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» VISIT US ONLINE @ DSNEWS.COM Robert J. Schiller of Yale Anat Bracha, an economist in the research department at the Federal Reserve Bank of Boston Meghan R. Busse of the Kellogg School of Management at Northwestern University Powers of Persuasion Expectations and projection bias are also affected by confidence. Anat Bracha, an economist in the research department at the Federal Reserve Bank of Boston, and Julian C. Jamison, a senior economist at the Federal Reserve Bank of Boston, looked at whether the recent U.S. housing crash affected individuals' confidence in homeownership. During the Great Recession, they noted, the value of residential real estate fell by more than $4 trillion in 2007 and 2008, but nonetheless a Pew Research Center survey of 2,000 U.S. adults in March 2012 found, surprisingly, that 37 percent still strongly agreed that "buying a home is the best longterm investment a person can make." Although homeownership has fallen since the crisis, they say it is, "nevertheless remarkably stable: the homeownership rate fell from 69.2 percent at its apex in mid-2004 to 66.5 percent at the end of 2010. . . . Given the drop in real estate values, the persistent belief in the value of homeownership seems to reflect attitudes that go beyond financial rationales." They looked at several datasets to match ZIP-code-level declines in housing prices and foreclosures with responses to questions that were added to the monthly Michigan Survey of Consumers and found a surprising result. "People who in 2008 lived in ZIP codes that were hardest hit by the crash in housing prices—as compared to those who resided in areas that were least severely affected—are significantly more likely to be confident about Jorge Silva-Risso of the School of Business Administration at University of California, Riverside owning a home if they are older (above 58 years old in our sample) but are significantly less likely to be confident about owning a home if they are younger," they said. These results were skewed by whether respondents had a first- or second-hand experience related to the housing crash and whether they or someone close to them actually lost a large amount of money in real estate during the crisis. individuals' confidence in buying a home while the drop in house prices led to more confidence in the financial soundness of buying rather than renting a home among older individuals. "Older individuals have a fixed set of beliefs and interpret the crisis as a temporary decline from a known trend," according to Bracha and Jamison. "Younger individuals who personally experienced the recent drop in house prices tended to have lower confidence in buying a "[W]hat happens in the market depends on the behavior and attitudes of millions of individual participants, foremost among them: buyers . . . . [O]ne aspect of this episode in the housing market has not received the attention that it deserves: the role of expectations." —Karl E. Case, Robert J. Shiller, and Anne Thompson "Merely possessing information about an adverse event is not enough to change behavior—rather, something like direct experience is required to change an individual's confidence in homeownership," they concluded. "People who did not personally suffer a loss from the housing crash or know someone close to them who did do not show a similar divergence in confidence." But, they cautioned, real estate prices mainly had a negative effect on younger home, a finding consistent with the idea that their beliefs are still flexible and can change over time." Whether young or old, a first-time homebuyer or an investor in many properties, the age-old adage of "perception is reality" rings true. In the end, what it really comes down to—no matter the market cycle—is the mindset of the American consumer. Without confidence and conviction, the market is certain to plod along no higher than it is now, but return those sentiments to the public psyche, and the market is poised for a measurable rebound. 71

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