Housing Market Is Heating Up, if Not Yet Bubbling HOME prices have been rising rapidly, so much so that there is talk that we are entering another national bubble. In fact, according to the S.& P./Case-Shiller Composite-10 Home Price Index, which Karl Case of Wellesley College and I developed, home prices in the United States were up 18.4 percent in real, inflation-corrected terms in the 16 months that ended in July. During the housing bubble that preceded the 2008 financial crisis, the largest 16-month increase wasn't much bigger: 22.7 percent, for the period ended in July 2004. Is it possible that we are lapsing into what I call a bubble mentality - a self-reinforcing cycle of popular belief that prices can only go higher? Some answers arise from a study that Professor Case and I have been conducting since 2003. Under the auspices of the Yale School of Management, we've been sending out annual questionnaires to random samples of recent home buyers in four United States cities: Boston, Milwaukee, Los Angeles and San Francisco. Last year, we reported on our project at the Brookings Institution in a paper we wrote with Anne Thompson of McGraw-Hill Construction. We updated the survey in May and June. The results suggest that though we are not in a bubble now, there are troubling signs that we may be heading toward one. Out of 2,000 questionnaires sent to home buyers, we received 368 responses. We asked the respondents how much they thought home prices would rise both in the next year and in the longer term - each of the next 10 years. The short-term expectations were somewhat high, with respondents saying they anticipated a 5.7 percent increase, on average, in the next year. That's close to the implied home price appreciation of 5.6 percent in the home price futures market at the Chicago Mercantile Exchange. These projections were much higher than those in 2011, when respondents anticipated only a 1.6 percent increase, and somewhat above those of 2012, when the expectation was 4.0 percent. Still, in 2004, just before the peak in home prices, short-term expectations were far loftier, at 8.7 percent. What's more, long-term expectations in the current survey remained relatively modest, at 4.2 percent a year for the next 10 years. At that rate, if consumer inflation is modest, at, say, 2 percent a year, real prices would rise only about 2.2 percent annually, and we wouldn't return to the December 2005 peak in real home prices until 2031. We also posed this question in the survey: "Do you agree with the following statement: Real estate is the best investment for long-term holders, who can just buy and hold through the ups and downs of the market." In 2004, some 84.2 percent of respondents agreed. But the percentage has been generally declining ever since, bottoming last year at 66.5 percent. While that level may still seem high, we should remember that these are people who have just bought a home. The level was up a little in 2013, to 70.4 percent. Here's another indication that we are not now in bubble territory: Some 10.6 percent of respondents said they bought a home "only to rent out to others." That proportion has been rising irregularly since 2004, when it was just 2.7 percent. The change likely reflects the recent tilt in demand toward rental housing, which isn't likely to sustain high prices in scattered suburban housing. The questionnaire invited readers to respond in their own words to questions like these: "Was there any event or events in the last two years that you think changed the trend in home prices?" "What do you think explains recent changes in housing prices in [name of respondent's city]? What ultimately is behind what is going on? When we asked these questions near the height of the bubble in 2004, especially in the booming markets like Los Angeles and San Francisco, home buyers tended to use terms that suggested bubble thinking - phrases like "limited land," "high demand for housing," "population growth," "everyone wants to be here" and "buyers willing to pay any asking price." There was also much talk about low interest rates, and how they might soon rise, even though the 30-year mortgage rate, then at just over 6 percent, was much higher than the current level of about 4.5 percent. In this year's survey, the answers didn't suggest a bubble mentality, though the theme of temporarily low interest rates remained. In summary, Americans are still relatively sober about housing. They aren't showing "irrational exuberance" about home investing to the degree they did in the past, at least not yet. But neither are they being completely realistic. In reading the most recent answers, I see no signs that home buyers have learned the lesson I tried to convey in the second edition of my book "Irrational Exuberance" in 2005. That message was that existing-home prices have shown virtually no tendency to trend upward in real, inflation-corrected terms over the last century. While land is limited, it's only a small component of home value in most places. New construction often brings down the value of older homes, which wear out and go out of fashion, dragging down prices. IT'S as if people are applying to housing an idea described by Frederick Lewis Allen in his 1931 book, "Only Yesterday." Before the stock market collapsed in 1929, he said, people thought that "every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point. Two steps up, one step down, two steps up again - that was how the market went. Well, people have certainly been right that there will always be steps up and down. Unfortunately, there is no certainty that the ups will outnumber the downs. People who are now inclined to buy a home are most often just thinking that we are gradually recovering from a recession and that this is a good time to buy. The mental framing still seems to be about economic recovery and the likelihood that interest rates will rise. People mostly don't seem to be prompted by the anticipation of another housing boom. That's the thinking at the moment. But whether these attitudes mutate into a national epidemic of bubble thinking - one big enough to outweigh higher mortgage rates, fiscal austerity in Congress and other factors - remains to be seen. Robert J. Shiller is Sterling Professor of Economics at Yale.