Rosewater

In a paper to be published soon in the Brookings Papers on Economic Activity, house-price gurus Karl E. Case of Wellesley College and Robert J. Shiller of Yale University find that the national measures of market trends can be very misleading. In most of the country, house prices tend to rise gradually, in line with personal income, they find. But California, New Jersey, New York, New England and Hawaii -- all of them short on land for building new homes -- are prone to lurch from booms to busts or periods of stagnation. The upshot: Buying a house in a popular, land-starved place doesn't necessarily mean you will gain more in percentage terms over the long term. In the 21 years ended in the first quarter of last year, Messrs. Case and Shiller found, prices in Milwaukee more than tripled, about the same as in Los Angeles. The difference was that prices in Milwaukee rose steadily, while Los Angeles rode a roller coaster.

Messrs. Case and Shiller, however, see signs that a bubble mentality has developed in some of the hotter markets. Last year they surveyed 700 people who had recently bought homes. The survey found that many of these people had very high -- and probably unrealistic -- expectations of how much home prices would keep rising. On average, respondents in the San Francisco area thought prices would rise nearly 16% a year over the coming decade. Another sign of self-delusion: Some people surveyed thought prices in places like San Francisco and Boston should continue to rise faster than those elsewhere because they are such attractive places to live and there is little space for new housing. Those factors do explain why home prices in those cities are relatively high, the authors note, but they don't mean that prices should keep on rising at a faster rate. Alas, write Messrs. Case and Shiller, "the single-family home market is a market of amateurs, generally with no economic training."