FHFA Examines Impact of Short Sales and REOs on Overall Housing Market

The Federal Housing Finance Agency (FHFA) has released a Working Paper that evaluates the impact of distressed sales—sales of bank-owned properties and short sales—on the FHFA house price index (HPI). The study details recent and historical price discounts associated with such sales and provides statistical evidence supporting the validity of the approach FHFA has used to form its “distress-free” house price indexes. Such indexes, which were first released in the summer of 2012, show price trends free of the direct effects of distressed sales. As the Working Paper notes, "homes sold in distress tend to sell at significant discounts relative to other transactions. Given this discount, even without looking at the empirical data, it would be reasonable to assume that such sales would have a significant impact on aggregate measurements of home price trends." The paper, “Working Paper 13-01: Distressed Sales and the FHFA House Price Index,” was authored by FHFA Principal Economist Andrew Leventis and FHFA Economist Will Doerner in FHFA’s department of Housing Finance Research and Analysis. FHFA Working Papers are preliminary products circulated to stimulate discussion and critical comment. The analysis and conclusions are those of the authors and do not imply concurrence by other staff at the Federal Housing Finance Agency or its Director.