REAL ESTATE TOPICS...Unlike in housing bubble, home buyers now put off by rising prices

By Andrea Riquier

Would-be home buyers see high prices as a deterrent, not an incentive to get in the market

There’s a paradox in Monday’s existing-home sales data.

Sales slid 7.1% to the lowest pace since November, the National Association of Realtors said. NAR has warned for many months that low levels of supply, which are pushing prices ever higher, will eventually cripple the market.

February’s decline may be a sign that the Realtors’ fears are coming true, although it may still turn out to be a temporary blip caused by weather, new closing regulations, and the difficulties of adjusting data to account for all those anomalies.

Still, as NAR Chief Economist Lawrence Yun said in a statement, “the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”

That may sound obvious: if you can’t afford the few limited options available on the market, you’d probably give up too. It also tracks with a survey NAR published last week, which found that the share of current renters who say now is a good time to buy fell in the most recent quarter.

But it’s worth remembering, as Yun pointed out in a press conference Monday morning, that it wasn’t too long ago that higher prices drew more buyers in, rather than shutting them out.

That phenomenon was documented by Robert Shiller, one of the creators of the S&P/Case-Shiller home price index and a Nobel Prize winner for his research on asset price psychology.

In a 2007 paper, Shiller described the bubble mentality as “a feedback mechanism operating through public observations of price increases and public expectations of future price increases. The feedback can also be described as a social epidemic, where certain public conceptions and ideas lead to emotional speculative interest in the markets and, therefore, to prices increase.”

A few paragraphs later, Shiller wrote, “That the recent speculative boom has generated high expectations for future home price increases is indisputable.”

That’s vastly different than the world we live in now. In the February Fannie Mae Home Purchase Sentiment Index, survey respondents said they expect home prices to rise 1.7%. One year ago, respondents forecast prices would rise 2.5%.

In the 12 months to February, the actual price gain was 4.4%, NAR said Monday, but in recent months the yearly increase has been as high as 8.2%.

Homeowners are also less confident about the value of the equity they have in their homes. That means they’re no longer cashing out to finance other spending, as they did in the bubble years.

But it also means they may not understand how much their homes could command on the market, making them less likely to list and worsening the supply problem.