Summary
The Case-Shiller home price index has increased sharply during the past several months, suggesting that homebuyers are expecting future home values to rise. A recent homebuyer survey confirms that homebuyers expect home values to significantly rise over the next 10 years and I worry that they are becoming over exuberant once again.
Analysis
There has been a sharp reversal in home prices in recent months—home values are now going up, rather than down and a rise in buyer optimism may have something to do with it.
After falling every month for almost three years, the Case-Shiller 10-city home price index changed direction and rose 3.6 percent between April and July of this year, following a decline of 4.8 percent between January and April.
These results are surprising since the economy continues to shed jobs on a monthly basis and foreclosures continue to dominate the housing landscape. But the Case-Shiller home buyer survey indicates that home buyer optimism overshadows economic reality. According to the survey, home buyers believed (on average) that home values would increase 11.2 percent annually for the next 10 years. The median response (half above and half below) was 5 percent. This finding is overly optimistic and suggests that home buyers are convinced that the housing contraction is over and it is now a good time to buy.
The survey suggests that American home buyers have become overly exuberant again about future home values.
David Lereah consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
