Parcl Labs Price Feed vs. Freddie Mac House Price Index: Chicago Case Study

April 4, 2024
min read
Parcl Labs Price Feed vs. Freddie Mac House Price Index: Chicago Case Study


The Parcl Labs Price Feeds have been compared extensively to the Case Shiller Index, traditionally the benchmark for US home price indices. However, the Case Shiller Index falls short due to its lag, limited housing transactions, and broad geographic aggregations.

This analysis compares the Freddie Mac House Price Index (FMHPI) with the Parcl Labs Price Feed, spotlighting Chicago—a market gaining attention for its higher yields and growth prospects.

Executive Summary

  • The Freddie Mac House Price Index is underpinned by loan data.
  • Parcl Labs powers its Price Feeds (PLPF) with a more robust, comprehensive dataset than the Freddie Mac House Price Index (FMHPI), showcasing significant differences between the two indices:
    • The PLPF updates daily, encompasses all transaction types including new construction and all-cash purchases, and offers data granularity down to the metro, city, county, and neighborhood levels.
    • The FMHPI is updated monthly with a lag, relies on a repeat sales methodology, and excludes new construction and all-cash purchases, with availability limited to the metro level.
  • Chicago serves as a compelling case study to illustrate the impact of these methodological and data differences. Here, the PLPF reveals more pronounced seasonal effects compared to the non-seasonally adjusted FMHPI.
  • Our analysis suggests a significant factor could be the spike in all-cash purchases during Chicago's winter—a dynamic captured by the PLPF but omitted from the FMHPI. Additionally, our data indicates that savvy investors, aware they can secure discounts during Chicago's winter, contribute to this trend of all-cash purchases.
  • Housing participants deserve an accurate, timely, transparent, and complete picture of what’s happening within their markets. That’s why we created the Parcl Labs Price Feeds.

FMHPI Methodology Tracks Home Values through Loan Data

The FMHPI has a similar core methodology to the Case Shiller Index, however it has several meaningful differences. Both indices calculate home appreciation using a repeated sales methodology. The same home has to turnover at least twice in order to calculate the difference in home values. This has positive effects such as controlling for quality in most cases, however explicitly removes all new home sales which can have a meaningful effect on home prices in a market depending on the mix and age of the housing stock.

The differences are where things get interesting. The FMHPI includes condos which has a positive effect regarding tracking home prices given many markets are dominated by condo sales (New York Metro), whereas the Case Shiller index ignores these all together.

There is one significant difference worth paying acute attention to - the FMHPI only tracks home values that have loans purchased by either Freddie Mac or Fannie Mae. It also includes appraisals from refinancing. Appraisals are often subjective and as Freddie Mac notes themselves from their own methodology:

"Appraisal values for refinance transactions are included in the estimation of some house price indices. Historically, appraisal valuations conducted as part of a loan refinance tend to measure value with more error than those completed in conjunction with a home purchase, as the latter benefit from the additional information of the home-buyer’s and home-seller’s agreed upon sales price. The inclusion of appraisal information for refinance decisions, however, can yield a far larger sample of observed housing values, which can improve the estimation of a house price index, especially at smaller geographic units where sales transactions volumes in a given period may be quite small. The decision whether to include or exclude appraisal valuations, therefore, involves a trade-off between sample size and the accuracy of a given valuation."

The FMHPI notably excludes transactions involving all-cash purchases.

Summary: Case Shiller Index vs. Fannie Mae Home Price Index vs. Parcl Labs Price Feeds

In Chicago, the Parcl Labs Price Feed Shows Stronger Seasonal Effects Than FMHPI, With One Major Factor Being Freddie Mac's Exclusion of All-Cash Transactions

Comparing our Price Feeds with the FMHPI's smallest geographic unit for Chicago—the Chicago Metro Area—since January 2010, we find a 1.4% difference in home price appreciation. The Parcl Labs Chicago Metro price feed shows a 60.7% appreciation, while the FMHPI records a 62.1% increase over the same timeframe. It's important to note that neither measure is seasonally adjusted.

The analysis also highlights greater volatility in seasonal swings between the two indices, with the Parcl Labs Price Feeds experiencing more pronounced seasonal effects.

One factor contributing to the increased volatility in Parcl Labs' seasonal swings, aside from excluding new construction, is the FMHPI's exclusion of all-cash purchase data.

In analyzing both the Chicago metro and city markets for the share of all-cash sales transactions, it becomes clear that these transactions significantly impact both market levels.

At the beginning of 2014, in the Chicago Metro, we note approximately 40% of all housing transactions marked as all cash. A report from Zillow during the same period notes 41%. Fast forward to more recent times, we observe in September of 2023, 30% of transactions are denoted as all cash. Redfin observed 27% during the same month.

What stands out are the winter season peaks in all-cash purchases, highlighted by the gray bars from December through March, indicating a seasonal trend in Chicago's market for such transactions. Again, FMHPI excludes these all-cash purchases.

To more explicitly demonstrate this, we have the following:

Over a 14 year period, all-cash sales in Chicago City increase by an average of 5.5% annually during the winter months, while the metro area sees nearly a 10% yearly increase during this period.

The FMHPI's sensitivity to seasonal shifts stems from its underlying dataset, which is limited to homes with loans and does not account for all-cash purchases.

Investor Activity Impacts All-Cash Transaction Trends Observed in Chicago

Investor Percentage of Total Purchase Activity Peaks in Winter Months

It's widely recognized that investors constitute a significant portion of all-cash buyers across the nation.

Parcl Labs' analysis of investor activity at both the Chicago MSA and city levels shows a marked annual uptick in the percentage of home purchases by investors during the winter months. This trend persists even as the city and metro areas began to diverge in their market behaviors starting with the onset of COVID (2020). These wintertime surges occur as the broader market experiences a seasonal downturn in sales, indicating that investors actively pursue and acquire properties at a time when retail buyers typically withdraw from the market.

Visualized differently, investor purchases as a percentage of total transactions peak in Q1 and Q4, coinciding with the holiday season and winter months.

This finding suggests that savvy investors recognize the winter months in Chicago as an opportune time to secure better-priced deals.

Investors Account for 1 in 3 All Cash Transactions During the Winter Months

A significant share of these investor deals involve all-cash transactions.

Parcl Labs' analysis of investor activity in both the Chicago MSA and city since 2010 reveals that investors make up about 20-40% of all-cash purchases. The share of all-cash purchases by investors notably rises during the winter months. In most years, more than one-third of all winter all-cash transactions are carried out by investors.

What does this tell us?

  1. Investors actively acquire inventory during the Chicago winter, a time when seller motivation is high and competition from retail buyers is low.
  2. A significant portion of these transactions is financed through all-cash deals.
  3. This dynamic of investor behavior and financing method is entirely absent from the Freddie Mac House Price Index, despite its tangible impact on home prices. This omission highlights a gap in capturing the full spectrum of market activities that influence pricing trends.

You Deserve a Home Price Index That Represents Your Market's Dynamics

Housing participants deserve an accurate, timely, transparent, and complete picture of whats happening within their markets. That’s why we created the Parcl Labs Price Feeds. That’s why we update it every day. And that’s why tens of thousands of investors around the world trust the Parcl Labs Price Feeds with their own money.

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