Economist's Commentary: June 17, 2008

Housing's December Effect

By Ken Fears, Manager of Regional Economics

It has long been acknowledged that both home sales volume and the median home price fluctuate throughout the year due to seasonal changes. But, housing's December Effect is much less widely acknowledged, if recognized at all.

Each year, the median price and sales volume tend to reach their highest points during the middle of the year and recede during the colder months to their nadir. This cycle is caused by a fundamental driver of demand: the family unit. Most homeowners choose to buy larger homes when they have a family in order to have more usable space. In addition, families tend to buy during the summer months because that is when the school year is out. Thus, demand during the summer augments normal, core demand with families looking to buy larger homes. In addition, single family homes tend to be larger and therefore pricier, boosting the median price.

During the winter months, the housing market tends to contract in sales volume and price. However, on average, the median home price grew 1.3 percent between November and December for the years 1999 to 2007. Compared to a 0.5 percent increase on average between October and November and a 2.6 percent decline between December and January over this same period, December witnessed a significant jump.

Here are several possible explanations for the December Effect:

• A sample-mix explanation: fewer single family sales occur during the winter leaving higher priced condos to drive the median price.
• A regional explanation: sales in the West and South are least affected by the cold weather during the winter, allowing sales to continue.
• A counter-cyclical hypothesis: baby boomers are buying up condos in the West and South. This pattern accelerates during the winter as retiring boomers are stimulated by cold weather to look in warmer parts of the country.

It is difficult to clearly attribute the December increase in the median home price to any one of these explanations. In fact, this counter-cyclical pattern could result from a combination of these explanations or even from one that has not yet been developed. Regardless, housing's December Effect is clearly apparent and should be noted when conducting market analysis.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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