5
Cash-Out Refinances and Estimated Appreciation Rates
With the purchase-only index’s appreciation rate lagging the appreciation for the usual HPI
by more than two percentage points, the question arises: “What is the source of the
difference?” As will be discussed in this Highlights section, the answer apparently is related
to the increasing proportion of mortgages that are “cash-out” refinances.
The mortgages used in the construction of the HPI can be classified into three groups:
mortgages for home purchases (“purchase mortgages”), refinance mortgages where the
loan rate or term is changed (“rate-term” refinances), and mortgages where the borrower
extracts equity from the home (“cash-out” refinances). For purchase mortgages, the home
valuations tend to be the actual purchase price. For refinance mortgages, the home values
associated with the mortgages are from house price appraisals.
The valuations associated with the three different types of mortgages may systematically
differ. Valuations derived from refinance appraisals are constructed under different
circumstances than those surrounding purchase prices; appraisers operate under specific
types of pressures and may employ different “comparable” properties in estimating value
than were (implicitly) used in the formation of a purchase price. Similarly, appraisals
conducted for “rate-term” refinances can in fact look different from appraisals for “cash-out”
refinances.1
An obvious source of the valuation differences stems from the possibility that the homes
with the different types of mortgages differ in material ways. For example, homes with
“cash-out” appraisals may be houses that have appreciated the most. Valuations for “cash-
out” appraisals may thus appear higher than others merely because they signal a select
group of homes.
If the composition of mortgage types in the HPI modeling sample (the “matched pair” data)
varies over time, these systema