After over 40 years in the real estate business in St Louis I’ve seen many times just how fast a good, or even great housing market can turn sour as well as the other way around. Two years ago, economic conditions relevant to the housing market included:
- Interest rates in the 3’s
- Inflation rate under 2%
- The money supply increasing at a historically normal rate
- A steady and robust St Louis housing market
Today, the above conditions are:
- Interest rates in the 6.25% – 6.5% range with the threat of increasing
- Inflation rate approaching 9%
- The money supply increasing nearly 50% in 2 years – that’s the same percentage increase that it had in the prior 7 years.
- A St Louis housing market that is showing signs of slowing as well as concern and even fear among real estate agents and consumers.
Does this mean St Louis home prices will come crashing down?
First off, I’m not an economist, in fact I didn’t even attend college and I certainly don’t have a crystal ball showing me the future, but I am a data junkie that has lived through a variety of markets spanning more than 4 decades. My experience as well as my study of past markets as well as current indicators of things to come certainly give me an opinion. In times past, my opinions on the market have been spot on, almost to the point that I even surprised myself (such as in October 2006, at the peak of the housing boom when I predicted the collapse) and other times I’ve been wrong, sometimes way wrong. The reality is that the housing market is affected, or can be affected by so many different economic factors, as well as social issues, consumer sentiment and more that I don’t believe anyone can predict what it’s going to do accurately consistently.
My short answer is no. I don’t think St Louis home prices will come crashing down, in fact, I don’t even think they are going to decline necessarily. The may not go up for a while and, as I have said recently in articles, I think the premiums buyer’s have paid over and above the value of the home they were buying are going to quickly come to an end, but given everyone involved knew the homes were not worth the resulting price that is not really a decline in value, it’s just the “bonus” is gone.
Why do I think St Louis home prices won’t come down?
I could write a book here but I’ll keep it short. Here are some of my reasons:
- The supply of homes for sale is still low with just about an 8/10’s of a month supply currently
- With the speed at wish the U.S. is printing money (increasing the money supply and increasing inflation) home prices have needed to increase a ton just to keep up. In 2000 the median priced home in the U.S. was $165,300. Since 2000 the money supply has increased 75% so if the current median price of homes sold was $289,000 it would be worth the same as 22 years ago after adjusting for inflation. The current median priced home in the U.S. is just $291,657, just slightly ahead of the “break-even” number. Therefore, even though home prices have increased a lot recently, so has the supply of money and inflation, therefore homes are not overvalued as a result.
- For interest rates to literally nearly double in the past 2 years sounds horrible. However, historically speaking, the average rate (since 1971) is nearly 8%. Additionally, many people are quick to think if interest rates doubled that means the payment doubled, but that is not so. On a $250,000 loan the payment (principal and interest) at 3.25% would be $1,088. At 6.5%, the payment is $1,580, an increase of nearly $500, but certainly not double. In fact, once you add in the property tax and insurance escrows to the payment to get the total payment you are likely going to be have a total payment of around $2,100 now vs about $1,600 before the rates doubled. It’s still the same $500 increase but it’s only increased the final payment about 30%, not great, but better than double.
- While some home buyers will be taken out of the market by the economic conditions or their concern about them, I believe any buyers lost will be replaced by institutional buyers and investors. Both of the latter groups have been playing a bigger role in the market and I don’t see that stopping.
Home Prices vs M2 Money Supply
