Why St Louis Home Prices Are Going To Decline

By Dennis Norman, on October 6th, 2022

A little over two weeks ago I wrote my most recent article addressing St Louis home prices titled “Will St Louis Home Prices Decline?” in which my short answer was “yes”, but kind of tongue in cheek and based upon the seasonality of home prices, but my longer answer was more vague. I mentioned that there certainly is a correction coming but pointed out that there are so many variables that will affect prices that it is hard to say to what extent this correction will be. While this is still true, a lot has happened in the short time period since that article that has caused me to become more bearish on the St Louis real estate market to the point where I’m confident St Louis home prices will decline.

What has changed in the last 16 days…

While it doesn’t directly impact the St Louis market, hurricane Ian has wreaked havoc on a lot of Florida and other areas and will no doubt impact the overall housing market and economy and likely in more of a negative way.
Interest rates have risen another 1/2% hitting and staying near 7%.
The Mortgage Bankers Association (MBA) just announced that mortgage applications dropped over 14% during the last week of September, the biggest one-week drop in 17 months and pushed their index down to the lowest point since 1997.
The percentage of active listings that have reduced the asking price at least once broke the 40% mark.
The 12-month home sales trend for St Louis for the period ending September 30, 2022 fell to the lowest point in over 2-years.
Active listings in St Louis have been for sale a median of 43 days over four times higher than the median time to sell during the past 2 years of 10 days.

Market data pointing to lower St Louis home prices…

The declining sales trend mentioned above. As chart 1 below shows, home sales during September in St Louis were down nearly 19% from last September.
The declining home price trend. Chart 1 also reveals the median price of homes sold during September 2022 was $267,500, only 2.8% from then September 2021 when the median sold price was $260,000 which was a 8.3% increase from September 2020 when the median price was $240,000.
Showings on active listings continues to decline. Chart 2 shows there are almost 10% fewer showings of active listings now then there were in the first week of January (the slowest time of the year). Last year at this time showing activity was over 30% higher than now and in 2020 it was abut 55% higher. Fewer showings mean fewer sales in coming.
The widening gap between home prices and rental rates. Chart 3 shows the home price index (blue line) rising above the rental rates (red line) at a fairly steep rate. Historically, such as the late 1980’s – 2000 shown on the left side of the chart, these two lines track closely with home prices slight below the rental rates line. The last time home prices started increasing more than rents was in the early 2000’s and this continue until the gap widened to the point that something had to give…either home prices had to fall or rents had to increase. In 2008, the bubble burst and home prices fell. While the present gap is not as large as it was during the height of the housing market bubble in 2006-07, we’re headed that way.
CPI and St Louis Home Price Index are hitting bubble levels. Chart 4 shows the rate of change (year over year) in CPI and the St Louis home price index. The rate of change in both has already exceeded what in the past (with the exception of 1979 when it went a little higher) has triggered home prices to fall.
Home price and interest rate increases are killing St Lous home affordability. Table 5 shows that currently, based upon median home prices and interest rates, one year of house payments (principal and interest only) take about 30% of the median household income for St Louis. In 2007, at the peak of the housing bubble, it was only 21% and in 2000, which many economists use as a “normal” or baseline year, it was 20%. So the real cost of a typical St Louis home to a typical St Louis family is about 50% higher now than normal.