I don’t know why reporters are surprised by things like this, but Diana Olick at CNBC writes Wake Up America—Home Prices ARE Falling:

Am I not doing my job? Or is nobody listening? How is it possible, in the midst of the worst credit crisis in history, which is predicated on one of the biggest housing crashes in history, that nearly half of all Americans still don’t get that home prices are falling?

A new survey from Zillow.com finds that a full 49 percent of those surveyed think their home has either retained its value or even gained value in the past year. According to Zillow, 74 percent of all U.S. homes have lost value in the last year. Don’t believe Zillow? How about the National Association of Realtors: Home prices down 9 percent nationwide in the past year. How about the government’s Office of Federal Housing Enterprise Oversight: Home Prices down 5.9 percent since last year. How about any real estate agent in the phone book??

A bias towards optimism? Hmm… I wonder if anyone has noticed that before? Wikipedia to the rescue! Here’s the wikipedia entry for Lake Wobegon Effect:

The above average effect or better-than-average effect is one kind of positive illusion. It describes the tendency for people to evaluate themselves as ‘better than average’ on desirable skills, characteristics or behaviors. It is a characteristic bias of social comparison where people usually compare themselves to an unspecified peer and, despite the mathematical odds, en masse judge themselves to be better than their average peer. For instance, surveying drivers, the Swedish researcher Ola Svenson found that 88% of American college students rated themselves as above 50% on driving skills. Asking college students about their popularity, Zuckerman and Jost (2001) showed that most students judged themselves to be “more popular than average”.

In a similar way, a large majority of people claim to be above average; this phenomenon has been observed among drivers, CEOs, stock market analysts, college students, police officers and state education officials, among others. Experiments and surveys have repeatedly shown that most people believe that they possess attributes that are better or more desirable than average. The term is also used to describe a perceived tendency to treat children as “special” in order to boost their self-esteem, even though the children may only be average or even underperforming.

One College Board survey asked 829,000 high school seniors to rate themselves in a number of ways. When asked to rate their own ability to “get along with others”, fewer than one percent rated themselves as below average. Furthermore, sixty percent rated themselves in the top ten percent, and one-fourth of respondents rated themselves in the top one percent. Some have argued that more subjective traits like this may be more easily distorted.

The effect has been found repeatedly by many other studies for other traits, including fairness, virtuosity, luck, and investing ability, to name a few.

I’m glad they listed “investing ability.” Yes, everyone knows how savvy they were when they bought their home in their “it’s different here” market. Incidentally, I have some faith that the reporter knows about this bias, but feigns surprise to make her article more interesting. Of course, that could just be my own bias toward optimism.

Note, there are many other optimism biases, but none have quite as cool a name as the Lake Wobegon Effect. Also, I used to listen to the re-airings of the old radio show (“A Prairie Home Companion,” which was about a fictitious place called Lake Wobegon) on family vacations, so it’s a personal favorite.