How Much Will St Louis Home Prices Be Impacted By Inflation?

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Yesterday, I wrote an article addressing the high rate of inflation just reported and its impact on the St Louis housing market. In it, I promised to take a deeper look into the effect of the current events related to the economy on St Louis home prices which I will do in this article.

Before I go further, I should mention I’m not an economist nor a fortune teller.  I am, however, a real estate broker and data nerd that has spent over 40 years in the St Louis real estate industry.  I try my best to use my knowledge and experience to anticipate changes in the market and use this to help our agents and clients use this information to their advantage.

History always repeats itself..

I find the above old adage to be pretty accurate when it comes to the real estate market.  Therefore, in trying to get my head around what impact a high inflation rate may have on home prices, I started by going back to prior periods of high inflation rates.

The first chart below shows the rate of inflation, interest rates, and the St Louis home price index.  I’ve made some notes on it to show prior inflationary periods and the effect on home prices. The first period, the early 80s was much worse than today as inflation was higher and interest rates were in the stratosphere hitting 18%.  The more recent period around 2007-2009 was not as severe and therefore the impact on home prices was not as dramatic as the former either.  As you can see on the far right side of the chart, home prices have increased in the past several months at a sharp rate with the change from a year ago being greater than the last inflationary period but not as great as the one from the early ’80s.

The next chart shows the relationship between home prices and rent.  When home prices outpace rent, home prices decline, when rent outpaces home prices, prices rise.  As the chart shows, these two lines have converged indicating a reasonable balance between home prices and rent.

During the period of 2007 – 2011 home prices fell over 17% during a four year period before finally bottoming out.

Today is different though…

The one thing that really sets today’s real estate market apart from the prior inflationary markets is the low inventory of homes for sale.  In the two above referenced periods, there were more normal levels of inventory but today, as the STL Market report below shows, there is still consderably under a one-month supply of homes for sale.  Additionally, new home construction in St Louis has not returned to historic normal levels since the real estate bubble burst in 2008 which has added to the low supply of homes for sale.  So, even if interest rates and bad economic conditions drive a number of potential home buyers out of the market, given the low inventory it won’t have near as much impact on the market as it would normally.

What will happen to St Louis home prices this year…

We are starting to see a slow down in home sales as evidenced by the 12-month home sales trend chart below.  However, homes sold in March sold for a median of $173/foot, an increase of 27% above last March when they sold for $136/foot.  So, while we are starting to see a change in sales trend we haven’t seen much change in prices but I think that’s coming.  In fact, I’m confident we are going to see a correction of sorts to home prices although I don’t believe we will see anything like the correction I mentioned earlier that occured after the bubble burst.  In fact, unless something changes to make things significantly worse than they are today in terms of our economy, I think we are likely to just see an easing of home prices in 2022 reaching a point where they are flat with no appreciation this year or maybe even next (to allow the real value to catch up with home prices) but that is about it.  I do think there will be markets where the prices even decline somewhat from the recent highs but again nothing like in 2008.

Selling a home the first weekend on the markeet for 10% or more above value will end…

I do believe this is coming to an end soon.  Don’t get me wrong, there will still be plenty of competition due to the low inventory however, I think the days of buyers ingoring the valu eof the home and just paying whatever crazy price they have to pay to come out on top is going to end soon.  This is actually good for the market though as there is no way the market could sustain itself forever how it has been the past couple years.

So there you have it…some gloom, albeit rather modest gloom, but no doom.  Well, provided you’re not one of those people that paid the crazy price in the past year or so to buy and find yourself needing to sell during the coming year.

Inflation Rate, Interest Rates, and St Louis Home Price Index (% Change From Year Ago)

(click on chart for live interactive chart)

Inflation Rate, Interest Rates, and St Louis Home Price Index (% Change From Year Ago)

St Louis Home Prices vs Rent Index

(click on chart for live interactive chart)

St Louis Home Prices vs Rent Index

St Louis 5-County Core Market – Sold Home Prices 2006-2012

(click on chart for live chart)

St Louis 5-County Core Market - Sold Home Prices 2006-2012

Listing Supply For The 5-County Core Market

(click on chart for the entire STL Market Report)

Listing Supply For The 5-County Core Market

St Louis 5-County Core Market Home Sales 12-Month Trend

(click on chart for the live interactive chart)

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