Americans Are Still Delusional About House Prices

The recent upturn in house prices from April to July (3.6%) is the sharpest change in direction professor Robert Shiller has ever seen. And Shiller, the dean of house-price analysis, has seen a lot.

The upturn could signal a v-shaped recovery in house prices. Or it could be the "mother of all head fakes," as one investor has described it.

Unfortunately, Robert Shiller's recent survey of Americans' attitudes about house prices suggests it's probably the latter. The survey also suggests that Americans are still delusional about the long-term trajectory for house prices.

In the survey, Shiller and his partner Karl Case ask Americans what they think home prices will do over the short and long term.

The expectation for long-term price changes hasn't changed much since before the bubble (it's now down to 11% a year appreciation). This outlook is more reasonable than it was at the peak of the bubble, but it's still extraordinarily optimistic. This happy outlook suggests that Americans still regard the last couple of years as a freak anomaly -- even though house prices are just now hitting the range of "normal" on key price ratios like price-to-rent and price-to-income.

The outlook for short-term changes (one year), meanwhile, has changed a lot in the past year. Specifically, it has gone from negative a year ago to 2% this summer. Thus, Americans are expecting a near-term housing recovery -- in part, perhaps, because of the recovery from April to July.

Shiller thinks this change suggests that buyers are now trying to time the housing market by getting in at the bottom. This could be contributing to the surge in prices we've seen over the last few months.

It's always possible that Americans are right, that we've passed the bottom and are on the way up. If so, however, this would mean remarkable foresight on the part of the average buyer.

Around major changes in market direction (the peak of the housing bubble, for example), there is widespread agreement about what future prices will do -- and this consensus is usually 100% wrong. If the consensus is right this time that we've just passed the bottom, therefore, it will be because the average American has suddenly gotten a lot smarter that usual about what the future holds.