Hot and cold seasons in the housing markets

In the U.K., every year during the second and third quarters (the “hot season”), regional housing markets experience sharp above-trend increases in (quality-adjusted) prices and in the number of transactions. During the fourth and first quarters (the “cold season”), housing prices and the number of transactions fall below trend. A similar seasonal cycle for transactions is observed in other developed countries. Housing prices, however, do not necessarily follow a seasonal pattern in all of them; in particular, in the U.S., while transactions are highly seasonal, prices display no seasonality. We discuss why the traditional asset-pricing approach to the housing market fails at explaining seasonal booms and busts and present a search model that can quantitatively mimic the seasonal fluctuations in transactions and prices in both the U.K. and the U.S. The model features a “thick-market” externality that can generate substantial differences in the number of transactions across seasons. The existence and extent of seasonality in prices depend on the distribution of market power between buyers and sellers. As a by-product, the model sheds new light on the mechanisms governing fluctuations in housing markets and it can be adapted to study lower-frequency movements.