Housing Prices Have Been Talked Up, Survey Says
Has anyone been to a cocktail party or a barbecue in Orange County in the past 6 months where talk hasn’t at some point turned to soaring housing prices?
Probably not. Now a new survey suggests that all that pool-side chit-chat about the real estate market has itself probably had more to do with the run-up in housing prices than any economic or demographic consideration.
Judy and Barry Slone can attest to the power of suggestion. They bought a four-bedroom house in Laguna Niguel for $285,000 in May, when they thought any further delay would price them out of the market. Now, based on recent sales in the neighborhood, they believe that their house is worth well over $400,000.
Whether they are right is not the point, according to the study to be published in the upcoming issue of New England Economic Review. The Slones are a good example of the buyer mentality that has driven the Orange County housing market in the past year, according to co-author Karl E. Case, a housing-price expert and professor of economics at Wellesley College in Massachusetts.
According to a survey of home buyers in Anaheim, Boston, San Francisco and Milwaukee, the Slones’ reason for buying is typical: the fear of getting priced out of the market. But the survey also shows that their decision, like those of all home buyers in a boom, was probably not based on any identifiable economic trends such as lower interest rates.
Instead, the unprecedented 32% price surge in the Orange County housing market in the past year has been fueled by a speculative fervor based on little more than the widespread expectation that housing prices will continue to rise indefinitely, the study suggests.
The current housing boom, which began late last year, became superheated during May and has continued largely unabated since, making Orange County the nation’s most expensive housing market and leaving the experts wondering how much longer the boom can last.
According to the survey, buyers’ expectations tend to be based purely on past price movements, rather than some rational explanation for higher prices in the future. Home buyers “tend to interpret events in terms of hearsay, cliches and casual observation,” according to the survey.
The psychological underpinnings of the buying spree, like previous housing booms in California and other parts of the country, are identical to the forces that drive stock market prices higher in a bull market, Case said. But unlike the stock market, the housing market is unlikely to collapse, because it has a built-in support caused by the reluctance of homeowners to sell their houses in favor of other investments.
Case said he began studying the psychology of housing booms when he was unable to identify any solid economic evidence--such as growth in jobs and population--to explain the exponential surge in housing prices in the Boston area from 1983 to 1986.
His co-author of the study is Robert J. Shiller, a professor of economics at Yale University who has studied investor psychology in the stock market.
Their study, conducted in July, asked 500 buyers in Anaheim and 530 buyers in San Francisco who bought houses in May the reasons for their purchase and what they felt had brought on the unprecedented run-up in housing prices.
The goal was to shed additional light on home buyer behavior: What causes housing booms and why do home buyers buy when they do?
The results were compared to an identical survey conducted in the Boston area, where the housing market has cooled off in recent years after prices surged 50% from 1983 to 1986.
Milwaukee functioned as the “control group” because housing prices there have been stable.
In each of the cities surveyed, virtually all of the home buyers saw their decision as an investment with little or no risk.
In California, more than 90% of those interviewed said it was a good time to buy because prices were likely to keep rising. Two-thirds of the Californians were afraid that if they delayed buying a house, they would soon be priced out of the market. But more than half also worried that they may have been drawn into the market by the swirl of enthusiasm and excitement surrounding the boom itself.
According to the survey, “since most people expressed a strong investment motive, one would assume significant knowledge of underlying market fundamentals.”
But, in fact, the survey found that the respondents could not identify any sensible economic reasons for the booms. Instead, they provided “cliches and images” such as “the region is a good place to live” and “there is not enough land.”
The study also notes that housing booms tend to have a “social basis.”
“There is significantly more discussion among friends and associates in the California markets surveyed,” the report says.
The authors don’t dispute the fact that a growing economy and an influx of new people have resulted in increased demand for housing and higher prices. Economic factors alone, however, could account for only a fraction of the pickup in demand and prices.
“Those economic factors are not brand new. They didn’t begin this year. It’s the explosive nature of the boom that tips you off that something else is going on here,” Case said.
“What we found was that excited expectations drive the market. . . . When everybody jumps in, the sky’s the limit.”
Interestingly, homeowners in Anaheim and Boston cited the identical reason, changes in interest rate levels, to explain two opposite phenomena: the surge in prices in Orange County and the leveling off of price increases in Boston.
But in fact, in both markets, interest rates have changed little over the past 6 months.
Similarly, homeowners in Boston explained away, in part, the slowdown in their market by what they believed was the effect of the stock market crash. But in Orange County, homeowners said they believed that the stock market collapse helped fuel the boom by funneling money into the housing market.
Heavy press coverage added fuel to the buying spree, completing a circle of “information transmission that feeds on itself,” Case said.
The study concluded that buying sprees based on expectations of higher prices “increases the likelihood that price booms will persist as home buyers in essence become destabilizing speculators.”
THE PSYCHOLOGY OF HOME BUYING
In a survey of May home buyers in Anaheim and three other cities, most of those surveyed said investment was a major or partial consideration in their decision to buy. Buyers were asked the following question:
“In deciding to buy your property, did you think of the purchase as an investment?”
The responses:
San Anaheim Francisco Boston Milwaukee It was a major consideration 56.3% 63.8% 48.0% 44.0% In part 40.3 31.7 45.0 45.7 Not at all 4.2 4.5 7.0 10.3
The surveyed buyers also were asked the following questions:
1. “What do you think explains recent changes in home prices in ------------------------? What ultimately is behind what’s going on?”
2. “Was there any event (or events) in the last 2 years that you think changed the trend in home prices?”
In responding to those questions, respondents in each city mentioned the following themes most frequently:
Anaheim
% 1. Interest rate changes 31.7 2. Local economy 25.4 3. Immigration or 20.4 population changes 4. Region is a good place 16.7 to live 5. Anti-growth legislation 10.8
San Francisco
1. Interest rate changes 39.5 2. Asian investors 27.2 3. Not enough land 18.5 4. Region is a good place 17.9 to live 5. Asian immigrants 13.8
Boston
1. Local economy 29.5 2. Stock market crash 25.0 3. Interest rate changes 24.5 4. Psychology of the 18.0 housing markets 5. Immigration or 11.0 population changes
Milwaukee
1. Interest rate changes 27.0 2. Local economy 18.4 3. Local taxes 9.8 4. Increasing black population 6.6 5. Other national 2.9 economic changes
Source: Study by economists Karl E. Case and Robert J. Shiller CHANGES IN HOME PRICES
Annual percentage rates of appreciation in the median home price for Anaheim and three other cities. Increases were compiled at the end of June in each year. Anaheim 1985: .2 1986: 10.3 1987: 12 1988: 21.9 San Francisco 1985: 8.1 1986: 8.5 1987: 11.6 1988: 15.5 Boston 1985: 37 1986: 19.2 1987: 12.8 1988: 3.8 Milwaukee 1985: -2.2 1986: 6.6 1987: 1 1988: -.3
Source: Study by economists Karl E. Case and Robert J. Shiller
