loan limits be ‘‘adjusted’’
each year and that the newly adjusted
limits apply beginning in January. Since
the passage of HERA—and in years prior
(when OFHEO was setting the loan
limit)—annual adjustments have been
announced in the latter part of
November. Under the terms of the
Charter Acts, adjustments are to reflect
the percentage price change in the index
over the ‘‘most recent’’ 12-month or 4quarter period.27 Given the large price
changes that occurred and the Safety
and Soundness Act’s prohibition on
declines in the baseline loan limit, it has
not been necessary for FHFA to formally
26 The repeat-transactions statistical model is
sometimes described as producing a ‘‘constantquality’’ index.
27 See Charter Acts sections 302(b)(2) (12 U.S.C.
1717(b)(2) and 305(a)(2) (12 U.S.C. 1454(a)(2).
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designate the reference period: i.e.,
whether price changes will be measured
on a 4-quarter or 12-month basis and the
specific comparison interval (e.g., July
vs. July of the preceding year or Q3 vs.
Q3).
Given the existing publication
schedule for the expanded-data HPI,
when setting loan limits on a go-forward
basis, FHFA anticipates measuring price
changes between the third quarter and
the third quarter of the preceding year.
As always, FHFA will produce its suite
of house price indexes (including the
expanded-data HPI) in November using
data through the most recent quarter—
the third quarter. Then, using the
measured price increase in the
expanded-data HPI between the third
quarter of the prior year and the third
quarter of the present year, FHFA will
compute the new baseline loan limit.
The new loan limit will be announced
toward the end of November at roughly
the same time as the HPI report is
published.28
The proposed focus on third quarter
prices means that, in the current
situation in which average prices are
below levels prevalent prior to the
passage of HERA, the third quarter of
2007 represents the relevant reference
period for determining when the
baseline loan limits can rise again. The
baseline conforming loan limit was first
set in late 2008 and, as such, the first
interval for assessing price changes was
2007Q3 to 2008Q3. Under the
expanded-data index (and other
measures), that 2007Q3–2008Q3 change
was a price decline, thus triggering the
prescriptive terms of the Safety and
Soundness Act requiring that prices rise
to the 2007Q3 level before the baseline
loan limit can be increased. In
successive years of setting loan limits,
the expanded-data HPI found further
declines—and then a partial recovery—
in U.S. average home prices. As shown
in the next section, the latest expandeddata index value for the U.S. (for
2014Q4) shows that prices are still 7.9
percent below the 2007Q3 level. When
the conforming loan limit is set for 2016
later this year, the index will generally
have to exceed the 2007Q3 level for
there to be an increase in the baseline
loan limit.
One final technical note must be
made about historical values of the
expanded-data HPI. Under the basic
repeat-transactions indexing model used
for producing the index (and other
repeat-transactions measures), all
historical values of the index are
unconstrained, meaning that they are
28 FHFA’s third quarter HPI for 2015 is set to be
released on November 25, 2015.
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revised in each period.29 Unlike other
types of price indexes, where an index
value for a given period may be initially
revised once or twice and then will be
fixed forever, the repeat-transactions
house price index produces index
values that are constantly in flux. That
is—values for all historical quarters,
even distant quarters, are modified
slightly each period to account for new
historical data. To be sure, most values
are revised only slightly (e.g., the index
value for a quarter in the late 1990s
might change from 175.02 to 175.04
between one quarter and the next).
Changes are constantly made, however.
FHFA’s measurement of price changes
for the setting of loan limits will use the
most recently released index values as
of the third quarter and will ignore prior
vintages. For example, in setting 2016
loan limits, FHFA will rely on the most
recent time series of index values for
comparing price levels. The 2015Q3vintage estimates of the relevant
historical values will be compared. To
illustrate—although the most recent HPI
publication showed that the expandeddata index estimate for 2007Q3 was
215.19,30 when determining whether
prices have risen for loan-limit setting
purposes in November, FHFA will use
the 2007Q3 value published in
November. If the 2015Q3 index value
exceeds the index value for 2007Q3 (as
determined in the 2015Q3 index
vintage), then the baseline loan limit
will be increased.31
F. Empirical Estimates of Price Changes:
Expanded-Data HPI vs. Other Measures
Using the expanded-data HPI and
several other commonly-cited measures
of home prices changes, Figure 1 and
Table 1 compare price trends calculated
by the expanded-data HPI and other
estimates of price change. Figure 1
indicates that all of the indexes report
a very similar evolution of prices since
2007. The metrics generally show
significant price declines between 2007
and sometime in 2011 and then a robust
recovery. The measures show that the
29 Other publicly available measures deviate
somewhat from the basic repeat-transactions model
and sometimes constrain historical price levels.
30 This value was the seasonally adjusted index
estimate for the U.S. published on February 26,
2015. FHFA anticipates using seasonally adjusted
index values in evaluating price changes. Because
all annual price comparisons are made relative to
the same (third) quarter in prior years, however,
this choice has little practical effect.
31 Note that, as indicated earlier, the loan limit
will only increase by the net percentage increase
since 2007Q3. In general, in market environments
where prior price declines do not need to be
overcome, the increase percentage will be the
proportionate increase between the third quarter of
the prior year and the third quarter of the
contemporary year.
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most recent price level is still somewhat
below the 2007Q3 level.
Reconciling the small short-run
differences in the price trends reflected
in the various measures is complicated
and even an in-depth analysis would
likely conclude with much of the
differences remaining unexplainable.32
In general, however, the variations are a
function of differences in the underlying
datasets, differences in the methodology
employed, and variations in the
weighting of sub-areas. Over the longterm, however, all of the indexes show
similar patterns. Even the NAR median
price, which is constructed using the
most simplistic approach, trends
similarly to the other measures. The
NAR figure is notably volatile, likely a
function of the fact that it is susceptible
to certain short-term biases the repeattransactions-based measures are
immune to. Over the time frame shown
and even over a more extended period,
however, its evolution is similar to that
of the others.33
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32 In a series of OFHEO papers published in 2007
and 2008, Andrew Leventis attempted to reconcile
differences between the OFHEO HPI and the S&P/
Case-Shiller indexes. See, for instance, https://
www.fhfa.gov/PolicyProgramsResearch/Research/
PaperDocuments/20080115_RP_
RevisitingDifferencesOFHEOSPCaseShillerHPI_
N508.pdf. The analysis, which just focused on the
indexes produced by the two providers, explained
some but not all of the variations in measured price
changes.
33 Observers will notice that Figure 1 reports the
S&P/Case-Shiller ‘‘20-City Composite’’ index as
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Table 1 provides estimates of the
overall price deficit—the change in
prices between 2007Q3 and the most
recent data reading—for the various
measures. As of the fourth quarter of
2014, the expanded-data HPI estimates
that the average U.S. price was roughly
7.3 percent below its 2007Q3 level. This
deficit is slightly below the midpoint of
the two extreme values in the table: The
S&P/Case-Shiller 20-City Composite
(down 12.0 percent) and the FHFA
purchase-only HPI (down 1.2 percent).
IV. Conclusion
A very significant number of
methodological and implementation
options exist for satisfying section 1322.
This Notice has described FHFA’s use of
the expanded-data index as the
preferred option for annually setting
opposed to a pure national measure. Although the
S&P/Case-Shiller suite of indexes includes a ‘‘U.S.’’
measure, that measure is published under a
timeline that would make it inconvenient for use
in adjusting conforming loan limits. In particular,
the S&P/Case-Shiller U.S. index is published
quarterly and the third quarter estimate would not
be available to FHFA until late in November. The
absence of (even preliminary) information about
price changes before the end of November would
mean that, were FHFA to rely on it, year-ahead loan
limits could not be published until early December.
The S&P/Case-Shiller 20-City composite index is
published on a monthly basis, by contrast. If FHFA
were to rely on that measure, it could use the
August-to-August price change estimate, which
would be available in late October (meaning that a
late-November release of loan limits would be
feasible).
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30243
loan limits under the procedure
outlined (e.g., comparing third-quarter
prices to third-quarter prices when
evaluating the most recent year’s price
change). FHFA recognizes that other
methodological and implementation
decisions could be made. Given the
material impact on the Enterprises and
in light of the significant number of
market participants affected by the level
of the conforming loan limit, FHFA has
released this Notice and Request for
Input to ensure that public input is
widely solicited.
FHFA encourages submitters to
address any theoretical or practical
issues deemed to be important in this
context. Once all submissions are
received, they will be reviewed by
FHFA staff and a final Notice will be
published in the Federal Register. The
final Notice will communicate FHFA’s
ultimate determination and may address
some of the submissions received in
response to this Notice.
FHFA intends to publish a final
determination in the Federal Register
by the time the Enterprise 2016
conforming loan limits must be
published (i.e., by late November 2015).
As in the past, the conforming loan limit
release will be published on FHFA’s
Web site.
BILLING CODE 8070–01–P
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16:45 May 26, 2015
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1 '<a.uutuu
Association of Realtors :Median Price
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VerDate Sep<11>2014
Table 1: Comparison of House Price Changes across Various Measures
16:45 May 26, 2015
U.S. Indexes (unless otherwise denoted)
Core logic HPI
S&P/Case-Shiller 20-
(Purchase-Only,
(Single-Family
4
City Composite
Adjusted)
1
Seasonally
PO 00000
Adjusted)
Combined)
2
(Seasonally Adjusted)
NAR Median
3
1
Frm 00040
Fmt 4703
Change over Latest 12 Months
Sfmt 4725
Aggregate Change
(or Four Quarters)
6.0%
5.4%
5.9%
5.0%
7.8%
-7.3%
-1.2%
-5.1%
-12.0%
-5.6%
E:\FR\FM\27MYN1.SGM
(August/Q3 2007- Latest Period)
Notes:
27MYN1
1
FHFA Indexes are ava i I able for down I oa d at www.fhfa .gov. The expanded-data series is a quarterly index, whi I e the purchase-only series reported is a month I y
-
series.
2
-
The "Single-Family Combined (SFC)" index, which incorporates data both from unattached and attached properties, is used here. Data are ava i I able for down I oa d
Federal Register / Vol. 80, No. 101 / Wednesday, May 27, 2015 / Notices
FHFA HPI
HPI (Seasonally
Jkt 235001
FHFA Expanded-Data
at https://www.corel ogi c .com/a bout-us/resea rchtrends/home-pri ce-i ndex-report.as px#.VQHqto7F98E.
3
4
-
TheS&P/Case-Shiller data can be downloaded at https://us.spindices.com/index-family/real-estate/sp-case-shiller.
-
The figure reported is from the National Association of Realtors (NAR's) Existing-HomeSales series--in particular, the median home value. NARdata can be found
on I i neat https://www.rea Itor .org/topi cs/exis ti ng-home-sa I es.
30245
EN27MY15.001</GPH>
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Federal Register / Vol. 80, No. 101 / Wednesday, May 27, 2015 / Notices
Dated: May 18, 2015.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
Analyst (202/452–3959); Anjana Ravi,
Financial Services Analyst (202/530–
6286); or Samantha Pelosi, Manager
(202/530–6292), Division of Reserve
Bank Operations and Payment Systems;
for users of Telecommunication Devices
for the Deaf (TDD) only, contact 202/
263–4869.
SUPPLEMENTARY INFORMATION:
[FR Doc. 2015–12781 Filed 5–26–15; 8:45 am]
BILLING CODE 8070–01–C
FEDERAL RESERVE SYSTEM
[Docket No. OP–1515]
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Enhancements to Federal Reserve
Bank Same-Day ACH Service, Request
for Comments
The Board of Governors (Board) is
requesting comment on enhancements
that the Federal Reserve Banks (Reserve
Banks) are considering to their current
same-day automated clearing house
(ACH) service. The enhancements
would require receiving depository
financial institutions (RDFIs) to
participate in the service and originating
depository financial institutions (ODFIs)
to pay a fee to RDFIs for each same-day
ACH forward transaction. The Board
believes that these changes may have a
significant longer-run effect on the
nation’s payment system. Interested
persons may express their views in
writing to the Board, by any of the
methods indicated below. Comments
must be received no later than July 2,
2015.
ADDRESSES: You may submit comments,
identified by Docket No. OP–1515 by
any of the following methods:
• Agency Web site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/apps/
foia/proposedregs.aspx.
• Email: regs.comments@
federalreserve.gov. Include the docket
number in the subject line of the
message.
• FAX: (202) 452–3819 or (202) 452–
3102.
• Mail: Robert deV. Frierson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments are available on
the Board’s Web site at https://
www.federalreserve.gov/apps/foia/
proposedregs.aspx as submitted, except
as necessary for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper in Room 3515, 1801 K Street NW.
(between 18th and 19th Street NW.),
Washington, DC 20006 between 9:00
a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Ian
C.B. Spear, Senior Financial Services
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I. Background
The ACH network serves as a
ubiquitous, nationwide mechanism for
processing batch-based credit and debit
transfers electronically. The private
sector and the Federal Reserve jointly
developed the ACH network as an
electronic alternative to checks, the
growth of which in the late 1960s and
early 1970s was creating operational
and cost burdens. Initially used for
government payments and recurring
payments such as payroll
disbursements, the ACH network
evolved with user needs and now
facilitates many types of transactions.
The time it takes to settle transactions,
however, has not changed materially
since next-day settlement was
introduced nearly four decades ago.1
NACHA, whose membership consists
of insured financial institutions and
regional payment associations,
establishes network-wide ACH rules
through its Operating Rules &
Guidelines. As an ACH operator, the
Reserve Banks, through Operating
Circular 4, incorporate NACHA’s
Operating Rules & Guidelines as rules
that govern clearing and settlement of
commercial ACH items by the Reserve
Banks, except for those provisions
specifically excluded in the Operating
Circular.2
A. Current Federal Reserve Same-Day
ACH Services
To address growing market demand
for faster, intraday ACH processing and
settlement, the Reserve Banks began
offering an optional FedACH® SameDay
Service (FedACH SameDay Service) to
Reserve Bank ACH customers in 2010.
The service allows ODFI participants to
originate same-day payments to all RDFI
participants that agree to accept such
payments.3 As part of the FedACH
1 ACH transactions using the Federal Reserve
Banks’ current same-day service and some
transactions conducted outside of the traditional
ACH network, such as ‘‘on us’’ transactions in
which the originator and receiver both have
accounts at the same bank, or proprietary ‘‘on we’’
networks between financial institutions, settle in
less than one day.
2 Operating Circular 4, Section 1.4, https://
www.frbservices.org/files/regulations/pdf/
operating_circular_4_11042013.pdf.
3 The service accommodates all non-government
ACH credits and debits except International ACH
PO 00000
Frm 00041
Fmt 4703
Sfmt 4703
SameDay Service, the Reserve Banks
charge participating ODFIs a per-item
surcharge on the normal ACH
processing fee and provide RDFIs a
discount on the normal ACH processing
fee for receipt of forward items.4 There
is no fee paid by ODFIs to RDFIs.5
In the five years since its
introduction, the FedACH SameDay
Service has experienced limited
adoption; fewer than 100 depository
institutions are currently using the
service. A number of factors may
account for this. RDFIs typically need to
upgrade internal processing capabilities
to post same-day transactions. ODFIs
may be able to realize value from the
service through enhanced ACH product
offerings, such as emergency bill pay,
although these services may be
unappealing to originators because of
low RDFI participation and
corresponding limited receiver reach.
B. 2011 NACHA Same-Day ACH
Proposal
In 2011, NACHA identified faster and
more flexible ACH clearing and
settlement capabilities as important to
the long-term viability of the ACH
network, and proposed creation of a
network-wide, same-day framework
called Expedited Processing and
Settlement (EPS). Through amendments
to NACHA’s Operating Rules &
Guidelines, EPS would have required
RDFIs to credit a receiver’s account by
the end of the RDFI’s processing day
when an originator properly specified
same-day processing.6 EPS failed to
receive the number of votes required for
adoption under NACHA voting rules.
According to NACHA, the proposal
failed because it provided insufficient
value to originators, caused uncertainty
around funds availability, and created
significant implementation costs for
Transactions (IAT), Check Truncated Entry (TRC),
and Check Truncated Entries Exchange (TRX).
Forward items may be sent between 2:15 a.m. and
2:00 p.m. with settlement at 5:00 p.m. Returns of
eligible forward items may be sent between 2:00
p.m. and 4:30 p.m. with settlement at 5:30 p.m. All
times in this notice are Eastern Time unless
otherwise noted.
4 The per-item forward surcharge ranges from
$.003 to $.0035, and the per-item discount is
$.0025.
5 Additional information on the FedACH
SameDay Service is available at https://
www.frbservices.org/serviceofferings/fedach/
sameday_service.html.
6 Originators would have been required to specify
same-day processing in compliance with EPS, ODFI
deadlines, and ACH operator requirements. NACHA
proposed a single submission deadline of 2:00 p.m.
for all same-day payments, excluded IATs, and
limited transaction amounts to $25,000 or less. The
requirement that RDFIs credit a receiver’s account
by the end of the RDFI’s processing day would have
been satisfied as long as the receiver’s account was
credited ‘‘as of’’ the settlement date.
E:\FR\FM\27MYN1.SGM
27MYN1
]]>Agencies
[Federal Register Volume 80, Number 101 (Wednesday, May 27, 2015)]
[Notices]
[Pages 30237-30246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12781]
=======================================================================
-----------------------------------------------------------------------
FEDERAL HOUSING FINANCE AGENCY
[No. 2015-N-03]
Notice of Establishment of Housing Price Index
AGENCY: Federal Housing Finance Agency.
ACTION: Notice and Request for Input.
-----------------------------------------------------------------------
SUMMARY: The Federal Housing Finance Agency (FHFA) is establishing and
shall maintain a method for assessing the national average single-
family house price for use in adjusting the conforming loan limits of
Fannie Mae and Freddie Mac (the ``Enterprises''). For these purposes,
FHFA has considered a number of different measures, including the House
Price Index maintained by the Office of Federal Housing Enterprise
Oversight (OFHEO) of the Department of Housing and Urban Development
before the effective date of the Federal Housing Finance Regulatory
Reform Act of 2008.\1\ FHFA also considered house price indexes of the
Bureau of the Census of the Department of Commerce as well as other
privately-produced indexes.\2\
---------------------------------------------------------------------------
\1\ Division A of the Housing and Economic Recovery Act of 2008,
Pub. L. No 110-289, 122 Stat. 2654, 2659 (2008). Note that OFHEO was
one of the predecessor agencies to FHFA.
\2\ The S&P/Case-Shiller and CoreLogic house prices indexes, for
instance, were considered.
---------------------------------------------------------------------------
FHFA intends to use the FHFA ``expanded-data'' house price index
(HPI)--an index it publishes on a quarterly basis--to adjust the
conforming loan limit. This Notice solicits public input. Once public
input is reviewed, another Notice will be published describing FHFA's
final determination.
DATES: FHFA will accept input on the Notice on or before July 27, 2015.
For additional information, see SUPPLEMENTARY INFORMATION.
ADDRESSES: You may submit your input on the Notice, identified by
``Notice No. 2015-N-03,'' by any of the following methods:
Agency Web site: https://www.fhfa.gov/AboutUs/Contact/Pages/Request-for-Information-Form.aspx.
Hand Delivery/Courier to: Alfred M. Pollard, General
Counsel, Attention: Input/Notice No. 2015-N-03, Federal Housing Finance
Agency, Constitution Center, 400 Seventh Street SW., Eighth Floor,
Washington, DC 20024. Deliver the package to the Seventh Street
Entrance Guard Desk, First Floor, on business days between 9 a.m. and 3
p.m.
U.S. Mail Service, United Parcel Service, Federal Express,
or other commercial delivery service to: Alfred M. Pollard, General
Counsel, Attention: Input/Notice No. 2015-N-03, Federal Housing Finance
Agency, Constitution Center, 400 Seventh Street SW., Eighth Floor,
Washington, DC 20024.
FOR FURTHER INFORMATION CONTACT: Andrew Leventis, Principal Economist,
202-649-3199, Andrew.Leventis@fhfa.gov, or Jamie Schwing, Associate
[[Page 30238]]
General Counsel, 202-649-3085, Jamie.Schwing@fhfa.gov, (not toll-free
numbers), Federal Housing Finance Agency, 400 Seventh Street SW.,
Washington, DC 20024.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Input
II. Statutory and Regulatory Background
III. House Price Index for Loan Limit Adjustments
A. Summary
B. Background
1. Safety and Soundness Act Section 1322
2. Evaluating Existing Measures of Price Changes
i. Available Measures
ii. Evaluation Criteria
C. Basics of the Proposed Methodology
D. Other Measures of Home Prices
E. Implementation Issues--Details
F. Empirical Estimates of Price Changes: Expanded-Data HPI vs.
Other Measures
IV. Conclusion
I. Input
FHFA invites input on all aspects of the Notice and will take all
relevant input into consideration. A final Notice will be published
after FHFA considers public feedback.
Copies of all submissions received will be posted without change,
including any personal information you provide such as your name,
address, email address and phone number, on the FHFA internet Web site,
https://www.fhfa.gov. In addition, copies of all submissions received
will be available for examination by the public on business days
between the hours of 10 a.m. and 3 p.m. at the Federal Housing Finance
Agency, Constitution Center, 400 Seventh Street SW., Washington, DC
20024. To make an appointment to inspect submissions, please call the
Office of General Counsel at (202) 649-3804.
II. Statutory and Regulatory Background
The Housing and Economic Recovery Act of 2008 (HERA), Public Law
110-289, 122 Stat. 2654 (July 30, 2008), amended the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501
et seq.) (Safety and Soundness Act) to establish FHFA as an independent
agency of the Federal Government.\3\ Pursuant to section 1322 (12
U.S.C. 4542) of the Safety and Soundness Act, as amended by section
1124(d) of HERA, 122 Stat. 2693,\4\ FHFA is required to establish and
maintain a House Price Index for use in adjusting the conforming loan
limits of the Enterprises.\5\ A number existing metrics, including
those identified in section 1322, could serve this purpose. Also, HERA
sections 1124(a) and (b), 122 Stat. 2691-2692, amended sections
302(b)(2) of the Federal National Mortgage Association Charter Act (12
U.S.C. 1717(b)(2), and 305(a)(2) of the Federal Home Loan Mortgage
Corporation Act (12 U.S.C. 1454(a)(2) (together, the Charter Acts), to
specify that the baseline national loan limit should be changed
annually by the percentage change in the established index.
---------------------------------------------------------------------------
\3\ Division A of HERA titled, the Federal Housing Finance
Regulatory Reform Act of 2008, established FHFA to oversee the
operations of the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation (collectively, Enterprises), and the
Federal Home Loan Banks (Banks) (collectively, regulated entities).
FHFA is to ensure that the regulated entities operate in a safe and
sound manner including being capitalized adequately; that their
operations foster liquid, efficient, competitive and resilient
national housing finance markets; that they comply with the Safety
and Soundness Act and their authorizing statutes, and with rules,
regulations, guidelines and orders issued under those statutes; that
they carry out their missions through activities authorized and
consistent with the Safety and Soundness Act and their authorizing
statutes; and that the activities and operations of the entities are
consistent with the public interest. See 122 Stat. 2659, 2663-2664
(2008).
\4\ Original section 1322 was repealed by section 1121(2) of
HERA, (122 Stat. 2689).
\5\ Section 1322 states in relevant part that ``the Director
shall take into consideration the monthly survey of all major
lenders conducted by the Federal Housing Finance Agency to determine
the national average 1-family house price, the House Price Index
maintained by the Office of Federal Housing Enterprise Oversight of
the Department of Housing and Urban Development before the effective
date of the Federal Housing Finance Regulatory Reform Act of 2008,
any appropriate house price indexes of the Bureau of the Census of
the Department of Commerce, and any other indexes or measures that
the Director considers appropriate.''
---------------------------------------------------------------------------
III. House Price Index for Loan Limit Adjustments
A. Summary
Section 1322 of the Safety and Soundness Act requires that FHFA
``establish and maintain a method of assessing the national average 1-
family house price for use in adjusting the conforming loan
limitations.'' 12 U.S.C. 4542. The conforming loan limit is the maximum
size of mortgage that the Enterprises are allowed to acquire in a given
year. With some exceptions, the Safety and Soundness Act requires that
FHFA annually adjust the maximum loan size by the percentage change in
the index over the preceding year.
After reviewing the landscape of available measures and analyzing
candidate new methodologies, FHFA has chosen its ``expanded-data'' HPI
for tracking average home values and adjusting the conforming loan
limit. The index, which is already produced by FHFA on a quarterly
basis, uses data from a number of different sources and employs the
well-established ``repeat-transactions'' methodology for measuring
price changes. A number of privately-produced indexes in fact use the
same fundamental methodology, but have not been selected. The expanded-
data index is deemed to be relatively attractive because of the lengthy
publication track record of the FHFA (and OFHEO) price indexes and the
methodological control that production of the relied-upon index allows.
Public input is sought on the relative merits of the selected
index. Feedback is also desired on technical implementation matters
addressed in this Notice.
B. Background
1. Safety and Soundness Act Section 1322
Under section 1322 of the Safety and Soundness Act, the FHFA
Director is required to ``establish and maintain'' a measure of average
U.S. home prices. In doing so, the Safety and Soundness Act requires
that FHFA ``take into consideration'' various measures of home prices
when developing the index. The reference measures include the FHFA
HPI,\6\ data from the Census Bureau, information from a contemplated
FHFA survey of national lenders, and ``any other indexes or measures
that the Director considers appropriate.'' 12 U.S.C 4542.
---------------------------------------------------------------------------
\6\ The Safety and Soundness Act describes the FHFA HPI as ``the
House Price Index maintained by the Office of Federal Housing
Enterprise Oversight of the Department of Housing and Urban
Development before the effective date of the Federal Housing Finance
Regulatory Reform Act of 2008.''
---------------------------------------------------------------------------
In the context of the Safety and Soundness Act, the purpose of the
established index is to adjust the conforming loan limit. Specifically,
it is used to adjust the baseline loan limit that applies in most of
the country. This limit applies everywhere except for areas where
median home values are high or are otherwise designated as ``high-
cost'' areas. Loan limits in high-cost areas will be addressed later in
this Notice.
Sections 302(b)(2) and 305(a)(2) of the Charter Acts specify that
the baseline national loan limit should be changed annually by the
percentage change in the established index. The change in the baseline
limit is constrained when price declines occur, however. Specifically,
the national loan limit is not permitted to decline when the national
average price declines. Also, after a period of price declines, when
the national
[[Page 30239]]
average home value finally does increase, the loan limit cannot
increase until prices regain all of their prior losses.
Prior to and immediately following the enactment of HERA, the
national average home price declined significantly. FHFA's house price
indexes and all other reliable measures of home price movements
evidenced substantial declines. FHFA's expanded-data house price index,
for instance, declined by more than twenty percent between the third
quarter of 2007 and the third quarter of 2011. Given the Safety and
Soundness Act's prohibition against declines in the baseline loan
limit, declining U.S. home prices meant that the selection of a
specific index for adjusting the loan limit under the Safety and
Soundness Act was of little practical import; the baseline loan limit
would be the same irrespective of the index used. With each year's
publication of the conforming loan limits for the following year, FHFA
noted this and kept the baseline loan limit the same ($417,000 for one-
unit properties in most of the country).\7\
---------------------------------------------------------------------------
\7\ The announcement for 2015, for example, can be found on
FHFA's Web site at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-2015-Conforming-Loan-Limits-Unchanged-in-Most-of-the-U-S.aspx. See, in particular, the second page of the Addendum to the
release: https://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-Limits/CLLAddendum_CY2015.pdf.
---------------------------------------------------------------------------
Housing markets have improved substantially over the last few years
and home values are getter closer to where they were just before HERA's
enactment. Indeed, FHFA's expanded-data house price index is within a
few percentage points of its level in 2007.\8\ Given the rising prices,
it is now important that FHFA formally establish the specific
methodology it will use for tracking prices and adjusting the baseline
loan limit.
---------------------------------------------------------------------------
\8\ As of the fourth quarter of 2014, the seasonally adjusted
version of the index was about 7.3 percent below the 2007Q3 level.
---------------------------------------------------------------------------
It should be noted that sections 302(b)(2) and 305(a)(2) of the
Charter Acts specify that in locations where the 115 percent of the
local median home value is above the baseline loan limit (``high-cost''
areas) the local limit is set at 115 percent of the median value. In no
case, however, can the local loan limit be more than 150 percent of the
baseline limit. The baseline loan limit thus acts as both a ``floor''
on loan limits and as a determinant of a ``ceiling'' on loan limits.
The methodology for adjusting the baseline loan limits thus plays an
indirect role in setting limits in these areas.
The adjustment process for setting the baseline loan limit is also
important to certain statutorily-defined areas. Legislation enacted
prior to HERA set out Alaska, Hawaii, Guam, and the U.S. Virgin Islands
as areas with higher loan limits.\9\ In these statutorily-defined
areas, the local ``floor'' on loan limits is 150 percent of the
baseline loan limit in the rest of the country. If area median home
values are sufficiently high in these areas, the local limit can be
even higher, as it can rise to a maximum of 150 percent of the ceiling
in the rest of the country (which in turn is 150 of the baseline loan
limit). Today, the highest possible loan limit for one-unit properties
in the statutorily defined areas is $938,250 (i.e., 225 percent of the
baseline loan limit of $417,000). The baseline loan limit establishes
the floor and ceiling limits in these statutorily-defined areas and
thus the index used for adjusting the baseline plays a role in
determining limits in the statutorily-defined areas.
2. Evaluating Existing Measures of Price Changes
---------------------------------------------------------------------------
\9\ The higher limit in the U.S. Virgin Islands, for example,
was established in PL 102-550.
---------------------------------------------------------------------------
i. Available Measures
A significant number of home price measures are available and could
be used for adjusting the baseline conforming loan limit. Available
metrics include:
[ssquf] Any of FHFA's existing price indexes, including the
purchase-only HPI, the all-transactions HPI, and the expanded-data HPI;
[ssquf] The Census Bureau's Constant Quality House Price Index;
[ssquf] The CoreLogic HPI;
[ssquf] The S&P/Case-Shiller Indexes; and
[ssquf] The National Association of Realtors' Average or Median
Home Prices.
The first two of these are specifically identified in section 1322.
The other listed measures are produced by private data suppliers. When
deciding which metric to be used for measuring price changes, FHFA
considered all of the measures above.
In 2010, FHFA published a Research Paper titled ``An Approach for
Calculating Reliable State and National House Price Statistics.'' The
paper, which is available for download on the FHFA Web site,\10\
described a methodology that might be used for measuring the national
average home price. The methodology will generally produce estimates of
average price changes that are similar to those estimated by FHFA's
expanded-data HPI, but involves the addition of supplemental data. This
more-complicated methodology may be considered as an option in the
future, but is not considered here.
---------------------------------------------------------------------------
\10\ The paper, authored by Andrew Leventis, is available at:
https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/20100930_RP_CalculatingStateNationalHousePriceStatistics_508.pdf.
---------------------------------------------------------------------------
ii. Evaluation Criteria
In evaluating various measures of home prices changes that might be
used for section 1322, FHFA considered a number of factors. The most
important factor was whether price changes reflected in the measure
would correlate closely with changes in the U.S. average home price.
The purpose of the index referenced in the Safety and Soundness Act is
to adjust the conforming loan limit, and thus the reliable measurement
of price changes is of the highest importance. As closely as possible,
changes in the selected index should reflect changes in the average
value of homes.
Section 1322 indicates that the measure should ``assess'' average
U.S. home prices. Whether or not the measure needs to show the actual
level of the average U.S. home prices is of little practical import for
the Safety and Soundness Act's purposes. The critical use of the metric
is to measure the price change and for FHFA to adjust the loan limit
accordingly.\11\
---------------------------------------------------------------------------
\11\ The Safety and Soundness Act implicitly recognizes that
primacy of the change estimate by describing the measure as an index
as opposed to merely the average value.
---------------------------------------------------------------------------
The absence of any real need to measure the level of prices is
notable because many existing house price measures do not actually
report statistics on the absolute level of home prices; rather, they
report indexes that can be used for measuring changes. No average or
median house prices are currently published for the FHFA HPI, for
instance. Similarly, other measures (e.g. the S&P/Case-Shiller index,
the CoreLogic index) are not generally accompanied by level estimates.
All of these measures, despite the absence of the estimated level of
home prices, thus can act as reasonable candidates for the index to be
used for loan limit adjustment.
Before the next evaluation criteria is discussed, it is important
to briefly address the target of the index--the ``average'' price.
Interestingly, the Safety and Soundness Act references the average
price in the context of measuring changes in national home price and
adjusting the baseline conforming loan limit, but references median
home values in the setting of loan limits in high-cost areas.
Ultimately, the practical impact of the average-median distinction
is modest:
[[Page 30240]]
the long-term growth rates in average and median home prices are very
similar and thus the choice of the target statistic (average vs.
median) likely will have only a minimal impact on long-term loan
limits. Even in the shorter term--during the recent housing bust--there
was no dramatic difference in the measured declines for the median and
mean U.S. prices.\12\ The index FHFA intends to use for loan limit
adjustment tracks the geometric average U.S. home price--a measure that
tends to correlate closely with median and average home prices.\13\
---------------------------------------------------------------------------
\12\ According to estimates from the National Association of
Realtors' Existing Home Sales series, for instance, the decline
between September of 2007 and September of 2011 was roughly 20.7
percent for average prices and 16.9 percent for median prices.
\13\ The geometric mean of N numbers is computed as the product
of the numbers taken to the 1/N root.
---------------------------------------------------------------------------
Aside from the issue of the relevance of the statistic and the
target (the average vs. median), the methodological transparency is
also deemed to be a key attribute for evaluating various alternatives
for the index. Details concerning how the statistics are constructed
are important, as is information about methodological changes that
might be made over time. In the landscape of available home prices,
FHFA found vast differences in the amount of background information
available.
Beyond relevance and transparency, FHFA also values reliability and
control. The selected index should have a historical ``track record''
to minimize the risk that the relied-upon metric would be discontinued.
Agency production of the index also is important, not only because
it would ensure continued publication of the important statistic, but
also because production of the index enables the agency to make
appropriate enhancements. The scope of available house price
information has expanded sharply over the last several years and new
developments may soon make more and better transactions information
available. Agency production of the index will mean that new
information can be added in a way that improves the precision of
estimates, while not being disruptive to the setting of loan limits.
Finally, cost considerations were taken into account when
evaluating candidate measures. While use of the expanded-data HPI and a
number of externally-produced indexes would entail no incremental cost,
one option would be for FHFA to develop and maintain a new index (for
example, the one considered in the 2010 FHFA Research Paper). Efforts
spent on maintaining a new measure, which would be yet another variant
of FHFA's already-expansive suite of available price indexes, would
entail a substantial expenditure of resources. The benefits of any
increased precision of the estimates would need to be weighed against
these costs.
C. Basics of the Proposed Methodology
FHFA intends to use the ``expanded-data'' HPI for the purpose of
tracking average U.S. home prices as contemplated in section 1322.
While any of a number of existing measures might produce similar
results, FHFA's expanded-data HPI for the U.S. is found to be
particularly attractive under the evaluation criteria discussed above.
The index, which has been published by FHFA since August of 2011,
is constructed using the same ``repeat-transactions'' methodology as is
used to construct the traditional FHFA HPI. The basic approach has been
used by FHFA and OFHEO, one of FHFA's predecessor agencies, since 1996
when the HPI was first publicly released. The details on how the index
is constructed are found in a technical primer available on FHFA's Web
site.14 15
---------------------------------------------------------------------------
\14\ See Charles Calhoun, ``OFHEO House Price Indexes: HPI
Technical Description,'' available at
https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/1996-03_HPI_TechDescription_N508.pdf. Hereafter, this
paper is referred to as the HPI Technical Primer.
\15\ Other publicly-available measures, including notably the
S&P/Case-Shiller and the CoreLogic suite of indexes, employ the same
basic methodology, although some details concerning their
construction are not publicly available. The methodologies used in
forming those indexes and decisions related to the release of the
measures are not within FHFA's control.
---------------------------------------------------------------------------
The technical elements of the methodology are not detailed in this
Notice, but the basic statistical model was first developed in the
1960s and was refined by Karl Case and Robert Shiller more than twenty
years ago. The fundamental approach entails finding homes that have
been sold two or more times in the past and calibrating a set of
numbers--index values--to broadly reflect changes in value observed for
such homes. Using millions of historical real estate transactions, the
model begins by creating transaction ``pairs,'' where each pair
reflects the price growth (or decline) that occurred for a given
property over a specific interval of time. For example, if a
hypothetical home was sold two times in the past--once for $100,000 in
the first quarter of 2001 and again for $225,000 in the fourth quarter
of 2014--then a pair would be created showing appreciation of 125
percent between 2001Q1 and 2014Q4.\16\ Using this pair and millions of
other pairs for other properties, the basic model entails estimating a
regression model \17\ that ``explains'' observed price changes using
only information about when the individual property transactions
occurred. The statistical model attempts to explain price changes (as
opposed to price levels), a feature that makes it less susceptible to
certain biases when measuring overall price movements in the
marketplace.\18\ The output of the model is a series of index values
whose changes broadly mimic the price changes observed for the millions
of properties in the dataset.
---------------------------------------------------------------------------
\16\ A home with three historical sales will produce two pairs.
The first pair will reflect the price change between the first and
second transactions and the second pair will show the change in
selling price between the second and third transactions.
\17\ A regression model is a well-established method for showing
the statistical relationship between variables.
\18\ For instance, if a large number of expensive homes transact
in any given quarter, then the average and median transaction values
will rise for a given area, even if there is no underlying home
price appreciation. The repeat-transactions index, by contrast, will
generally not reflect spurious price ``increases' in such
situations.
---------------------------------------------------------------------------
The FHFA expanded-data HPI uses the repeat-transaction model for
estimating price changes in individual cities, all 50 states (and
Washington, DC), and in the U.S. as a whole. Consistent with the way
other FHFA indexes, for example the ``purchase-only'' and ``all-
transactions'' indexes, are formed, the change in the expanded-data
U.S. index is constructed to reflect the weighted average changes
across the 50 states and Washington, DC. This ensures that changes in
relative real estate volumes across states do not bias the measurement
of the change in U.S. prices. If the expanded-data U.S. index was
estimated by simply pooling transactions data from all states together
and directly estimating it, the measured price change would be
susceptible to biases when relative transaction volumes shift across
states. In an environment in which prices are rising and transaction
activity increases dramatically in those states with the most extreme
price increases, for instance, the weighting ensures that the volume
shifts do not inflate the measured price measure for the U.S. as a
whole.\19\
---------------------------------------------------------------------------
\19\ During market downturns (when transaction volumes tend to
shrink in areas with the most extreme price declines), the constant
weighting approach prevents the index from reporting undersized
price declines.
---------------------------------------------------------------------------
Although the expanded-data HPI employs the same basic methodology
as is used for forming FHFA's two Enterprise-only datasets (the ``all-
transactions'' and ``purchase-only'' indexes), it uses slightly
different historical transactions data. Like
[[Page 30241]]
FHFA's other measures, the expanded-data index incorporates sales price
information for homes with Enterprise-purchased mortgages. Unlike
FHFA's ``all-transactions'' index, however, appraisal values from
refinance mortgages are not used in the data sample. Also, importantly,
unlike both of the other two measures, the expanded-data indexes
incorporate transaction prices for homes with FHA-endorsed loans and
homes whose transactions have been recorded at various county recorder
offices through the country. FHFA works with an outside data vendor--
currently CoreLogic--to obtain the county records data from hundreds of
counties throughout the country.
The addition of the two supplemental data sources (FHA and
CoreLogic) to the Enterprise data provides for a better estimate of the
overall change in the U.S. average home price than is available from
the other indexes. To be sure, price changes reported in FHFA's other
datasets will often closely resemble those reported by the expanded-
data index. However, as has been discussed in prior OFHEO and FHFA
publications, trends in home values sometimes have been demonstrably
different for homeowners with different types of financing.\20\ The
expanded-data HPI is well-suited for capturing and incorporating those
trends into its estimate of aggregate home price movements, unlike the
other FHFA indexes.
---------------------------------------------------------------------------
\20\ See, for example, ``Recent Trends in Home Prices:
Differences across Mortgage and Borrower Characteristics,'' August
2008, available at https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/20080825_RP_RecentTrendsHomePrices_N508.pdf.
---------------------------------------------------------------------------
Changes in the expanded-data HPI do not perfectly measure changes
in the average or median U.S. home prices, to be sure. As discussed in
the technical primer that details the FHFA methodology \21\ and in the
academic literature on the subject of price indexes,\22\ FHFA's basic
methodology tracks the geometric average home price. In most cases,
however, the index will very closely correlate with any index that
would specifically track the median (and often the average) price.
---------------------------------------------------------------------------
\21\ See the HPI Technical Primer available at https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/1996-03_HPI_TechDescription_N508.pdf.
\22\ For a lengthy discussion, see Shiller, Robert, ``Arithmetic
Repeat Sales Price Estimators'' Journal of Housing Economics 1, pp.
110-125, 1991.
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In the context of the estimation of house price indexes, a robust
debate has occurred over the last several years regarding whether
``distressed sales'' should be included in the calibration data sample.
Distressed sales, which include sales of bank Real Estate Owned (REO)
properties as well as short sales,\23\ tend to have lower prices than
other transactions. These lower prices generally result from two
factors: poor property condition and greater-than-average seller
motivation.
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\23\ Short sales are transaction for which: (a) The homeowner
was in financial distress and (b) the transaction price was an
amount lower than the loan balance. In such situations, to avoid the
costs associated with foreclosure, lenders allow the distressed
homeowner to sell the property for less than the loan amount.
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Like other FHFA indexes and house price metrics produced by many
others, FHFA's expanded-data HPI incorporates price data from
distressed sales. As with all transactions, the distressed sales are
included in the calibration of the expanded-data HPI as long as the
buyer obtained an Enterprise or FHA loan or the property is in one of
the counties for which FHFA has licensed county recorder information.
The primary justification for including such distress transactions
is that they provide indications of value in situations where, without
such data, price declines may be understated. It is well established
that, during housing market downturns, sellers commonly pull their
properties from the market, preferring to ``wait out'' declines rather
than selling at a loss. In such environments, transaction volumes may
shrink dramatically and the few observed transactions that do occur may
show relatively limited price declines.\24\
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\24\ Another reason for including the transactions is pragmatic:
it is often difficult to identify distressed sales using available
data. FHFA has done so in the past and it does produce a set of
``distress-free'' indexes for select cities. The distress-free
indexes take advantage of a unique dataset that aids in the
identification of distress only in select cities, however.
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One final note about the expanded-data HPI is important: as new
opportunities arise for the addition of transactions data to the
modeling dataset, FHFA may take advantage of those to improve the
index. Since the inaugural release of the expanded-data HPI in 2011,
the term ``expanded'' has referred to the addition of FHA and county
recorder data to the standard Enterprise dataset. There is no reason
that additional data sources may not be included into the calibration
dataset in the future. For instance, transaction prices embedded within
property appraisal data \25\ might supplement the existing data
sources. As with all significant changes in FHFA indexes, FHFA would
notify the public of any such data enhancements.
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\25\ To be clear--this would not entail the inclusion of
appraisal values, but rather property sales prices (e.g., sales
prices for ``comparable'' properties) found in electronic appraisal
records.
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D. Other Measures of Home Prices
While other existing (and potential) measures had some attractive
qualities, given the criteria used, FHFA believes that the expanded-
data HPI is the best option for the purpose of adjusting the loan
limit.
The data sources that the Safety and Soundness Act explicitly
requires the Director to consider are the FHFA's ``monthly survey of
all major lenders'' and any ``appropriate house price indexes''
published by the Census Bureau. Viable options for measuring
appropriate price changes are not available from either. In the case of
the monthly survey, the requisite data fields are currently under
development, and therefore FHFA has not yet conducted the survey.
Statistics from the Census Bureau are comprehensive for tracking the
prices of new homes that are sold, but generally do not show price
changes for existing homes. Price trends for new homes can differ
substantially from price trends for existing homes, and thus the new
home focus of the Census Bureau data is deemed to be a significant
drawback in this context.
In theory, one might track changes in the average or median U.S.
home prices by looking at statistics published monthly by the National
Association of Realtors (NAR). The NAR's estimates focus on prices for
existing homes, as direct estimates of the average and median
transactions prices are reported using data from a large number of
local Multiple Listing Services. NAR's estimates are attractive in
their simplicity (no statistical models are employed in their
derivation) and in the fact that the statistics have been published
consistently for decades. The major problem with their use, however, is
that--like all summary statistics--they are susceptible to short-term
biases caused by fluctuations in the types of properties that transact
in any given quarter. If a substantial number of expensive homes
transact in any given quarter, for instance, the reported average and
median home values will tend to rise even if no real market
appreciation was present. If the ``quality'' of transacting homes is
not held constant from quarter to quarter, the resulting statistic can
produce volatile measures and may bias estimates of price changes
(particularly in the short run). As has been discussed at length in
academic and practitioner literature, other indexes--for example those
that rely on the repeat-transaction methodology (e.g., the expanded-
data
[[Page 30242]]
HPI)--are less susceptible to these biases.\26\
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\26\ The repeat-transactions statistical model is sometimes
described as producing a ``constant-quality'' index.
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U.S. house price indexes published by S&P/Case-Shiller and
CoreLogic use the repeat-transactions approach for measuring price
changes and thus would not be susceptible to these biases. Use of
either of these indexes--or other external measures of house price
movements--in the context of setting loan limits would entail
substantial operational risks, however. The external measures do not
generally have track records that rival the lengthy publication history
of the FHFA HPI. Reliance on an external measure would mean that FHFA
would be dependent on its continued publication and on the
methodological decisions made by the producer. If the producer opted to
discontinue publication or to make undesirable methodological changes,
significant complications would arise, and the publication of the
conforming loan limits ultimately could be disrupted. Separately,
ignoring the issue of continued publication risks, details concerning
the methodology employed in the production of external indexes are not
always publicly available and, therefore, have less transparency than
FHFA's indexes. The prospect that FHFA would rely on an index having
little public descriptive material for the important function of
setting loan limits is not appealing to the agency.
E. Implementation Issues--Details
While it will be enlightening to compare price trends for the
expanded-data HPI to trends for other measures, it is useful to first
address details concerning implementation timing. In particular, this
section describes the ``when'' and ``how'' of loan limit changes under
the use of the expanded-data HPI.
The Safety and Soundness Act requires that loan limits be
``adjusted'' each year and that the newly adjusted limits apply
beginning in January. Since the passage of HERA--and in years prior
(when OFHEO was setting the loan limit)--annual adjustments have been
announced in the latter part of November. Under the terms of the
Charter Acts, adjustments are to reflect the percentage price change in
the index over the ``most recent'' 12-month or 4-quarter period.\27\
Given the large price changes that occurred and the Safety and
Soundness Act's prohibition on declines in the baseline loan limit, it
has not been necessary for FHFA to formally designate the reference
period: i.e., whether price changes will be measured on a 4-quarter or
12-month basis and the specific comparison interval (e.g., July vs.
July of the preceding year or Q3 vs. Q3).
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\27\ See Charter Acts sections 302(b)(2) (12 U.S.C. 1717(b)(2)
and 305(a)(2) (12 U.S.C. 1454(a)(2).
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Given the existing publication schedule for the expanded-data HPI,
when setting loan limits on a go-forward basis, FHFA anticipates
measuring price changes between the third quarter and the third quarter
of the preceding year. As always, FHFA will produce its suite of house
price indexes (including the expanded-data HPI) in November using data
through the most recent quarter--the third quarter. Then, using the
measured price increase in the expanded-data HPI between the third
quarter of the prior year and the third quarter of the present year,
FHFA will compute the new baseline loan limit. The new loan limit will
be announced toward the end of November at roughly the same time as the
HPI report is published.\28\
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\28\ FHFA's third quarter HPI for 2015 is set to be released on
November 25, 2015.
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The proposed focus on third quarter prices means that, in the
current situation in which average prices are below levels prevalent
prior to the passage of HERA, the third quarter of 2007 represents the
relevant reference period for determining when the baseline loan limits
can rise again. The baseline conforming loan limit was first set in
late 2008 and, as such, the first interval for assessing price changes
was 2007Q3 to 2008Q3. Under the expanded-data index (and other
measures), that 2007Q3-2008Q3 change was a price decline, thus
triggering the prescriptive terms of the Safety and Soundness Act
requiring that prices rise to the 2007Q3 level before the baseline loan
limit can be increased. In successive years of setting loan limits, the
expanded-data HPI found further declines--and then a partial recovery--
in U.S. average home prices. As shown in the next section, the latest
expanded-data index value for the U.S. (for 2014Q4) shows that prices
are still 7.9 percent below the 2007Q3 level. When the conforming loan
limit is set for 2016 later this year, the index will generally have to
exceed the 2007Q3 level for there to be an increase in the baseline
loan limit.
One final technical note must be made about historical values of
the expanded-data HPI. Under the basic repeat-transactions indexing
model used for producing the index (and other repeat-transactions
measures), all historical values of the index are unconstrained,
meaning that they are revised in each period.\29\ Unlike other types of
price indexes, where an index value for a given period may be initially
revised once or twice and then will be fixed forever, the repeat-
transactions house price index produces index values that are
constantly in flux. That is--values for all historical quarters, even
distant quarters, are modified slightly each period to account for new
historical data. To be sure, most values are revised only slightly
(e.g., the index value for a quarter in the late 1990s might change
from 175.02 to 175.04 between one quarter and the next). Changes are
constantly made, however.
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\29\ Other publicly available measures deviate somewhat from the
basic repeat-transactions model and sometimes constrain historical
price levels.
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FHFA's measurement of price changes for the setting of loan limits
will use the most recently released index values as of the third
quarter and will ignore prior vintages. For example, in setting 2016
loan limits, FHFA will rely on the most recent time series of index
values for comparing price levels. The 2015Q3-vintage estimates of the
relevant historical values will be compared. To illustrate--although
the most recent HPI publication showed that the expanded-data index
estimate for 2007Q3 was 215.19,\30\ when determining whether prices
have risen for loan-limit setting purposes in November, FHFA will use
the 2007Q3 value published in November. If the 2015Q3 index value
exceeds the index value for 2007Q3 (as determined in the 2015Q3 index
vintage), then the baseline loan limit will be increased.\31\
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\30\ This value was the seasonally adjusted index estimate for
the U.S. published on February 26, 2015. FHFA anticipates using
seasonally adjusted index values in evaluating price changes.
Because all annual price comparisons are made relative to the same
(third) quarter in prior years, however, this choice has little
practical effect.
\31\ Note that, as indicated earlier, the loan limit will only
increase by the net percentage increase since 2007Q3. In general, in
market environments where prior price declines do not need to be
overcome, the increase percentage will be the proportionate increase
between the third quarter of the prior year and the third quarter of
the contemporary year.
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F. Empirical Estimates of Price Changes: Expanded-Data HPI vs. Other
Measures
Using the expanded-data HPI and several other commonly-cited
measures of home prices changes, Figure 1 and Table 1 compare price
trends calculated by the expanded-data HPI and other estimates of price
change. Figure 1 indicates that all of the indexes report a very
similar evolution of prices since 2007. The metrics generally show
significant price declines between 2007 and sometime in 2011 and then a
robust recovery. The measures show that the
[[Page 30243]]
most recent price level is still somewhat below the 2007Q3 level.
Reconciling the small short-run differences in the price trends
reflected in the various measures is complicated and even an in-depth
analysis would likely conclude with much of the differences remaining
unexplainable.\32\ In general, however, the variations are a function
of differences in the underlying datasets, differences in the
methodology employed, and variations in the weighting of sub-areas.
Over the long-term, however, all of the indexes show similar patterns.
Even the NAR median price, which is constructed using the most
simplistic approach, trends similarly to the other measures. The NAR
figure is notably volatile, likely a function of the fact that it is
susceptible to certain short-term biases the repeat-transactions-based
measures are immune to. Over the time frame shown and even over a more
extended period, however, its evolution is similar to that of the
others.\33\
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\32\ In a series of OFHEO papers published in 2007 and 2008,
Andrew Leventis attempted to reconcile differences between the OFHEO
HPI and the S&P/Case-Shiller indexes. See, for instance, https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/20080115_RP_RevisitingDifferencesOFHEOSPCaseShillerHPI_N508.pdf. The
analysis, which just focused on the indexes produced by the two
providers, explained some but not all of the variations in measured
price changes.
\33\ Observers will notice that Figure 1 reports the S&P/Case-
Shiller ``20-City Composite'' index as opposed to a pure national
measure. Although the S&P/Case-Shiller suite of indexes includes a
``U.S.'' measure, that measure is published under a timeline that
would make it inconvenient for use in adjusting conforming loan
limits. In particular, the S&P/Case-Shiller U.S. index is published
quarterly and the third quarter estimate would not be available to
FHFA until late in November. The absence of (even preliminary)
information about price changes before the end of November would
mean that, were FHFA to rely on it, year-ahead loan limits could not
be published until early December. The S&P/Case-Shiller 20-City
composite index is published on a monthly basis, by contrast. If
FHFA were to rely on that measure, it could use the August-to-August
price change estimate, which would be available in late October
(meaning that a late-November release of loan limits would be
feasible).
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Table 1 provides estimates of the overall price deficit--the change
in prices between 2007Q3 and the most recent data reading--for the
various measures. As of the fourth quarter of 2014, the expanded-data
HPI estimates that the average U.S. price was roughly 7.3 percent below
its 2007Q3 level. This deficit is slightly below the midpoint of the
two extreme values in the table: The S&P/Case-Shiller 20-City Composite
(down 12.0 percent) and the FHFA purchase-only HPI (down 1.2 percent).
IV. Conclusion
A very significant number of methodological and implementation
options exist for satisfying section 1322. This Notice has described
FHFA's use of the expanded-data index as the preferred option for
annually setting loan limits under the procedure outlined (e.g.,
comparing third-quarter prices to third-quarter prices when evaluating
the most recent year's price change). FHFA recognizes that other
methodological and implementation decisions could be made. Given the
material impact on the Enterprises and in light of the significant
number of market participants affected by the level of the conforming
loan limit, FHFA has released this Notice and Request for Input to
ensure that public input is widely solicited.
FHFA encourages submitters to address any theoretical or practical
issues deemed to be important in this context. Once all submissions are
received, they will be reviewed by FHFA staff and a final Notice will
be published in the Federal Register. The final Notice will communicate
FHFA's ultimate determination and may address some of the submissions
received in response to this Notice.
FHFA intends to publish a final determination in the Federal
Register by the time the Enterprise 2016 conforming loan limits must be
published (i.e., by late November 2015). As in the past, the conforming
loan limit release will be published on FHFA's Web site.
BILLING CODE 8070-01-P
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Dated: May 18, 2015.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2015-12781 Filed 5-26-15; 8:45 am]
BILLING CODE 8070-01-C
