US home owners more confident than those who rent, new analysis suggests

Home owners in the United States are generally more confident than renters in their local housing market’s performance, according to the latest research from Zillow.

But this confidence gap is widening in areas with rapid home value growth and narrowing in areas with more restrained growth, the firm says.

Overall home owners have become more confident about their decision to invest in a home where home values in their area have increased more rapidly.

By contrast, renters feel that they cannot escape renting and have lowered their aspirations for homeownership in areas where home values have increased more rapidly.

Rapidly rising home values have powerful psychological effects on both home owners and renters and research has shown peoples’ expectations about the future are strongly anchored in recent experience.

Rapid asset price growth can contribute to what has sometimes been labelled ‘irrational exuberance’, or overly optimistic and self-perpetuating positive feedback in price trends.

Zillow’s Housing Confidence Index (ZHCI) is designed to be a forward looking measure of housing market health by gauging the beliefs and aspirations of home owners and renters towards the future state of the housing market.

There are two groups, those that have experienced rapid recent home value growth in excess of 9% annually between July 2013 and July 2014, when the survey was last conducted, and those that have experienced more restrained growth of less than 9% over the same period.

By this classification, nine metro areas have experienced rapid home value growth and in general, the ZHCI is higher for home owners than for renters. The firm says this is not surprising since, relative to renters, home owners typically have higher incomes and a more optimistic perspective about the economy and housing market.

But as the economy has improved, the gap between home owners’ and renters’ confidence index levels has widened in metros where home value growth has been rapid, and narrowed in metros where home value growth has been more restrained.

Home owners and renters have very similar perspectives on the overall housing market and the ZHCIs for both groups tend to move together. A larger improvement in outlook among renters is the primary driver of converging optimism levels in slow home value growth markets.

But the opposite is true in markets where home values are growing more rapidly. In these markets, optimism levels are diverging. Because home owners’ wealth is largely tied to the value of their home, slower home value growth results in a smaller change in home owners’ housing market outlook.

In markets where home values are appreciating at a slower pace, renters have become increasingly optimistic about their potential for future home ownership. The Home ownership Aspirations Index, which measures how optimistic owners and renters are about their future home ownership prospects, increased more for renters in slow growth markets than for home owners.

But in markets where home values are rising rapidly, renters are becoming increasingly disillusioned, as they likely see the possibility for future home ownership become more inaccessible.

Zillow says that these findings can be attributed, in part, to changes in price expectations between renters and home owners, as can be seen in changes in the Housing Expectations Index. Renters have increased their expectations about future home value growth more than homeowners have, and even more so in rapid growth markets.

However, home owners have decreased their expectations about future home value growth in slower growth markets. Even though home owners have higher expectations for future home values on average, the gap in price expectations is narrowing in both fast and slow growing markets.

‘These observations paint a unique picture of beliefs about the housing market. Home owners likely feel that buying a house is a good investment when home values rise, and much more so when home values rise rapidly,’ said the firm’s report.

‘Home owners have a tendency to enjoy high home value growth, because it builds their wealth. Renters, on the other hand, dislike rapid growth in home values, as it likely decreases their view of housing affordability,’ it adds.

‘Renters appear to feel they cannot escape renting and join the coveted ranks of home ownership when home values rise rapidly,’ it concludes