Federal Housing Finance Agency

Distressed Sales and the FHFA House Price Index Federal Housing Finance Agency

Trends in residential house values can be expressed by changes in House Price Indexes (HPIs). HPIs are based on observed prices and help guide real estate activities. Since the recent housing crash, distressed sales have increased in numbers and have led to concerns about their effects on market valuations. This book explores the extent to which distressed sales can be identified in transactions data and how they affect HPIs. The book is broken into three parts. First, FHFA's standard metropolitan HPIs are compared to HPIs constructed without distressed sales. The analysis reveals that distressed sales have had substantial effects on measured price changes over the last several years. Second, FHFA's approach to identification of distressed sales is validated against a public data source. Third, the distressed sale discount is quantified in several ways that show it is not fixed across time or place. The magnitude of the discount is shown to depend on whether the current or prior recent sales are distressed. Collectively, the three parts of the book serve as validation of FHFA's current methods and provide evidence for how distressed sales have a material and adverse impact on measurements of price change.