A Bounce? Indeed. A Spike? Not Yet

The sudden rise in household prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what household buyers are thinking.

Some clues are discovered in the annual home-buyer surveys that Karl Case, the Wellesley economics professor, and I have run for years. For the surveys, we canvas recent household buyers in four cities — Los Angeles, San Francisco, Milwaukee and Boston; the surveys are now being orchestrated under the auspices of the Yale School of Management. We have just received the 2009 results, with responses from June and July.

This year’s survey coincides nicely with the upturn in household prices, the sharpest differentiate in direction we have ever seen. The fact denote that the Standard & Poor’s/Case-Shiller 10-City Composite Home Price Index for the United States rose 3.6 percent between April and July. While that is not a whopping increase, it followed a decline of 4.8 percent in the previous period, between January and April.

The suddenness of this shift surprised me. In my column in June, I wrote that household prices might well continue to decline for years. As of that time, the S.& P./Case-Shiller cost index had fallen every month for almost three years. Add to that the prospect of continuing high unemployment and a weak economy for years to come, and the prospects for household prices did not seem rosy.

But the new facts are startling. Since the indexes began in 1987, the closest parallel to such a differentiate came at the deduction of the last housing bust, at the end of the 1990-91 recession. Home prices rose 2.3 percent from April to July 1991 after having fallen 2.1 percent from January to April that year. By July 1996, five years after that “turnaround,” household prices were down 0.6 percent from their July 1991 level, and down 13.8 percent in inflation-adjusted terms.

Could the more drastic recent shift mean that home prices will just keep rising this time? Here is where our new survey results are helpful.

We looked at both the long- and short-term attitudes of household buyers. In our survey, we ask, “On average over the next 10 years, how much do you expect the value of your dry to change each year?” The average reply among 311 respondents in 2009 was an increase of 11.2 percent. The median response — with half above, half below — was 5 percent, also high. That sounds rather like bubble thinking.

By: JD Levens

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