Boom2Bust.com

Real Estate, Real Denial

A recent survey by the Boston Consulting Group reveals that 55% of Americans believe they can sell their house for more now than a year ago, which is down slightly from the 59% who felt that way in summer 2006. 49% percent of those polled in the Northeast think their home is worth more now than a year ago, compared with 51% in the Midwest, 56% in the South, and 64% in the West. Nearly three-quarters believe they can sell their homes within the next 6 months at a price they set, and 63% feel that real estate is a good or excellent investment. The survey was conducted by phone from May 31 to June 3, with 1,007 responses.

In a June 22 Associated Press article, Michael J. Silverstein, a senior partner at the Boston Consulting Group, said, “Americans believe their homes are still their best investment. They’re positive about their homes’ value and believe in a bounce-back in residential real estate, overall.” In a June 25 CNNMoney.com article, Silverstein added that he believes the strong faith in home values shown in the latest survey is due to homeowners’ long-term view of their real estate investment. He pointed to another survey question that found 85% believe their house will be worth more in 5 years than it is today. According to Silverstein, “American consumers think long-term and they have a five-to-seven year time frame about the value of their home… I think what people want for their home is more than [what] they paid for it. They are looking at the glass and saying it’s half-full and I’m going to make some money if I sold it today. Do they know what their house was worth precisely a year ago, and what it’s worth today? The answer to that is no.”

BCG’s Silverstein may be correct in stating that the survey results are so upbeat because American consumers think long-term (5 to 7 year timeframe) about the value of their homes. After all, as Americans we have been told all along that housing values never go down. However, consider the following points made by the Wall Street Journal on March 12:

If you bought a house in Los Angeles in 1990, just as the real-estate market turned downward, you would have had to wait a decade for your home’s value to return to what you paid.

If you bought in Rochester, New York, in 1980, you would have seen only a mediocre 4% annual growth for the next 25 years.

If you bought in Dallas in 1986, as the oil boom went bust, your home wouldn’t have appreciated at all before 1998.

The reality is, real estate values can and do go down, significantly and for an extended period of time.

Home prices in 10 major U.S. cities dropped at the fastest pace in 16 years during the 12 months ending in April, according to Standard & Poor’s Case-Shiller home price index that was released earlier today. Home prices in the 10 cities fell 2.7% on a year-over-year basis, the largest decline since September 1991. Prices in the 20-city composite dropped a record 2.1% year over year. According to Robert Shiller, chief economist for MacroMarkets LLC and the co-creator of the index, “No region is immune to weakening price returns.”