Quick Tip: Profiting from Seasonality

Seasonality using Case Shiller's Home Price Index:

Typically the news uses the SnP Case Shiller's home price index that is seasonally adjusted.  However, the non-seasonally adjusted number offers additional profits for real estate investors if analyzed carefully.  Under certain circumstances, timing of a listing/sale can lead to higher expected sale prices.

Everyone recognizes selling in the early winter is difficult, this blog will shed some real numbers and quantify this difficulty.  

In the following graph, we see the January of each year since 2000 in the orange vertical bar.  At first glance it looks like the NSA case shiller index has some random chatter.  But a careful eye will notice how the peaks mid year and the troughs occur in January.

Those minor bumps in the road don't look like much on the trending graph above.  But lets take a look at the average month over month change for the Cleveland market and Composite 20 since January, 2000:

Cleveland MoM %  Composite 20 MoM % 01-January -0.77% -0.41% 02-February -0.91% -0.27% 03-March 0.02% 0.09% 04-April 1.12% 0.75% 05-May 1.15% 1.03% 06-June 1.16% 1.06% 07-July 0.44% 0.84% 08-August 0.29% 0.47% 09-Septemer -0.64% 0.14% 10-October -0.50% -0.15% 11-November -0.80% -0.28% 12-December -0.43% -0.37%

In the past decade, the three months April, May, and June have totaled a 3.43% price increase in the Cleveland market. Nationally using the composite 20 they have totaled a 2.84% increase.  Realize these gains are only for a three month period. Annualized, this is a return of 14.4% and 11.8% in the Cleveland and National markets respectively.

Practical Implications:

If you are going to sell a $250k home, waiting three months would on average lead to a sale price of 258,575 (250k * 103.43%).  Of course you'd have holding costs ranging from property taxes, insurance, interest, etc.  However, on the right property with lower costs you may find yourself netting an extra several thousand dollars by considering the seasonality of real estate and either selling sooner or later depending on the time of year.

On the buy side, you will want to focus all the capital you muster up in the month of December.  On average you'll purchase for thousands of dollars less.

Important items to consider:

1. 1. The case shiller home price index is a three month weighted average that measures sales (not listings or contracts).  If you consider the average mortgage is taking 35 days to close.  And factor in your expected time on the market.  You likely want to back the months up to reflect those expectations. In other words, Those booming June sales are reflecting the MLS listings from March or April.
2. 2. The seasonal adjustment factor has been increasing post great recession. It is not entirely clear what is the root cause of this but many economists speculate it has to do with distressed assets (ie REOs) sell year round putting downward pressure on average pricing during winter months.
3. 3. Historical patterns seems to indicate fast trending markets have smaller seasonality adjustments.  The true root cause of this is also not entirely clear.
4. 4.  The seasonal adjustment factor fluctuates considerably by location.  As a rule of thumb, cities with cold/blizzards will see greater seasonality.  I'd recommend your location specifics
5. 5.  Based purely on my own speculation, I expect the actual gains for an investor using this strategy will be less than the law of averages would indicate.  I suspect some of the price fluctuation may come from "fire sales" as people have life changing events (ie divorce) in the winter.  Or additional forecloses during the winter as a percentage of all sales.   
6. 6.  Be under no illusion this is a quick fix to make millions.  It is not even invest-able as a strategy alone.  However, under the right circumstances when timing of a sale of an existing asset, this is a useful phenomenon to keep in the back of your mind