Are Homebuyers Today Grossly Overpaying for Homes and Making Decisions They’ll Regret?

I’ve been in the real estate business since I was 17, which means it has been 45 years of experiencing various market conditions, including recessions, inflation, 18% mortgage rates, the burst of the housing bubble, and a myriad of other good and bad things. However, I can confidently say that I have never witnessed a real estate market quite like the one we have been experiencing in the past couple of years.

So, what makes the current real estate market so unique?
First and foremost, I’ve pondered this question extensively, and I honestly can’t recall a time in this industry when the supply of homes for sale was not at least 4 to 6 months’ worth. Although there was a brief period in 2015 when the inventory of homes in St. Louis fell below 4 months, it quickly returned to nearly 5 months. From 2016 until early 2020, the inventory fluctuated between approximately 2 and 3 months, and then began a downward trend, hitting a record low of less than a 1-month supply in the latter part of 2021. While the supply has slightly increased since then, it still hovers around 1 month.

Months of Inventory – St Louis 5-County Core – 2013 – 2023

This situation showcases the basic law of economics—supply and demand. The supply of homes for sale in St. Louis is exceptionally low, and even though the number of home buyers in the market has seemingly declined significantly over the past few years, there still isn’t enough supply to meet the demand of the remaining buyers. Consequently, in accordance with the law of supply and demand, prices tend to rise when supply is insufficient to meet demand. While it’s easy to increase widget production to meet demand, it’s not as simple to suddenly add thousands of homes to the market in the St. Louis real estate market. Factors such as a lack of available land for development in high-demand areas, lengthy approval processes for new developments, labor shortages in the trades, difficulty in controlling construction costs, and the significant time required to bring a substantial number of homes to the market contribute to this complexity. As a developer, I can attest that the development process is lengthy enough for the market dynamics to change entirely before the first home hits the market.

So, where did all the houses go in St Louis?  Why aren’t there more homes for sale?

It all goes back to the simple law of supply and demand. If we are currently in a once-in-a-lifetime seller’s market, why aren’t more homeowners taking advantage of it? This is a good question, and here are my thoughts on why:

  1. Mortgage rate “lock-in”: A significant portion of existing homeowners have mortgages with an interest rate around 4%. Considering that current mortgage rates for a 30-year fixed-rate mortgage are around 7%, this acts as a deterrent for selling and buying another home.
  2. Fear of being homeless: The scarcity of homes for sale, coupled with high demand from buyers, creates concerns for many potential sellers. They fear that their home will sell immediately, leaving them unable to find a replacement home, resulting in temporary accommodations or renting.
  3. Bidding wars driving prices up: Most sellers today are aware that if they find a home they desire, they will likely face competition from other buyers. Listings often receive multiple offers right away, leading to bidding wars. This becomes another deterrent for sellers, particularly those who wish to avoid bidding wars. Although sellers benefit from receiving multiple offers for their existing homes, selling for more than their worth, the tables turn when they become buyers.

The result of all these factors is that many homes are being sold today for much more than their actual value, especially considering their present condition. Buyers are paying premium prices, sometimes as much as 20% or even 25% above the asking price. However, instead of receiving a “perfect” home that has been well-maintained and improved, buyers often end up with homes that need updates, haven’t been adequately cared for, and simply aren’t that great.

So, are home buyers today making foolish decisions that they will regret?

If only I had a working crystal ball, I could provide an accurate answer to this question. In short, my answer is both yes and no.

Yes, I do believe that some buyers today lack the knowledge necessary to make wise decisions in a market like this. Unfortunately, they may be guided by agents who possess limited expertise. This is not a time for amateurs! Although there are excellent real estate agents who understand the market and serve their clients well (which is the only kind of agent we accept in our company, MORE, REALTORS®—shameless plug), in my opinion, about 50% of agents fall short.

However, for the other buyers—those who are well-informed and guided by knowledgeable, honest, and ethical professionals—their decisions are unlikely to lead to regret. Given the fact that there doesn’t seem to be any significant change in the supply of homes for sale in St. Louis in the near future, these buyers are left with two choices: either don’t buy or do what it takes to purchase a home. Unless we experience a substantial drop in interest rates, a surge in new construction, or a significant economic change in St. Louis, I don’t foresee any significant alterations happening in 2023. Perhaps we’ll see some changes in 2024, but it may take years before we return to a normal inventory. As long as buyers are well-informed, can afford their purchase, and plan to make the house their home for at least the next few years, it is likely a decision they won’t regret.

Buyers may find themselves nearly “underwater” for a while.

Underwater Homeowners in St Louis. Negative equity.The term “underwater” emerged in real estate after the housing bubble burst in 2008 and referred to homeowners whose mortgage balance exceeded the value of their home. With the high prices paid by buyers today, it is not unlikely that many of these new homeowners may find themselves in a negative-equity position if the market cools down. Elon Musk even tweeted on Monday, ‘Commerical real estate is melting down fast.  Home values next.’‘ while others make similar predictions. However, some people have a more optimistic outlook on the housing market. Personally, I believe it is impossible to predict with certainty, but I do expect a temporary easing of home prices in the short term. However, at least in St. Louis, I don’t anticipate a prolonged decrease unless external factors such as the economy exert significant downward pressure. Homebuyers today face the risk of being underwater for a while, but if they have no immediate plans to move, the worst-case scenario is having no equity for a couple of years. Meanwhile, the house remains a home for the buyer and their family. Additionally, if interest rates ease somewhat within the next year or two, they may have the opportunity to refinance and lower their mortgage payments. The homeowner will only face significant challenges if circumstances such as job changes, health issues, finances, or divorce necessitate a sale before the home’s value aligns with what was paid, potentially requiring the homeowner to bring money to closing.


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