HOT AND COLD MARKETS IN RESIDENTIAL REAL ESTATE The study originated when one of the co-authors entered the residential real estate market to buy a home and started became aware that there seems to be a regular cycle during which there is more activity in the summer when prices are higher than in the winter months when prices are lower.  This is a puzzling scenario because it begs the question: Why would people enter a market during a period when it is known that prices will be higher?  Why do they not wait until the winter when they know that prices will be lower.  And on the flip side, why do sellers sell during the winter season when they know that prices will be lower? Check out these shownotes in the blog page The pattern of higher prices and more activity in the summer, and lower prices and less activity is so ingrained in the market that In the US the FHFA produces two house price indexes; one that is the actual price and the other that is seasonalized.  This means that the FHFA is reporting housing prices as though the cyclicality of the seasons does not exist. The study looked at how big was this seasonal impact by looking at the raw data and not the seasonalized data to determine what is the difference between the summer and winter months for house prices.  They found that the difference between the summer and the winter months is around 4.5% – a significant difference in pricing between the seasons – and that this difference has remained consistent for at least two decades.  The study found international differences in the seasonality with the UK having higher price differences summer over winter, and found that there were regional differences.  For example, major California cities experience an 8% variance from winter to summer seasons.  This is a very significant price difference, one season over another. Similarly, the seasonality impacted the transactional volume with summer months experiencing over two and a half times more transactional volume than the winter months i.e. a 150% increase in volume. The study thus put specific numbers on this known seasonality in the market, and then set out to explain why this was happening – why would anyone buy in the summer when prices were higher, or sell in the winter when prices were demonstrably lower.  To answer this question the researchers considered the motivation for participants in the housing market.  Typically, these are people who wish to live in the house that they buy – not always, but for the most part this is true.  On average in the US and the UK, people tend to live in their homes for around ten years.  [This trend is increasing in the US and has been discussed previously by economist Jordan Levine of the California Association of Realtors in a prior podcast].  The process of buying a house is costly on many levels.  It is time consuming, stressful, and, of course, costly in financial terms, so when buyers look they tend to pay a lot of attention to the process and to take care in ensuring that the house they choose is one in which they will likely be happy to live for up to a decade.   The extent to which a house suits a particular person is very specific to that person – one person might love a house for a number of reasons that another person might not.  The result of this differentiation is that for someone who likes a specific home, they may be willing to pay more than the person who likes it less.  This concept that the same home can enjoy different valuations depending on the individual’s perception of that home is what the researchers called the ‘match quality’ of the home.  If a person likes the home they will be willing to purchase the home for a price higher than other people might.  This is the first building block of the theory underpinning the study. The second building block of the theory is that where you have a market where the match quality is important – like, perhaps, the jobs market or the marriag