A House Price Index (HPI) measures the price changes of residential housing. Methodologies commonly used to calculate HPI are the hedonic regression (HR), simple moving average (SMA) and repeat-sales regression (RSR).
The
HPI was developed in conjunction with OFHEO's (now FHFA)
responsibilities as a regulator of Fannie Mae and Freddie Mac. It is
used to measure the adequacy of their capital against the value of their assets, which are primarily home mortgages.
In Canada, the New Housing Price Index is calculated monthly by Statistics Canada. Additionally, a resale house price index is also maintained by the Canadian Real Estate Association, based on reported sale prices submitted by real estate agents, and averaged by region. In December 2008, the private National Bank and the information technology firm Teranet began a separate monthly house price index based on resale prices of individual single-family houses in selected metropolitan areas, using a methodology similar to the Case-Shiller index and
based on actual sale prices taken from government land registry
databases. This allows Teranet and the National Bank to track prices
without allowing periods of high sales in one city to push up the
national average. The National Bank also operates a forward market on Canadian housing prices.
Hedonic Regression(HR)
In economics, hedonic regression or hedonic demand theory is a revealed preference method of estimating demand or value.
It decomposes the item being researched into its constituent
characteristics, and obtains estimates of the contributory value of each
characteristic.
In real estate economics, hedonic pricing is used to adjust for the problems associated with researching a good that is as heterogeneous
as buildings. Because buildings are so different, it is difficult to
estimate the demand for buildings generically. Instead, it is assumed
that a house can be decomposed into characteristics such as number of
bedrooms, size of lot, or distance to the city center.
A hedonic
regression equation treats these attributes (or bundles of attributes)
separately, and estimates prices (in the case of an additive model) or
elasticity (in the case of a log model) for each of them. This
information can be used to construct a price index that can be used to
compare the price of housing in different cities, or to do time series
analysis.
As with CPI calculations, hedonic pricing can be used to
correct for quality changes in constructing a housing price index. It
can also be used to assess the value of a property, in the absence of
specific market transaction data. It can also be used to analyze the
demand for various housing characteristics, and housing demand in
general. It has also been used to test assumptions in spatial economics.
Hedonic models are commonly used in tax assessment, litigation, academic studies, and other mass appraisal projects
Simple Moving Average (SMA)
In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating series of averages of different subsets of the full data set. It is also called a moving mean (MM) or rolling mean and is a type of finite impulse response filter. Variations include: simple, and cumulative, or weighted forms
In financial applications a simple moving average (SMA) is the unweighted mean of the previous n
data. However, in science and engineering the mean is normally taken
from an equal number of data on either side of a central value.
If those prices are then the formula is
Repeat Sales Regression (RSR)
Perhaps the most well-known housing index that uses the repeat-sales method is the Case-Shiller Index, which measures changes in house prices. It excludes new construction, condos and co-ops. It also excludes non-arms-length transactions, such as home sales between family members at below-market prices. It does include foreclosure sales.
Other indexes that use the repeat-sales method are the Federal Housing
Finance Agency’s monthly House Price Index, which is based on Fannie Mae
and Freddie Mac’s data on single-family home sale prices and refinance
appraisals; and Core Logic’s Loan Performance
Home Price Index, which
covers a broader geographic area than the Case-Shiller or FHFA indexes.
Canada’s major home price index, the National Composite House Price
Index, uses the repeat-sales method, too. Indexes such as these
typically report changes in home prices from the previous month, quarter
and year. Increasing home prices indicate increasing demand, while
decreasing prices indicate decreasing demand.
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