Tuesday, the Federal Home Finance Agency’s Home Price Index (HPI) showed home values rising 0.2% on a seasonally-adjusted basis between June and July 2012, and moving +3.7% on an annual basis.

Home values have not dropped month-to-month since January of this year — a span of 6 months.

For today’s home buyers and sellers throughout Minneapolis , though, it’s important to recognize on what the HPI is actually reporting.

Or, stated differently, on what the HPI is not reporting. The Home Price Index is based on home price changes of some homes, of certain “types”, with specific mortgage financing only.

As such, it excludes a lot of home sales from its results which skews the final product. We don’t know if home values are really up 0.2% this month — we only know that’s true for the home that the HPI chooses to track.

As an example of how certain homes are excluded, because the HPI is published by the Federal Housing Finance Agency and because the FHFA gets its access to home price data from Fannie Mae and Freddie Mac, it’s upon data these two entities upon which the Home Price Index is built.

Home price data from the Federal Housing Administration (FHA), from local credit unions, and from all-cash sales, for example, are excluded from the HPI because the FHFA has no awareness that the transaction ever happened.

In 2006, this may not have been a big deal; the FHA insured just 4 percent of the housing market at the time. Today, however, the FHA is estimated to insure more than 20% of new home purchases. Furthermore, in August, more than 1 in 4 sales were made with cash.

None of these home sales were included in the HPI.

Furthermore, the Home Price Index excludes certain home types from its findings.

Home sales of condominiums, cooperatives, multi-unit homes and planned unit developments (PUD) are not used in the calculation of the HPI. In some cities, including Chicago and New York City, these property types represent a large percentage of the overall market. The HPI ignores them.

Like other home-value trackers, the Home Price Index can well highlight the housing market’s broader, national trends but for specific home price data about a specific home or a ZIP code, it’s better to talk with a real estate agent with local market knowledge.

Since peaking in April 2007, the Home Price Index is off 16.4 percent.

The housing market recovery appears to be sustainable.

According to the Federal Housing Finance Agency’s Home Price Index, home prices rose by a seasonally-adjusted 0.7 percent between May and June 2012. The index is now up 3.0% over the past 12 months, and made its biggest quarterly gain since 2005 last quarter.

The FHFA’s Home Price Index measures home price changes through successive home sales for homes whose mortgages are backed by Fannie Mae or Freddie Mac, and for which the property type is categorized as a “single-family residence”. 

Condominiums, multi-unit homes and homes with jumbo mortgages, for example, are excluded from the Home Price Index, as are all-cash home sales.

June’s HPI gives buyers and seller in Minneapolis reason to cheer, but it’s important to remember that the Home Price Index — like so many other home valuation trackers — has a severe, built-in flaw. The HPI uses aged data. It’s nearly September, yet we’re talking numbers from June.

Data that’s two months old has limited meaning in today’s housing market. It’s reflective of the housing market as it looked in the past.

And, even then, to categorize the HPI as “two months old” may be a stretch. Because it often takes 45-60 days to close on a home sale, the home sale prices as reported by the July Home Price Index are the result of purchase contracts written from as far back as February 2012.

Buyers and sellers in search of real-time home price data, in other words, won’t get it from the FHFA.

The Home Price Index is a useful housing market gauge for law-makers and economists. It highlights long-term trends in housing which can assist in allocating resources to a particular policy or project. For home buyers and sellers throughout Illinois , however, it’s decidedly less useful. Real-time data is what’s most important.

For that, talk to a real estate professional.