Home Price Rise Expectations Are High In the Short Term

However long term expectations are modest and consumer exuberance is rational (so far)

With home prices back on the rise, there is some speculation that we are entering the beginning phase of another market bubble. In the past 16 months ending in July, United States home prices were up 18.4 percent in real (inflation adjusted) terms. The largest 16-month increase during the housing bubble was 22.7 percent for the period ending July 2004.

Karl Case of Wellesley College and his associates have been conducting a study on the housing market under the sponsorship of the Yale School of Management since 2003. Some answers to the question of another bubble in development have arisen from their surveys. They sent out questionnaires annually to collect random samples of recent homebuyers in San Francisco, Los Angeles, Milwaukee and Boston.

In a paper they wrote with Anne Thompson of McGraw-Hill Construction last year, they reported on their project at the Brookings Institute. The results of the study found that although we are not in a bubble, there are signs that one may be on the horizon. The survey was last updated in May and June of this year. They received 368 responses out of the 2,000 questionnaires they sent out to homebuyers in the aforementioned four United State cities.

Short-term expectations were high in responses to home price rises in the next year, with respondents anticipating a 5.7 percent increase on average. In 2011, respondents anticipated only a 1.6 percent increase and 4.0 percent in 2012. Just before the peak and fall of home prices in 2004, respondents anticipated a lofty 8.7 percent increase. If inflation is modest in the future (2 percent per year), we would not return to the 2005 peak in real home prices until 2031. In the most recent survey, long-term expectations in home prices are relatively modest at 4.2 percent a year over the next 10 years.

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