$5.4 Trillion in Home Equity Separates U.S. Housing Optimists & Pessimists

The latest edition of the Zillow Home Price Expectations Survey was published this morning. A panel of more than 100 experts has updated their expectations for national home price growth rates through 2021.

According to widely cited price indices, nominal home values have already eclipsed (or are close to surpassing) their pre-crash peak levels. And now, most experts expect somewhat stronger home value appreciation this year and next than they did just a few months ago, as tight inventory conditions persist.

However, despite ample evidence of price recovery and steady housing confidence in many metro area markets, the widening gulf between the outlook of the most optimistic and most pessimistic quartiles of experts in this survey is a reminder that volatility and uncertainty (i.e., risks) persist. The confident group expects about 27% appreciation through 2021–growth that easily exceeds the historical average rate before the historic bubble. In contrast, the pessimistic group expects just over 6% cumulative growth–a paltry nominal return that is negative after adjusting for expected inflation over the coming five years. I should emphasize that these are not “outlier” forecasts: each group comprises views from more than two dozen well-informed experts.

It might be easier to grasp the implications of these alternative scenarios by extrapolating from The Fed’s latest estimate of the current value of U.S. single-family housing stock ($26.1 trillion as of December). Single-family housing values in the U.S. would grow to $33.1 trillion if home prices follow the optimists’ expected path, and to $27.7 trillion if they follow the pessimists’ path–a difference of $5.4 trillion in aggregate home equity value by year-end 2021 (for simplicity, I assume static mortgage debt levels and housing unit counts).

When I last described this “expectations gap” in a November 2014 post, I noted that it should serve as a reminder of the virtue of efforts to develop modern, liquid markets for home price risk. Back then, when the gap was “only” $4 trillion, the majority of our expert panelists said that at least three more years would pass before U.S. housing market conditions returned to normal. They were right, and the case for embracing new housing risk management tools and institutions is even stronger today.