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Traditional Seasonality Makes a Return to Home Prices

Traditional Seasonality Makes a Return to Home Prices

We have previously written on the fact that housing markets are inherently local, with seasonal pricing and sales volume patterns that repeat every year, especially in colder-weather markets. That pattern is evident when we look at single family home sales volumes for the five years prior to 2020 (Exhibit 1).

In 2020, the COVID-19 pandemic shifted sales activity into the latter half of the year (an anomaly we posted about here in the Vision blog back in January). The latest sales counts from Black Knight’s Collateral Analytics HomePriceTrends real-time tracking dataset suggest we’re returning to a more normal seasonal pattern this year.

Extremely low interest rates, stimulus funds, a robust stock market and increased mobility among remote workers all contributed to keeping sales well above normal in recent weeks, even as lower-than-normal housing inventories continued to drive prices upward. Though mortgage rates have moved up slightly, they are still historically low, and many markets remain affordable by long-term measures.

Exhibit 1: 2020 Was Not Normal

That said, home prices remain relatively high overall. Though new home sales tend to represent only about 15% of overall home sales, one contributing factor to today’s home prices are supply chain issues that have impeded new home construction. In the intermediate- to longer-term, there is also a shortage of lots available for new construction, especially in coastal markets, in addition to material and labor shortages that are likely to persist for the next year or longer.

Although the seasonality of sales volumes is well-established, home prices also exhibit seasonal fluctuations – sometimes quite pronounced – especially in northern markets where cold weather can literally put a chill on demand.

As an illustration, Exhibit 2 shows the median selling price of existing single-family homes in Cook County (Chicago), both actual, based on daily tracking data, and then “smoothed,” to illustrate the underlying trend.

Exbibit 2

As can be seen, there is a clear pattern of sales prices being above the underlying trend in the spring and early summer months. Prices consistently drop below that trendline during the cooler months before rising again, each year, with the thermometer.

We used these two series to create home price seasonality factors, based on the percentage difference in the actual and smoothed prices each month. Exhibit 3 shows these percentages back to 2016 for several large U.S. counties. Again, seasonal patterns appear to be quite consistent from year to year, with the primary difference being the magnitude of the deviations.

Exhibit 3

Exhibit 4 shows the average monthly percentage deviations for home prices in each of the same counties. Seasonal factors are largest in colder northern markets such as Chicago (Cook County), King (Seattle), and Minneapolis (Hennepin County) and smallest in warmer climate markets such as Miami (Miami-Dade County) and Phoenix (Maricopa County).

Exbibit 4

In a previous blog, we discussed how home price growth has been slowing in most markets in recent months. It remains to be seen whether this represents an intermediate-term inflection point. At a minimum, however, it does suggest a return to normalcy and that a repeat of the year-end surge of 2020 is unlikely.

Implications of price seasonality

Buyers who have flexibility in terms of when they buy may want to shop for homes during the late fall/early winter months, when they are most likely to find the best deals. Sellers, on the other hand, may want to wait until mid- to late-spring to list properties for sale. Appraisers who aren’t already adjusting for seasonal price fluctuations may want to take such factors into account when comparing sales occurring at different times of the year.

With more informed markets, it is reasonable to think that the variation observed in all the exhibits shown here would diminish, and buyers, sellers and appraisers could focus more on the underlying pricing trend. That does not yet appear to be the case, but perhaps – as with landing the best price on a home sale or purchase – it’s a matter of time.