While the real estate market has been bubbling, Robert J. Shiller doesn't think we are in a real estate bubble.  At least not yet.  Shiller who, along with Karl Case, developed the S&P/Case-Shiller Composite Home Price Index, wrote a column for the this Sunday's New York Times explaining why 2013 is not 2004.

The Case-Shiller 10-City Composite Index has seen a real, inflation-corrected rise of 18.4 percent in the 16 months ended in July, Shiller said, only about 4 basis points below the largest 16 month increase during the years-long run-up to the 2008 financial crisis.  Is it possible, Shiller asks, "that we are lapsing into what I call a bubble mentality - a self-reinforcing cycle of popular belief that prices can only go higher?"

He sees a lot of differences between then - the pre-2008 period - and now and uses the results of this year's installment of a survey he and Case have conducted since 2003 to illustrate them.  The survey involves sending questionnaire to a random sample of recent homebuyers in Boston, Milwaukee, Los Angeles, and San Francisco.  The results from the most recent survey conducted in May and June suggest, Shiller said, that we are not in a bubble now but there are troubling signs we may be heading into one.

In response to a question about how much prices would rise in the next year and over the next 10 years respondents had high short term expectations, an average of a 5.7 percent increase over the next year.  Respondents to the 2011 survey expected on average an increase of 1.6 percent and those in 2012 projected 4.0 percent.  But, Shiller said the 2004 survey pulled in an average response of 8.7 percent.  Long-term expectations from the recent survey were also comparatively modest at 4.2 percent per year over 10 years.  Assuming inflation at 2 percent this would mean a real rise of 2.2 percent annually "and we wouldn't return to the December 2005 peak in real home prices until 2031."

Shiller points to answers gathered through other questions that indicate that we aren't in bubble territory."  In the 2004 survey nearly 85 percent of respondents agreed that real estate is the best investment for long-term holders.  That number bottomed out in 2012 at 66.5 percent and went up a bit, to 70.4 percent, this year. That new number may seem high, he said, but the respondents are people who did just purchase a home. 

Some 10.6 percent of respondents indicated their home purchase would be rented out to others, a number that has risen regularly from 2.7 percent in 2004.  Shiller said this increase likely reflects the growing demand for rental housing but is not one likely to sustain high prices in scattered suburban housing.

A series of open-ended questions regarding factors that had or might influence home price changes elicited responses in 2004 that Shiller said suggested bubble thinking, answers like "limited land," "high demand for housing," "population growth," "everyone wants to be here" and "buyers willing to pay any asking price," as well as responses speculating about interest rates, then at around 6 percent

Answers this year did not, he said, suggest a bubble mentality beyond the interest rate theme.   "Americans are still relatively sober about housing. They aren't showing 'irrational exuberance' about home investing to the degree they did in the past, at least not yet."

However, borrowers are also not being completely realistic.  Shiller said his message has long been that existing home prices "have shown virtually no tendency to trend upward in real, inflation-corrected terms over the last century."  Land is limited but isn't a major component of prices in most places.  New construction often brings down the value of older homes, which wear out and go out of fashion, dragging down prices.  While prices go up and down, there is no guarantee that the ups will outpace the downs.

People who are now inclined to buy a home. Shiller are now buying on the theory that we are in an economic recovery and interest rates are likely to rise and for those reasons it is a good time to buy. People mostly don't seem to be prompted by the anticipation of another housing boom at least not at the moment.  "But whether these attitudes mutate into a national epidemic of bubble thinking - one big enough to outweigh higher mortgage rates, fiscal austerity in Congress and other factors - remains to be seen."