The housing market’s “January Effect”

Home sales plummet by 25%?!

The 376 houses sold during the month of January 2016 in the Reno and Sparks, Nevada market represented a nearly 25 percent decline in the number of home sales from the month prior (December 2015).

25 percent sounds like a very large decrease. But is it really that uncommon? Should we be concerned? The answer to both questions is No. Let’s take a look at some historical numbers.

As you can see from the past ten years of data, January has always seen a large decrease in the number of houses sold for the month when compared to the number sold in December. This is due to many home sellers and buyers being incentivized to close on the sale of the home prior December 31.

Why purchase a home by December 31? There are many reasons for this, but probably the biggest are the tax savings (the ability to deduct mortgage interest, property taxes, points on your loan and interest costs) available to many buyers who close before the end of the year.

The motivation to close by year’s end results in the parties involved moving forward the closing dates for transactions that would have normally closed in January. In this way December cannibalizes some of the January’s sales. Think of it as sort of a reverse “January Effect”.

Further supporting this notion is the fact that the number sales in December is seen as a spike upward when compared those of the prior month (November).

Looking at the same ten years of data and comparing December home sales to November’s homes sales, we observe that December’s sales typically are higher than November’s.