Seasonality in Home Prices

realism.IN expert finds out the seasonal effects of home prices and how to correct for them in valuation; a study published by the Appraisers Journal

Valuation of real estate is a complex activity. In addition to the intrinsic characteristics of a piece of property, a number of extrinsic factors play a role in putting a price on real estate. For example, however the quality of construction (good or bad), there is a 'bias' effect on the property-price based on the locality in which it stands. Some researchers found that a small house in a nice neighborhood enjoys a positive value premium but the contrary was not true (i.e. a large house in an inferior neighborhood suffers from a price discount).  Of course, when determining price a number of factors are into play including intrinsic factors such as size, number of bedrooms, construction quality, number of bathrooms, etc. and extrinsic factors such as locality, access to public transport, security, proximity to market place and so on. 

When an appraiser (valuation expert) is asked to put a price on a real estate asset, s/he considers most of the factors mentioned above. However, note that all these factors are non-temporal; meaning that they do not vary so readily with time. The appraiser, in the simplest valuation approach, compares the property under question with some similar properties which were sold recently to ascertain the price. Most often the 'temporal' (time dependent) factors are ignored which may lead to faulty valuations. The home price movements may have three components: trend, seasonality and random changes. A number of indices may claim to capture the 'trend' component. However, the seasonality component may be ignored and may often hide behind the 'random' component. A study by Dr. Vivek Sah, Head of Strategy at realism.IN and a professor of real estate at the University of San Diego (USD) and Dr. Norm Miller (USD) addresses the issue of seasonality in home prices. The paper titled "Correcting for the Effects of Seasonality on Home Prices" will soon be published by The Appraisal Journal. 

"By definition, a comparable is assumed to have similar characteristics to that of the property being appraised and adjustments  are made for time since sale, size, quality, features and location..." says the paper, "...when appraisers must reach back several months for comps it is doubtful that they consider making a seasonal adjustment to estimate what the comp would sell for if it sold in the current month, beyond some general market trend for appreciation or depreciation patterns which attempts to adjust for the average annualized time impact."

That home price is independent of the time of the year when a house is sold, may be an erroneous assumption, claims the study: "say for example, the subject property is being appraised in the month of June, while the comparable property being used was sold in the month of January. This would mean that the price of the property has to be finally adjusted (after adjusting for all other factors) by the difference in the seasonal adjustment factors between the two months...".
"Although the study is based on the U.S. data, the phenomenon of seasonality in home prices may be universally applicable," says Vivek Sah, Ph.D., "and similar studies should be carried out in India to separate the seasonal components from the overall house price indices... we are in talks with data providers for potential research collaborations in India." 

Conducting seasonality studies requires a relatively larger time series data of house prices indices. Most house price indices in India are very recent. For example, although holding a great promise for future research, the Residex (from the National Housing Bank) was started only in 2007 and has been released at rather irregular intervals. While data availability is a basic requirement, substantial amount of academic rigor, econometric skills and professional insights are required to develop a meaningful seasonal series for house prices. realism.IN offers expertise in these areas and is exploring collaboration with potential data providers.

Some pertinent References:

• V. Sah & N. Miller, "Correcting for the Effects of Seasonality on Home Prices," The Appraisal Journal (2012), forthcoming
• K.E. Case and R.J. Shiller, “The Efficiency of the Market for Single Family Homes,” American Economic review (1989): 125-137.
• K.E. Case and R.J. Shiller, “Forecasting Prices and Excess Returns in the Housing Market,” Journal of the American Real Estate and Urban Economics Association (1990): 253-273.
•  J. Goodman, “A Housing Market Matching Model of the Seasonality in Geographic Mobility,” The Journal of Real Estate Research (1993): 117-138.
• C.L. Kuo, “Serial Correlation and Seasonality in the Real Estate Market,” Journal of Real Estate Finance and Economics (1996): 139-162.
• G. Kaplanski and H Levy, “Real Estate Prices: Seasonality's Sentiment Effect,” Working Paper (2009): Available at SSRN: http://ssrn.com/abstract=1438826
• N.G. Miller, V. Sah, M. Sklarz and S. Pampulov, “Is there Seasonality in Home Prices – Evidence from CBSAs,”, Forthcoming, Journal of Housing Research (2011)