05. Feb 2018
In your professional capacity and perhaps also in your private life, you are closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.
Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if you own a home you wish to sell.
Today I want to show you that on these occasions, you can either save quite a bit of money, or realize greater proceeds with the aid of seasonality.
Here is how easily you can save money when purchasing a home, or earn additional money when selling one!
The first chart below shows the seasonal pattern in US home prices, i.e., the average trend based on the price performance of residential real estate over the past 64 years. In other words, on this chart you see the average progression in home prices in the course of a year.
US home prices: seasonal trend, 1953 - 2016
Prices tend to advance strongly between springtime until late in the summer. Source: Seasonax, data source: Robert J. Shille
As can be seen, prices typically rise much faster between March and August than in the rest of the year.
However, there is no distinctive seasonal pattern visible, similar to those displayed by listed financial instruments such as stocks, currencies, commodities or bonds. This is due to the inertia of real estate price trends.
Thus, in order to show the details of the seasonal trend in residential real estate more clearly,a different method of presenting the data is used in the next chart.
De-trended chart shows the seasonal pattern in home prices more clearly
In order to improve the visibility of the seasonal price pattern in home prices, the following operation is performed: as a first step, the data are de-trended. In order to do so,the average price increase per year is determined and the same pro-rata amount is deducted from every month (except for the first month), so that the year's ending value is equal to the beginning value. The result of this is a de-trended seasonal pattern index.
In the next step, the average of these 12 values is calculated, i.e., the de-trended mean is determined. As a final step, the difference between the monthly values of the de-trended seaonal pattern index and the de-trended mean is calculated.
The next chart shows the seasonal divergence of US home prices from their de-trended mean over the past 64 years.
US home prices: seasonal divergence from the de-trended mean, 1953 - 2016
Prices are at their peak in midsummer. Source: Seasonax, data source: Robert J. Shiller
On this chart one can discern seasonal effects on relatively inert real estate prices much more clearly. Between June and September, home prices reach their highest seasonal levels, between December and March they reach their seasonal lows. As a result of the inertia of real estate price trends, the difference between these is relatively small in percentage terms, but in view of the high absolute value of homes, it still represents fairly sizable amounts of money.
What causes this difference though?
Sunshine makes home purchases more expensive
One is immediately reminded of another well-known curve when looking at the chart: namely the seasonal pattern of temperatures. In summertime, temperatures are higher, in the winter season they are lower. The same obviously applies to the number of sunshine hours.
The seasonal trend in home prices is indeed correlated with the weather.
In the summer, bathed in sunshine, homes appear far more inviting and friendly than they do in the darkness of the winter season. That makes buyers more willing to pay higher prices; it is the other way around in the winter.
Naturally, properties are always perceived as similarly drab and colorless in the darkness of the cold season, regardless of whether they were bought in the winter or in the summer.
Nevertheless, at the time of the purchase, when the decision to buy is actually made, buyers are taken in by the perception created by sunshine and are willing to pay higher prices.
Use your knowledge of seasonal trends to save money!
As you can see, knowledge of seasonal trends can help you improve your financial situation. Preferably purchase a home in the dark winter season until March at the latest, and sell between June and September!