Survey: Homeowners don't believe in real estate bubble

Most respondents confident about rising home prices
Inman News
Despite fears in the marketplace about a U.S. housing bubble, about 60 percent of homeowners expect the value of their homes to increase by at least 5 percent annually during the next several years, according to an online survey of 1,001 American consumers.

According to the survey findings, released today by RBC Capital Markets, the corporate and investment banking arm of RBC Financial Group, 24 percent of respondents said they expect annualized gains of 10 percent or more over the next few years. About 3 percent of respondents said they expect their home values to decline over the next few years.

The findings were released at the RBC Capital Markets Consumer Conference, which was attended by over 250 institutional investors and retail executives.

About 85 percent of homeowners who responded to the survey said they have experienced real estate gains over the last three years and over 70 percent experienced gains in excess of 10 percent during this timeframe, RBC announced.

Meanwhile, about 10 percent of the respondents said rising home values have affected their spending habits. And over half of those surveyed disagreed with the notion that real estate gains impacted their spending even though 51 percent either sold their home or borrowed against their home equity in some fashion. Ironically, those that disagreed most with the idea that real estate gains had impacted their spending were those in higher income brackets (defined as those making over $100,000) and those that had already experienced the biggest real estate gains, RBC reported.

Ultimately, these two groups were also the most aggressive in extracting equity (approximately 65 percent).

"Not only are most people expecting big real estate gains to continue, the vast majority of people don't believe these gains have impacted their spending. These opinions run contrary to most data in the marketplace regarding the real estate wealth effect," said Scot Ciccarelli, managing director of equity research for RBC Capital Markets.

"We believe these findings raise a major question. In our minds, the question is whether people have spent more freely than they otherwise would have because of their real estate gains and don't even recognize it. If that's the case, a simple slowing of real estate gains, not just a fall in housing prices, could have a significant adverse impact on spending patterns."

About 60 percent said rising gas and energy prices were already causing them to cut back on their spending. "Rising energy prices are essentially creating a flat tax that is affecting lower income consumers at a disproportionate rate and supports anecdotal evidence in the marketplace over the past two years that companies more levered towards higher-end consumers have largely outperformed those that cater to lower-end consumers," Ciccarelli said.

Finally, by a 2-to-1 ratio, people are more positive about their personal financial situation than they are on the broader economy. On average, just under 40 percent of respondents were optimistic about their personal financial situation and just over 30 percent were concerned or pessimistic, the survey found.

On the flip side, 20 percent of the respondents were optimistic about the broader economy while just over 50 percent were concerned or pessimistic about the economy.

"Not surprisingly, those that were the most optimistic about their personal financial situation were those in the upper income categories and those that had experienced the biggest real estate gains," RBC announced.

"This outlook seems to cut to the heart of the American consumer. People seem to be conscious of the macroeconomic headwinds facing them like rising energy prices, the war on terror, and the growing federal deficit and the impact it can have on others. However, they are less inclined to believe they can be affected by these same factors. Ultimately, it is this optimism that keeps the U.S. spending engine intact," said Ciccarelli. "While energy prices are certainly disconcerting, it is this real estate wealth effect that we are most concerned about and should be the primary focus of investors."

The RBC Capital Markets survey was conducted during the week of Sept. 19 and included 1,001 online respondents. Stamford, Conn.-based InsightExpress assisted RBC Capital Markets in the survey. The survey's margin of error was plus or minus 3 percent.

RBC Capital Markets is the corporate and investment banking arm of RBC Financial Group, the global brand name of Royal Bank of Canada. Royal Bank of Canada is Canada's largest bank as measured by assets, and is one of North America's leading diversified financial services companies. It provides personal and commercial banking, wealth management services, insurance, corporate and investment banking, and transaction processing services worldwide.