RealEstateEconomyWatch.com

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.

According to the Case-Shiller annual home-buyer survey released last week, home buyer psychology shifted substantially in June and July of this year, coinciding with upward monthly movements in the Case-Shiller home price indices.

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 also measured home buyers’ short-term expectations and revealed that they expected home values to rise 2.3 percent for June-July which closely matches the positive changes in the Case-Shiller home price indices during the same period.

The survey suggests that American home buyers have become overly exuberant again about future home values. There also seems to be a speculative element in their thinking. Home buyers’ sanguine confidence about future home prices does not neatly fit into the reality of today’s housing market. Home sales have trended modestly upward during the past several months, in part, because of a government bailout program-the $8,000 first-time homebuyer tax credit which expires at the end of November. Further, it is likely that a new round of foreclosures will hit the markets over the next two years due to planned rate resets on option ARM and interest only mortgage loans. And finally, it is difficult to imagine home values rising when the economy continues to shed jobs at a meaningful pace every month.

According to Robert Shiller in a recent New York Times opinion piece, “The sudden turn (in homebuyer price expectations) could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.”