Home Affordability In St Louis Declining With Increasing Home Prices – Will Home Prices Suffer?

It seems almost crazy to even throw out the idea of an adjustment in St Louis home prices or, perhaps even, any sort of slow down in the rate of home price appreciation given that the inventory of homes for sale is so low in so many parts of the St Louis area, however, maybe it’s something to look at.  For anyone that has been reading what I have written here over the past 8+ years, you will hopefully know that I am not a “gloom and doom” guy at at all, but I do share my honest outlook on the market.  Having said that, I do feel home prices are something worth taking a look at.

What is causing the concern about home prices?

For starters, new housing affordability information was just released yesterday by ATTOM Data Solutions which shows home affordability in the St Louis area has eroded somewhat.  The table below, based upon the ATTOM data, shows what percentage of the average wages for the area are needed to make monthly house payments on a median-priced home with a 30-year fixed rate mortgage and a minimal downpayment of 3%.  It also shows how much, on a year over year basis, income has risen in that county versus how much home prices have increased.  As the table shows, it takes a pretty big chunk of pay to pay for the typical median priced home today and, in most cases, home prices are rising at higher rates  than income is rising.  Even if the year over year income/home price increase looks ok, home prices have been on the rise here for several years so if we look at a 5 year period home price growth is outpacing income growth.

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St Louis Home Affordability-By County

St Louis Home Affordability-By County

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St Louis Home Prices vs Inflation…

The chart below, from the St Louis Federal Reserve, shows the home price index as well as inflation over the past 10 years.  You can easily see the big gap between the two back in 2006 after home price appreciation had outpaced inflation for years before the housing bubble burst and home prices fell.  After home prices fell, and finally hit bottom around late 2011 to early 2012, home prices and inflation rose at roughly the same rate for a couple of years.  However, around 2015 to early 2016 home prices began increasing at a rate higher than inflation so the gap is widening again.  The gap is not as wide as the housing bubble days, but is wide enough to get my attention and perhaps suggest the idea that home prices may need a little correction in the coming months.

St Louis Home Price Index VS Consumer Price Index (Inflation)

Interest rates will rise and that won’t help…

Toss onto the pile the fact that home mortgage interest rates are on the rise and home affordability will decline further and there will be more pressure on home prices.  As the chart below shows, mortgage interest rates have risen over 1/2 percent in the past several months and the forecast is that rates will approach 5% later this year.

Mortgage Interest Rates – Chart

Mortgage Interest Rates Chart

Home Prices vs Rent…

Finally, the last thing I want to talk about is the home price to rent ratio.  If you have ever heard my “Real Estate From the Trenches” lecture, then you have heard my rant about how there is a relationship between home prices and rent and, in my humble opinion, the relationship between the two is one of the best leading indicators of where the housing market is headed.  As the chart below shows, which is based upon the Case-Shiller national home price index, the home price to rent ratio has been rising since early January 2012.  It is currently around 1.3 (with 1.0 being more or less the historic “norm”) and while it is still well below the high of nearly 1.7 hit shortly before the housing bubble burst, it is high enough to cause some concern.  When we see this ratio increase it means one of two things will happen in the coming months or years…either home prices will decline or rents will increase.  So which is it?  Well, considering historically rents rise at a fairly steady and consistent rate and are not as affected by economic conditions as much as home prices, I would put my money on home prices adjusting more than rents.

Home Price To Rent Ratio – Chart

Home Price To Rent Ratio

What should home sellers and buyers do?  Is now the time to sell or buy?

While I have pointed out things here to keep an eye on and do think they will add some pressure to the St Louis housing market in the coming year, there is no reason to panic.  Having said that, I do believe that for people that are considering buying a home in St Louis the sooner the better!  No, I’m not just saying that because I’m a real estate broker and partner in MORE, REALTORS, but because I believe it’s the smart thing to do given everything I’ve shared here.  Affordability has already declined and, even if home prices soften a little, will probably not get better due to the factors that are causing prices to soften such as interest rates.  Therefore, people that buy now will benefit from lower interest rates, which, assuming you get a fixed rate loan (which I would recommend), will save you much more in the long run than a slight adjustment in home prices accompanied by higher interest rates.

If you are a homeowner considering selling, I have the same advice…the sooner you do it, the better.  Granted, since real estate is so local there may be pockets of the market where this doesn’t make sense (contact me and I’ll let you know if you are in one of those), however, now is the time for most.  I say this because of the same reasons I suggest now is the time to buy, plus, with the low inventory of homes for sale in most areas of St Louis, there is less competition.  If home prices do soften and interest rates rise, it won’t help you as a seller.  Therefore, I believe now is the time.  Plus, with as good as the market is (assuming you price your home appropriately and it is properly marketed) you can save a serious chunk of money on commission today (contact me and I’ll tell you how or see FairCommissionRate.com).



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