Realty Denial?

I like to think of myself as an optimist. My glass is often more than half full. I bounce back quickly from setbacks, and I usually expect things will work out for the best.

But according to a bunch of new survey data, I'm hardly as optimistic as the average American, at least when it comes to the value of my house. According to the latest figures from the S&P Case-Shiller index, the average U.S. home has lost about 16 percent of its value in the last year. Things may not be quite that bad in my neighborhood, but based on everything I see around me—local newspaper headlines, the asking prices of homes near mine, chatter I hear from local brokers—I assume my house has fallen by more than 10 percent since the housing market shifted from boom to bust over the past couple of years. Even former Federal Reserve Chairman Alan Greenspan agrees. In Thursday's Wall Street Journal, he cautioned "that prices could continue to drift lower through 2009 and beyond."

But amid these grim headlines, other Americans seem strikingly upbeat about the value of their own homes. In a survey released last week by the real estate Web site Zillow.com, a "Homeowner Confidence Survey" of 1,351 U.S. homeowners revealed that 62 percent of them believe their home value has increased or stayed the same in the last year. Three-quarters of them believe their home will continue to increase in value or hold steady in the next six months. And according to a different survey commissioned last month by Move Inc., the company that runs Realtor.com, 44 percent of Americans believe the housing market will improve once a new president is inaugurated next January.

Let's state it plainly: most of the people in the Zillow survey are wrong, and the ones who think a new president can fix the housing market are engaging in some pretty wishful thinking, too.

Although Zillow's "Zestimates" of home value are notoriously inaccurate, the company estimates that 77 percent of U.S. homes fell in value last year, and by most accounts, the ongoing housing bust will continue to take a toll on home values for months to come. "We attribute this gap [between homeowners' perceptions and reality] to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them," says Stan Humphries, Zillow's vice president of data and analytics.

But how, exactly, could so many people be living in such a state of denial? Amid a glut of data that suggest home values are falling, why do so many people believe their own home is gaining value?

Without even looking at the surveys, Terrance Odean, a behavioral economist at University of California at Berkeley, suggested NEWSWEEK look at the survey methodology for an answer. Odean guessed these surveys might involve online, voluntary surveys, not the scientific telephone queries that collect information from a representative sample of the population (and which cost companies far more money to commission than cheapo Internet polls). In fact, he's right: Both the Move and Zillow surveys are done by Harris Interactive, and both surveys rely on voluntary responses from Web surfers. Odean guesses that creates some bias in the sample. "The neighborhoods hardest hit by the mortgage/credit crisis are working class and lower middle class, [and] a lower percentage of the households in these neighborhoods probably have Internet access," he says. Odean also suggests people whose homes are on the brink of foreclosure may be less enthusiastic about volunteering for a survey about home values, further skewing the sample.