What Are Homebuyers Thinking?

Many places around the world have been in a housing boom since the late 1990’s. As I argued last year, in the second edition of my book Irrational Exuberance , the boom is rooted in speculative investment by ordinary homebuyers, fueled substantially by the worldwide perception that capitalism has triumphed, and that all people must look out for themselves by acquiring property. Convinced that private ownership has become essential to smart living, buyers bid up home prices.

Moreover, the fear that one must get in on the boom before it is too late often drives people to bid up home prices faster now. This certainly seems to be the market psychology in China and India, where rapidly rising incomes and newly successful people are widely expected to put pressure on markets for land, real estate, and construction materials. Real estate booms have been going on in these countries’ major cities for years. In China, despite some signs of weakness – the Shanghai market is down, for example – price growth is still robust in much of the country.

But the boom generated by such beliefs cannot go on forever, because prices can’t go up forever, and there are already signs of a hard landing. In the United States, newspapers and magazines are trumpeting reports in the last few months that the decade-long boom in home prices may be at an end, and that the bubble may be bursting. The psychology has suddenly changed, creating widespread fear of sharp drops in US home prices.

The new futures market for single-family homes at the Chicago Mercantile Exchange (which I helped establish last May with our firm MacroMarkets LLC) is predicting that by next August prices will fall between 6% and 8% in all ten US cities traded.