How Over-Optimistic Homebuyers Could Inflate Next Bubble

Renters and first-time homebuyers want more amenities in their first homes and generally feel a sense of optimism that outpaces the reality in a slowly recovering housing market ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a disconnect that could set the stage for the next housing crisis.

[IMAGE]

Those are the findings that real estate company ""Trulia"":http://www.trulia.com/ unveiled in an American Dream survey it released Wednesday. Harris Interactive surveyed more than 4,000 adult respondents twice in May.

Of 86 markets in the 100 largest metro areas, 61 percent, or nearly two-thirds, of Americans believe that home prices will rise over the next year, according to the company.

Many of these believe that home prices will return to highs seen before the crisis in the next decade. Just how many? Fifty-eight percent.

High hopes for home prices weren't the only warning signs for Trulia.

While 62 percent of renters envisioned en-suite master bathrooms, for example, only 26 percent of first-time homeowners got their wishes. The same went for renters who wanted walk-in closets (56 percent)

[COLUMN_BREAK]

and gourmet kitchens (50 percent) and those for whom reality fell short (35 percent and 9 percent, respectively.)

The same disconnect took place for renters who wanted pre-wired entertainment systems (31 percent), pools (24 percent), and hot tubs (22 percent) and had to face reality (7 percent, 10 percent, and 6 percent, respectively).

""That's the kind of optimism that led us to the last bubble, and if that type of optimism persists, [it] could lead us to the next housing bubble years from now,"" ""Jed Kolko"":http://www.trulia.com/about/people/jed-kolko, chief economist with Trulia, said during a phone call earlier Wednesday.

He said that markets where the bubble ""wasn't very steep"" ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô including Pittsburgh, Houston, and swaths of Texas ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô would likely escape another severe bust. Cities with slacking job demand and unstable prices ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô Detroit, Las Vegas, and Sacramento, among others ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô would more likely feel the burn from over-optimism by comparison.

""It is very unlikely prices will return to those highs"" in those cities in the next decade, he explained, and pent-up demand, fueled by unrealistic expectations, could lead residential construction back to an unsustainable peak. He added that construction remains the industry's laggard at the moment.

Where's the housing recovery headed? If the signs mean anything ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô construction, foreclosures, delinquencies, home sales ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô ""normal should come early in 2016.""

Still, he added, ""there are many risks to the housing recovery. The euro zone crisis, big questions about the American budget and what that means for interest rates and the economy, and foreclosures that are still to come, in many local areas, are all potential threats to the housing recovery. These are all factors that could set us back.

Concluded Kolko: ""So the recovery, while it continues, is slow, with the risk of bumps, and that's the reality that consumer optimism right now is outpacing.""