Every year during the second and third quarters (the “hot season”) housing markets
in the U.K. and the U.S. experience systematic above-trend increases in both prices and
transactions. During the fourth and first quarters (the “cold season”), housing prices and
transactions fall below trend. A similar seasonal cycle is observed in other developed countries.
We present a search-and-matching model that can quantitatively mimic the seasonal
fluctuations in transactions and prices observed in the U.K. and the U.S. The model features
“thick-market” effects that can generate substantial differences in the volume of transactions
and prices across seasons, with the extent of seasonality in prices depending positively on
the bargaining power of sellers. As a by-product, the model sheds new light on the mechanisms
governing fluctuations in housing markets and can be adapted to study lower-frequency
movements in prices and transactions.
Joint paper with Silvana Tenreyro (London School of Economics, CEP, CEPR),October 2008.