Why do the FHFA Appreciation Rates Change For Previous Quarters (And Years) When I Get The Updated Graphs?
The United States Federal Housing and Finance Administration (FHFA) tracks the re-sale and refinancing of homes throughout the nation to track the change in value of real estate over time. This data is valuable to us as real estate professionals because it’s an accurate measure of appreciation on a large scale that shows what kind of home value increase can be expected for homeowners as the years go by. At Focus 1st LLC, we have taken that data and created beautiful graphs that make numbers easy to understand and can easily be explained. There is one detail though that we have not spent a lot of time explaining which deserves a little understanding of its own. The numbers from the FHFA and therefore the graphs change every quarter. Appreciation rates can (and many times do) change for previous quarters (and years) when graphs are updated.
Look at the example below.
Data Reported 2/23/22 for West Virginia
Data Reported 8/31/22 for West Virginia
Sometimes this change causes great concern for our customers who fear that something is wrong, or the data is inaccurate. Both of those fears are incorrect. The reason for the change in the data is because of how the government calculates that number. As a home sells the FHFA takes the appreciation based on the sale price minus the original price and distributes that money evenly over all the years it was owned.
Let me describe a little bit about the way the FHFA charts are created.
The government’s definition is that the FHFA House Price Index (HPI) data is based on repeat transactions. That is, the calculations of appreciation are based on repeated valuations of the same property over time. Therefore, each time a property “repeats” in the form of a sale or refinance, average appreciation since the prior sale/refinance period is influenced.
What this means is that once a year's appreciation is calculated (let's say for 2020), in the future when homes are sold (for example in 2021), those sales affect all the years that the home was previously owned. Of course, this is done for thousands of homes. In other words, each year (or quarter), all the data is recalculated based on the new sales. This means it isn’t unusual to see minor changes in previous years' appreciation. Historically, we’ve seen most of the changes occur in the more recent years, where the data is more likely to be impacted by recent sales. Older data is generally impacted to a much lesser degree and thus changes are less likely to impact that year's appreciation.
What's the difference between the FHFA appreciation and other appreciation measures you, see? In most cases other appreciations are based on the average price of the homes sold. Thus, those appreciation measurements just look at the average sale price and check to see if the average sale price is increasing and by what percentage that increase is. Thus, the appreciation that they calculate doesn't change. That being the case, we don't believe this method is as accurate. This is because at times where there is new construction, particularly bigger more expensive homes, the average increases create the perception of appreciation without real appreciation.
Appreciation based on All Transactions or Purchase Only
All this being said, there are some significant changes in the data the FHFA is now providing. Historically, the appreciation data FHFA provided was based on "purchase and refinance data" (as you saw from the earlier paragraph). This means that along with new purchases, the FHFA data also included data from refinance appraisals. Recently FHFA has been providing "purchase only" data for only the top 100 Metropolitan areas (based on population numbers). We believe that this data is more accurate. Generally, refinance appraisal data tends to be more conservative and will bring down actual appreciation value. We have decided to use the purchase only data when it is available. For other areas where we only have "purchase and refinance" data, we will show that. In both cases, we do state on the graph, the data that we are using to create those charts.
Also, you may be aware that we also provide an updated "accumulated appreciation" chart. We feel that this newer chart provides the same information but clearly shows the equity growth due to the appreciation for the specific area.
When I add up the appreciation for four quarters why doesn’t it add up to the annual appreciation?
Also be aware that you can't just add up the appreciation for each quarter and have it equal to the annual appreciation, let me go through an easy-to-understand example. While this example is a made-up example, it really demonstrates the point.
Let assume a home is worth $100,000 and the 1st quarter appreciation is 10%. That being the case, after the first quarter the home will be worth $110,000 ($10,000 being 10% increase). Then let's assume the appreciation for the 2nd quarter is also 10%. The home (after the first quarter is worth $110,000) will be worth (10% of %110,000) an additional $11,000 or $121,000 after the second quarter.
If you add up the appreciation for both quarters individually you get (10% + 10%) or 20%. However, if you look at the actual appreciation over time, since the home started at $100,000 and after two quarters the home is now worth $121,000, the appreciation over the two quarters is 21% (and not the %20 you get by just adding up the appreciation over the individual quarter periods). Sometimes people refer to this as the compound effect. In most cases, the actual appreciation over a period will be greater than the sum of the appreciation of the individual sub-periods.