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» » VISIT US ONLINE DSNEWS.COM VISIT US ONLINE @ @ DSNEWS.COM MARKET PULSE F orget prices. Forget mortgage rates. The main driver of housing demand—according to three separate and distinct market studies—is confidence, primarily assurance that the value of the home will increase over time. "A setback to confidence means a setback to the recovery of the housing market," according to Doug Duncan, chief economist at Fannie Mae. Karl E. Case of Wellesley College, Robert J. Schiller of Yale—namesakes of the often touted and quoted Case-Shiller Home Price Index—and Anne Thompson of McGraw Hill Construction studied the results of 11 surveys conducted over a 14-year period (first in 1988 and annually since 2003) to understand the forces that led to the development and then the bursting of the housing bubble and to determine which buyers understood the market and whether their perceptions matched reality. The trio acknowledges that the origins and end of the market bubble were studied extensively but "one aspect of this episode in the housing market has not received the attention that it deserves: the role of expectations," they said. "What were people thinking when they bought a home?" Assessing Home Purchases Housing, economists observe, is unique among purchase and investment decisions. For the owner-occupant, buying a home is more than merely buying shelter because of the investment component, and similarly it provides the owner-occupant an investment vehicle while filling an immediate consumption need. At the time of purchase, a buyer of a capital asset buys a flow of services and benefits that will all come in the future, which is always uncertain. "To buy a house an individual (or a household) must make a series of very difficult decisions that will in all likelihood impact their lives forever," Case, Shiller, and Thompson wrote. "In virtually every case, a buyer walks into a closed room and writes a check and signs an offer sheet or a purchase and sale agreement. Anyone who ever signs an offer sheet, reads a building inspector's report, or wonders what would happen if she lost her job, knows the decision is emotional, personal, and difficult." But the decision process, they said, is more than "the process of thinking about the future, calculating subjective costs, risk aversion, and preference formation, all difficult topics for economists. It is really about what goes on in the minds of buyers." What happens in the market, they said, "depends on the behavior and attitudes of millions of individual participants, foremost among them: buyers." Their study tracked perceptions in four metropolitan areas: Middlesex County, Massachusetts, in the Boston-CambridgeQuincy metropolitan statistical area (MSA); Orange County, California, in the Los Angeles-Long Beach-Santa Ana MSA; Alameda County, California, in the San Francisco-Oakland-Fremont MSA; and Milwaukee County, Wisconsin, in the Milwaukee-Waukesha-West Allis MSA. They measured responses to questions about anticipated housing trends and found buyers had a good understanding of what was happening to house prices at the time of the survey and were not lured by prospects of huge future gains. Buyer Foresight "Over the cycle," they said, "buyers in boom cities were very much aware of contemporaneous changes in house prices and … were, if anything, out in front of changes that were occurring. When house prices turn down, buyers are cognizant of it." In many instances, buyers had a better sense of the market than professionals, the trio concluded. The survey data "show that buyers were, if anything, out in front of short-term changes that were occurring and that homebuyers' short-run expectations under-reacted to the year-to-year changes in actual home prices … since most homebuyers own their homes for many years, [long-term expectations] are arguably the more important determinants of housing demand," they said. Buyers, the study found, anticipated a market downturn in 2004—two years before prices peaked. Homebuyers are "very much aware of trends in house prices at the time they make a purchase. There is a strong correlation between the descriptions that the [survey] respondents give to their perceptions of price trends and actual movements in prices," according to Case, Shiller, and Thompson. "Since homebuyers are likely an upwardbiased sample of the population, in terms of their expectations, the perceived investment opportunity may be even lower for the general population," they wrote in their paper for the National Bureau of Economic Research. "A survey of professional forecasters run by Pulsenomics LLC suggests that the professionals may have lower long-term expectations for home prices." Perceptual Shifts The researchers note there was a clear change in public perception during the two years between 2004 and 2006. During that time, they say, there seems to have been an emergence of an idea, in media accounts, that there are such things as bubbles and that the bubble might be expected to burst. Over this two-year period, there were a number of 69

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