Future Nobel Laurelate Robert Shiller has an interesting article in today’s NYT about a recent shift in the psychology of home buyers.

He and Wellesley prof Karl Case conduct an annual survey of what home buyers are thinking:

“On average over the next 10 years, how much do you expect the value of your property to change each year?”

The average answer among 311 respondents in 2009 was an increase of 11.2%. The median response — with half above, half below — was 5 percent, also high. That sounds rather like bubble thinking.”

Its worth noting a few things about surveys in general, and this survey in particular:

Forecasting Failures: Humans are especially bad at forecasting the future. Not only do they lack the skill set to rationally think about the factors impacting prices, they tend to engage in all manner of error-laden, faulty thinking;

Zero Objectivity: Asking new homeowners about home prices is a kin to asking a new car buyer about the future reliability of their vehicles as they drive from the dealer. They sure hope its reliable, just as buyers hope prices don’t go down.

Past Failures: Trying to discern future price movements based on surveys of recent buyers is a fatally flawed endeavor. The 2008 Case-Shiller survey had an average expected yearly increase in home values of 9.5% a year — at a time when prices were falling 20% per year. (Median was also 5%)

The bottom line is that surveys often reveal more about the questioners and questionees than they do about the subject matter at hand.

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Source:
A Bounce? Indeed. A Boom? Not Yet.
ROBERT J. SHILLER
NYT, October 10, 2009

http://www.nytimes.com/2009/10/11/business/economy/11view.html

Category: Psychology, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “What Does the Psychology of Home Buyers Mean For Prices?”

  1. jc says:

    Hope springs eternal in the human breast: Man never is, but always To be Blest

  2. jc says:

    we canvas recent home buyers in four cities — Los Angeles, San Francisco, Milwaukee and Boston

    Recent home buyers basically excludes everyone who is unemployed or who fears losing their job …

  3. WaveCatcher says:

    This survey only shows how out-of-touch most Americans are regarding our dire economic circumstances.

    That was my first impression of last year’s survey, and nothing’s changed in the last 12 months. Amazing the gullibility of the public.

  4. jc says:

    “Millions for defense but not one penny for tribute” is incorrectly attributed to Thomas Jefferson. Actually the quote was made by Rep. Robert Goodloe Harper, chairman of the committee on ways and means in Congress, on June 18, 1798. President John Adams had sent representatives to France to try to keep the US from going to war with that country. French and British warships had been attacking Americans ships at sea and claimed the right to seize American vessels. Three French diplomats offered to negotiate a treaty if the US would pay a bribe (tribute) to the French foreign minister, Tallyrand. This episode became known in history as the XYZ affair because the French diplomats were referred to by these initials rather than their names. The affair generated anger in the US, which prompted Rep. Harper’s famous words.

  5. Onlooker from Troy says:

    Barry

    I haven’t yet read the article but I completely agree with your assessment. It’s hard for me to believe that Shiller and Case don’t see the error of their method (although admittedly I have only spent a minute or so mulling this). Any survey would be faulty, for reasons you’ve outlined, but it seems to me that a more diverse sampling of home owners (not just recent buyers), and prospective buyers would yield a more enlightening look at the where the psychology is at the moment.

    Owners in general, and especially recent buyers, so want their homes to appreciate in value in a way that looks like a good investment that they will definitely fool themselves about the real prospects. The same is true for stocks. And for too long now we’ve thought of homes as investments vs. shelter only. That mindset will take a while longer to extinguish, no doubt.

  6. Marcus Aurelius says:

    Buy now, or be priced out forever.

  7. Onlooker from Troy says:

    After reading the article I guess I need to adjust my views on this. The methodology is good for assessing what new buyers are thinking and thus what their motivations for buying were. These results show that more people have bought thinking the bottom is in and that their “investment” will yield healthy returns, vs. the people who have bought despite the prospects of having bought before a bottom.

  8. David Yaseen says:

    I’d love to see what these same people think about their job security.

  9. flipspiceland says:

    Other than as entertainment, akin to the days (or hours) spent between fantasizing about what one would do with monstrous obscene Powerball winnings, and the drawing, (wherein one expects to lose), projecting the future of home values is pointless.

    I wonder what the projections are among those of us who paid our mortgages off in 15 years, on homes that we bought quite a bit beneath our affordable quotient.

  10. DL says:

    “…surveys often reveal more about the questioners and questionees than they do about the subject matter at hand”.

    True enough. Saying what doesn’t work is easy. Saying what DOES… a little more difficult.

  11. dss says:

    Everyone knows that home prices never go down.

  12. tradeking13 says:

    If Schiller didn’t get a Nobel Prize for Economics in his first 9 mos. at Yale, then I don’t see him getting one in the future.

  13. flipspiceland says:

    @Tradeking

    That Nobel is reserved for TheBamster. Next year.

  14. olephart says:

    Marcus Aurelius Says:
    October 11th, 2009 at 1:27 pm
    Buy now, or be priced out forever

    That was originally found scratched on a cave wall in the Neander Valley.

  15. wunsacon says:

    Shiller’s survey data isn’t an anomaly. I think we’re back in bubble territory on house prices.

    I’ve also been monitoring a couple of Redfin markets. In the past 3 months, nothing’s for sale anymore in the price range where I might’ve considered buying anything. (Since Redfin is a database, I’m not sure I’d dismiss this observation as “anecdotal”.)

    I also watched the latest Jim-the-Realtor video on Youtube. Sheesh.

    The 2004-2007 market bullshit went on longer than I imagined it would. How long will this nonsense continue? Will no one rid me of these meddlesome price supports?

  16. wunsacon says:

    Attempt #2

    Shiller’s survey data isn’t an anomaly. I think we’re back in bubble territory on house prices.

    I’ve also been monitoring a couple of Redfin markets. In the past 3 months, nothing’s for sale anymore in the price range where I might’ve considered buying anything. (Since Redfin is a database, I’m not sure I’d dismiss this observation as “anecdotal”.)

    I also watched the latest Jim-the-Realtor video on Youtube. Sheesh.

    The 2004-2007 market bullshit went on longer than I imagined it would. How long will this nonsense continue? Will no one rid me of these meddlesome price supports?

  17. wunsacon says:

    Oh, sorry for the double-post. I didn’t notice my post show up in the middle.

  18. carping demon says:

    • Forecasting Failures: Humans are especially bad at forecasting the future. Not only do they lack the skill set to rationally think about the factors impacting prices, they tend to engage in all manner of error-laden, faulty thinking;

    Flatworms, on the other hand, are especially good at it.

  19. Winston Munn says:

    Off-topic, but….

    Meanwhile while Rome burns we continue to bring democracy…er…..capitalism…..to the rest of the world.
    From timesonline.co.uk.

    “Afghans are known for changing sides back and forth during their long years of war — there is an old saying that “you can rent an Afghan but never buy one” — and battles have often been decided by defections rather than combat.

    Paying Taliban foot-soldiers to switch sides could spare US lives and save money, say its advocates. A recent report by the Senate foreign relations committee estimated the Taliban fighting strength at 15,000, of whom only 5% are committed idealogues while 70% fight for money — the so-called $10-a-day Taliban. Doubling this to win them over would cost just $300,000 a day, compared with the $165m a day the United States is spending fighting the war.

    The tactic was used to good effect in Iraq where the US government put 100,000 Sunni gunmen on its payroll for about $300 a month each.”

    Maybe the real solution is to slice the Taliban into tranches, have Fitch rate them, and then sell them to the Chinese.

  20. Maybe the real solution is to slice the Taliban into tranches, have Fitch rate them, and then sell them to the Chinese.

    LOL! You almost knocked me off my chair that time!

    Anyway, what I originally came here to say is those *cough* ‘forward looking’ numbers are a mirror image of what people were expecting I-net stocks to continue to do sometime around 1999. It’s amazing, the chairs change but the players don’t.

    In five years time they may be having the same expectations about gold

  21. km4 says:

    @Winston Munn
    Obama to pay off insurgents? I thought he already did with $12Trillion to Wall St
    http://www.timesonline.co.uk/tol/news/world/Afghanistan/article6869503.ece

  22. Mannwich says:

    I agree with wunsacon. Check this out. We’re back in bubble-land with bidding wars going on. It’s ’05-’07 all over again but this one won’t likely last quite as long.

    http://www.calculatedriskblog.com/2009/10/foreclosures-movin-on-up-or-euphoria.html

  23. Mannwich says:

    @Winston: That is priceless. I’m sure that Summers has already thought of that one though.

  24. Darkness says:

    The survey result does tell you a lot, just not (directly) about house prices. What it tells you about is the reasons for foreclosures and exceptionally long DOM.

  25. bigbluecrab42 says:

    Barry, One only has to look at the mortgage reset chart below to see what will happen to prices going forward for the next 2 or more years.

    Mortgage Reset Chart
    http://tinyurl.com/c77m2p

    Even this chart is just what is reported…it doesn’t take into account the probable outcome of those resets, and the fallout if even a small fraction is defaulted ( which most would wager is going to be high.)

  26. Home price will go north next year!

  27. peachin says:

    Hard to think in %’s. I think the average $300m home today was thought to be worth $450m by the owners. So they are waiting, some renting, and others are waiting to be processed out (forclosed.) Over the next 3 years the value could go down to $225,000….Then, yes 5% per year increase after that (2012.) How does that sound – from my economic assessment company – I am neither Case nor Shiller. One thing we have learned – those out front pontificating are wrapped up in their own “mechanics” of thought and prejudices. There are still few bargains out there – and there have to be many more – Inventory (supply) of private sellers (many who are putting their properties on and off the market – to avoid “spoilage”) We haven’t even reached the kind of “Pain Point” required to call a bottom…a real bottom unaffected by artificial stimulus (like $8000 for first time buyers) We are now seeing “Absolute” auctions (no price retainage) We will be seeing more – lots more…. The Corporate Builders have yet to face their biggest nightmare (who wants to live in a gated community?) Originally thought to keep the “unfit to own” out of the community – now “it is thought by many” Gated communities are gatherings of refugees – no one wants to live with.

    After, what will be a Xmas, of market dumping (from old merchandise packed deep in the warehouses we will see storefronts (strip malls, etc) fold up – Drive in to return a movie to Blockbuster and find the store is empty – commercial property – will be the next “Dong” in this “Ding Dong” fall apart – with another round of major layoffs – who will pay their mortgages, utilities, Taxes, etc… the local governmental economic environment facing a “spending” and collection disaster – RECOVERY?

  28. peachin says:

    Did I say enough? We are in the eye of the storm – quiet, almost pleasant and reassuring – and the second “things didn’t line up” wave – The need to have everyone have a safety net in Healthcare is ABSOLUTELY necessary – because the healthcare system has to remain viable during “disastrous” times. Why are the markets in “Recovery?” Because everyone wants the “eye of the storm” to continue in peace. The Real Estate Industry’s selling techniques have not changed, The Automobile Dealers haven’t changed either. Credit availability is on Vacation….Earnings Season is the “hope” before the storm – which should continue after earnings season is over….The Republican Party and supporters are acting in “surety” to enhance this failure. It’s going to be a very cold winter!