By any measure, 2008 has been tough on home prices and most economists expect further declines, but it appears somebody forget to tell homeowners.

fed fundsA survey by real-estate Web site Zillow.com found that 40% of homeowners think that the value of their house increased in the past year and 22% think it stayed the same. However, according to Zillow, 77% of homes saw a drop in value over the past year, while just 19% increased. The South had the highest misperception, with 48% of respondents believing their property had appreciated and just 28% seeing depreciation. That compares to 69% of houses actually seeing drops and 26% rising in value.

“We attribute this gap to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them,” said Stan Humphries, Zillow vice president of data and analytics.

The disparity between perception and reality has the potential to extend the correction period for home prices. That could be exacerbated by unrealistic expectations. Three out of four homeowners in the Zillow survey expect their home value will increase or stay the same over the next six months, with just 25% expecting a decline.

However, optimism appears to stop at the doorstep and doesn’t extend to one’s neighbors. Some 42% of respondents expect values in their local market to drop and 58% think values will increase or remain the same. –Phil Izzo