Realty Denial?

Over at the National Association of Realtors, chief economist Lawrence Yun offers several reasons on his blog for this disconnect between national housing prices and owners' perceptions of their home value. As you'd expect from a trade group that's often criticized for spinning a too-rosy scenario when it comes to the housing market, Yun suggests the media are overly fixated on the Case-Shiller index, which he says focuses too much on metro areas and ignores smaller cities and rural areas, where values are holding up better. He also says that since fewer than 10 percent of Americans buy or sell a home in a year, most of us have no real basis for knowing what our home is really worth. Finally, he says that the biggest declines are concentrated in neighborhoods with many homes financed with sub-mortgages, which finance only 9 percent of U.S. homes; in other neighborhoods, he suggests, values may be holding up just fine. "So it is very reasonable that the majority of homeowners, as stated in the survey, have not witnessed a decline in their home value," Yun writes.

Economist Karl Case, a professor at Wellesley College and co-namesake of the Case-Shiller Index, offers up historical evidence that homeowners are consistently optimistic about the value of their property. Each year since 1988, he's sent out questionnaires to 2,000 recent homebuyers in four U.S. cities. Year-in and year-out, strong majorities tell him that housing values have gone up or are likely to do so in the near future. Even today, with housing values well off their peak, more than 15 percent of respondents told surveyors they see "little or no risk in buying a house today." When Case's survey asks buyers how much they expect their home to gain in value over the next 10 years, the average respondent says he expects 15 percent annual appreciation—meaning that if they own a $100,000 house today, it will be worth $260,000 in 10 years.

Like other realists, Case finds some of these answers curious. "It's hard for me to imagine anyone believing the value of their house is going to go up in the next year, but apparently they do," he says. He attributes part of this rosy view to history. Until recently, national home prices had never fallen year-over-year, and in many places (including California), homeowners made out wonderfully as home prices rose. "They've got 30 years of data that say if you bought a house, you did really well," Case says, so people may assume that will hold true in the future, too.

Case makes another good point: rather than make fun of these people for their irrational exuberance, we should probably be thanking them. "In a way it's stabilizing," he says. "Despite the fact that we have all these auction sales and foreclosures and gloom and doom, there are still 4.8 million existing home sales a year." In other words, thank goodness there are still people who believe buying a house today is a good investment--or else the housing market might be worse than it already is.

Daniel McGinn is a national correspondent at NEWSWEEK and the author of "HOUSE LUST: Americas Obsession with our Homes."

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