Wednesday, May 9, 2012

Seasonality in house prices

There is a marked seasonal cycle in many housing markets. Sale volumes and house prices are significantly higher in the Summer and lower in the Winter. Evidently there should be some arbitrage, by selling high and buying low and renting in between for those who are genuinely moving or simply holding on to real estate for speculators. Possibly, the transaction costs are too high for this to happen. Or maybe the market for houses is not fluid enough for price not to cycle in a predictable way.

Cemil Selcuk picks up on this second idea and builds a search model where the supply is smaller in the Winter in the sense that the probability of finding an appropriate house is lower. As a result, there are fewer successful matches in the Winter, and they happen with a lower price because of the discount cost of waiting for better opportunities in the Summer and because the matches in the Winter are of lower quality. This is a rather trivial theoretical result, and it would be nice to know whether it approaches quantitatively the seasonal differences that are observed.


Ritholtz said...

We had this fight with the WSJ in 2008, who clearly did not understand Seasonality

Anonymous said...

It is well known that demand and supply both rise in summers and drop in winters. Using the demand and supply curves from Econ 101, it is easy to see that trade volume would follow the same pattern; high in summer and low in winter. The crucial bit is the price. For instance it is not clear why prices rise in summers. Demand goes up in summers, yes, but so does supply. The paper says that it's because of market thickness. In summers there are lots of houses to choose from and given that people have different tastes and preferences it's much easier to find a suitable match in the summer than it's in the winter. That's why buyers are willing to pay a premium.