More than 42% of prospective homebuyers polled by Zillow believe home values will appreciate by 7% annually in the years ahead. "It's troubling that we're still in the midst of one of the worst housing recessions in history, and yet prospective buyers continue to have such high expectations for home value appreciation," said Stan Humphries, chief economist at Zillow. Many commented the Zestimates put out once a month by Zillow routinely show rosier-than-expected home values than other indices. Still, the findings in their survey were most troubling because even in a normal market, home prices only appreciate between 2% and 5% per year, according a 2005 study completed by Robert Schiller, founder of the Standard & Poor's/Case-Shiller home price index. Zillow polled 177 people who said they were planning to buy a home within the next three years. The prospective buyers did show a knowledgeable grasp of the process. More than 65% of those surveyed answered questions correctly more than half of the time. There were still some areas of concern. Roughly 41% of respondents believe purchasing private mortgage insurance is mandatory, no matter the down payment. Typically, lenders require PMI when less than 20% down is given. And 56% of those polled said appraisals determine whether a home is in good condition, which is something an inspection does. Nearly half of those surveyed said a prospective buyer  owns a home as soon as the contracts are signed, when in fact the purchase and sales agreements kicks off the closing phase, which can be lengthy. "It’s great that buyers seem to have a fairly solid grasp of the home-buying process, but since this is one of the biggest financial decisions of most people’s lives, it’s even more important that they understand how that investment will appreciate after they sign the papers," Humphries said. "Over-estimation of the appreciation potential will lead many to buy real estate when the time in which they plan to live in the house may make renting a better strategy." Write to Jon Prior. Follow him on Twitter @JonAPrior.