Using Monte Carlo simulations to establish a new house price stress test

► We assess the ALMO house price stress test designed to monitor the fiscal strength of Fannie Mae and Freddie Mac. ► We examine how the relationship between house prices and fundamentals has varied over time and across states. ► A Monte Carlo simulation model is developed to estimate the implications of a severe negative shock to housing markets. ► We conclude that the ALMO stress test scenario severely understated what an updated statistical process would have suggested.