Things Change: COVID, Composition Effects, and Homebuyer Preferences
Prices aren’t the only things that changed for housing during the pandemic. The physical characteristics that buyers looked for in houses also changed, and in predictable ways.
Recently, home prices have grown more than four times faster than the 2012-19 annual trend of 5.27%. From January 2020 to May 2022, the average selling price of a home in Texas rose from $278,542 to $443,856. This 59% increase over two years and four months is equivalent to a 22% annualized growth rate. Broadly speaking, the main cause of this rapid price run-up was a rapid fall in interest rates while most typical homebuyers remained employed.
However, the average price could also have been influenced by what is called a composition effect. For example, many have postulated that homebuyers shifted their preferences to larger homes because of COVID-19. They may also have shifted in that direction as mortgages became cheaper. Regardless of the reason, that shift in demand to larger and presumably more expensive homes would cause the reported average price to increase even if no individual home actually increased in price.
The Texas Real Estate Research Center’s Home Price Index (HPI) attempts to control for these composition effects and provide a more reliable indicator of average house price changes. Are signs of composition effects evident? If so, how do those composition effects impact the relationship between the average transaction price and the HPI?