3 reasons you shouldn’t get caught up in spring “price growth”
Friday Mar 13th, 2020
Today’s 3-pointer will be brief, and it could very quickly become functionally irrelevant as the coronavirus panic spreads from grocery stores to real estate viewings. There are 3 statistically-biased reasons you really shouldn’t get too wrapped up in the idea that “spring market” pricing is any different than the other seasons:
- People – selection bias
- Product – selection bias
- Pricing – observer bias
I have this conversation a lot with clients and other agents – everyone thinks the “best time to sell” is in the spring, and some people actually think prices are higher in the spring. If our market was so inefficient that property values peaked for 3 months per year, we’d all be millionaires from trading in and out of it. So, what gives, then?
This is a selection bias that skews pricing data marginally higher during the spring.
“Selection bias occurs when you are selecting your sample or your data wrong.”
Simply put, the type of people looking to purchase in the spring are people who are looking to close in the summer, and those people typically buy and sell more expensive homes:
- People buying in the spring want to close in the summer
- People close in the summer to align with school years
- People who care about 1 & 2 are families
- Families require bigger homes
- Bigger homes are worth more money
Translating this into volume and average/median price metrics for the spring market, we can conclude that a higher concentration of higher-priced homebuyers is going to give us the illusion that prices are rising.
Simple enough, right? So, when someone tells you prices are higher in the spring market, you can tell them they’re biased.
Compounding the first point, the type of product available becomes a function of the “summer closing” phenomena ends up being family-homes, too. Typically, families with school-aged children are moving from one product in the middle-market to another product in the middle market, and therefore, they’re leaving behind more expensive product, too.
The easiest way to understand the impact of this is to visualize it graphically. For the purpose of this exercise, let’s make this extremely simple and cut the market into 3 parts: top; middle; and bottom.
Observer bias happens when the researcher subconsciously projects his/her expectations onto the research.
In this case, the observer is a prospective seller, and the prospective seller wants to be correct in their assumption that the spring market has higher prices. As a result, many, many people choose to list their property in the spring for this reason, and therefore list higher than they would’ve in a different market. This is why we often see a decline in sales-to-new-listings ratio (SNLR) in the peak of the spring market: people see price growth, they react to it, they flood the market with supply to capitalize on that growth.
Furthermore, we also see a sale-to-list-price ratio (SLPR) decline progressively from the peak of the spring market toward the summer, as any unsold inventory is absorbed at a discount. This can tell us that proper pricing and proper timing is of the utmost important in the information age.
In the spring market, new supply is introduced as perceived price rices, but new demand isn’t (in some cases, it declines due to price growth). It is a simple supply and demand equilibrium we meet every spring, and an always reassuring sign of a healthy market – until yesterday.
I felt it was necessary to conclude this 3-pointer because I didn’t inject much critical thinking, it’s mostly information.
I often recommend that people list in the spring anyways, because it’s simpler, the flowers are blooming, the volume is higher, and the birds are chirping. That being said, I always advise people to be conscious and critical of the price growth that seems apparent heading into a spring market to set realistic expectations.