Optimism Can Be Bad for Recovery, Rental Market is Bubble-Proof: Trulia

Optimism is good for the recovery, but too much optimism can lead us back on the path to the next housing bubble, said ""Trulia"":http://www.trulia.com/ Chief Economist Jed Kolko during a conference call Wednesday.

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Although home prices are rising, renters might be overconfident, with 58 percent of respondents expecting home prices to return to peak in the next 10 years, according to Trulia's American Dream survey.

Kolko explained that in healthy markets where prices didn't fall much from their peak after the bubble, the projection makes sense. But, in markets such as Detroit, Las Vegas, and Sacramento â€" where there was weak housing demand, job declines, or oversupply due to excess construction - prices fell by half or more from their peaks. In those cases, Kolko said optimism is outpacing reality, and it is very unlikely that prices in those hardest hit markets will return to the peaks in the next 10 years.

One area where renters had a more realistic outlook is the expectation for local prices.

Overall, 61 percent of respondents thought local prices would rise in the next 12 months, which Kolko said is totally reasonable given that data from Trulia shows prices are up quarter-over-quarter in 86 out of 100 metros.

As for the rental market, Kolko said there is no danger of a bubble and if anything, we are in danger of the rental market becoming extremely tight in some markets.

""The reason why I'm less concerned about a rental bubble is that bubbles often arise when expectations of price increases cause people to bid up homes or whatever it is around which the bubble is forming,"" he explained, adding that since renters don't benefit from price increases, they're not going to bid up prices beyond demand.

Also, Kolko said in most markets, it is possible to convert rental units to condos or owner occupied units, which could act as an outlet in case of any overbuilding on the rental side.

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When gauging the recovery based on three key metrics - new construction starts, existing home sales, and foreclosures and delinquencies - Kolko said we are 37 percent back to normal conditions.

If we continue at this rate, foreclosures, delinquencies, and sales should be normal in 2016, he said, noting that recovery usually takes a couple steps forward, then a step back.

Out of the three metrics, Kolko said construction is lagging and is always a little bit slower than other indicators in the market because builders don't want to break ground until they see strong evidence that the market is tightening.

The survey also revealed that while 78 percent of renters plan to buy some day, 51 percent of renters said they plan to wait for more than 2 years before buying. Only 8 percent of renters said they would buy in the next 7 to 12 months.

Following more positive news about the housing market, respondents are finding bigger homes to be more desirable. When asked about ideal home size, respondents showed greater interest in supersized homes.

The percentage of those who said their ideal home is bigger than 3,200 square feet nearly doubled to 11 percent from 6 percent last year.

Interestingly, only 8 percent of respondents said their ideal home size is in the 800 to 1,400 square footage range, but 29 percent of inventory listed on Trulia fits that category.

About 25 percent of respondents said 2,001 to 2,600 square feet is ideal, but only 17 percent of Trulia listings met that size range.

The larger share of respondents, 29 percent, said their ideal home size is 1,401 to 2,000 square feet and 29 percent of homes listed on Trulia matched that range.

Just like ideal size, dream amenities were found to be unrealistic. About 50 percent of renters said a gourmet kitchen is a dream amenity, but only 9 percent of first-time homeowners said this was a reality for them. An en-suite master bathroom was another popular dream amenity, with 62 percent of renters desiring this feature, but this was a reality for only 26 percent of first-time homeowners.

Wooden floors turned out to be a realistic amenity, with 47 percent of renters viewing this as a dream amenity and 35 percent of first-time homeowners actually having this feature.

""As the economy recovers, people are dreaming bigger, but most won't realize their dreams anytime soon,"" Kolko. ""Few homebuyers â€" and even fewer first-timers â€" can afford 3,000 square feet and a gourmet kitchen. Buyers need to take a hard look at what they can actually afford, and give themselves some cushion in case a Euro crisis or federal budget battle pushes us back into recession.""

On behalf of Trulia, ""Harris Interactive"":http://www.harrisinteractive.com/ surveyed 2,205 U.S. adults, age 18 and over, between May 22 to 24 and 2,230 adults between June 4-6, 2012.