Hopefully, value is not the first word that comes to mind when one hears the word home. But even if it is, a house’s price is thought to be relatively stable, shifting on the scale of years, not months (barring any system-exploding market shock, of course).
What makes the housing market peculiar is that its buyers are unusually idiosyncratic—some people will fall for a house just because it has a walk-in closet, an extra bathroom, or a breakfast nook. These idiosyncrasies cause two different buyers to place wildly different values on the same house, which can produce some surprisingly rapid fluctuations in price. Over the course of a year in Dallas, for example, the annualized rate of price increases varied by an average of 12 percent between 1987 and 2012. That’s a hand-picked extreme example, but that average is between roughly five and seven percent for homes in the U.S. and the U.K. But these fluctuations, as erratic as they seem, actually occur very predictably: The cost of a home is higher in the summer than in the winter.
Average Change in House Prices Between 1991 and 2012, by Season
These seasonal shifts are well documented—most housing indexes provide “seasonally adjusted” prices—but many models of the housing market have failed to account for them. Why might that be? L. Rachel Ngai and Silvana Tenreyro, both professors at the London School of Economics, have a paper in this month’s American Economic Review proposing a model to correct this oversight. (Slate wrote about Ngai and Tenreyro’s model six years ago, before it had been fully fleshed out.)