Have Home Prices Increased Too Much Too Fast? Is A Correction Coming?

Not only has it become common today for homes to sell as soon as they hit the market but receiving offers from multiple buyers and at prices that equal or even exceed the asking price is common as well.  While this is an illustration of Economics 101, the rule and supply and demand, when the demand exceeds the supply (such as in the housing market in many price ranges and areas), prices increase this can also be a reminder of times past when home prices rose quickly for several years, then retreated rather abruptly.  The most recent example of this, and arguably the worst during my 40 years in the real estate business, was the housing bubble that burst in 2008 sending home prices into a downward trend that lasted about 3 years.

So, are we headed to another housing bubble?

My focus is primarily on the St Louis housing market so I will focus on that but I will point out what I see with regard home prices, St Louis has a better outlook than at the national level.

The Real Cost of a Home In St Louis Is Lower Now Than It Was In 2006

You are probably saying I’m nuts to be saying that a home in St Louis costs less today than it did 13 years ago, back in 2006, but, note I said the “real cost” of a home.  Since nearly all people buying a typical home in St Louis are going to do so with a mortgage, I think to really determine the cost of a home, and certainly, it’s affordability, we have to look deeper than just the price.  Therefore, as the table below shows, I analyzed the cost of a home in St Louis during two periods of time, the most recent 5-year period and the 5-year period leading up to and including 2006 (the last year of the boom before the bust).  In determining the real cost, I looked at the median price of homes sold but then also the mortgage interest rate at the time and the resulting payment.

As the table illustrates, the current cost of a median-priced home in St Louis, from a mortgage payment perspective, dropped 5.5% from a year ago thanks to lower mortgage interest rates which more than offset the increase in home prices.  The impact of interest rates on the true cost of a home is further illustrated by looking that the change in the mortgage payment for a median-priced home in St Louis from 2014 to today which was an increase of 17.8% over the period.  However, the median price of homes sold during the same period increased by 23.4%, over 30% more than the payment increased!

The real cost of a St Louis home today is even less than in 2006

Now, to go one step further, if you look at the second table below, which is for the period of July 2001 through July 2006, you will see that, while the median price of homes in St Louis was lower, mortgage interest rates were much higher.  In fact, the median mortgage interest rate from 2001 through 2006 was 6.245% while it was just 4.0% from 2014 through 2019.  This resulted in the mortgage payment of $1,084.26 on a median-priced home in St Louis in 2006, $76.56 per month more (7.5%) than today’s mortgage payment on a median-priced home in St Louis.

St Louis Home Prices Have Increased Thirty-Four Percent In Past 6 Years….Too much, too fast?

After the housing bubble burst in 2008, home prices finally hit bottom in the St Louis metro area, as they did in most areas of the U.S., during 2012.  Since then, home prices in most areas have not only regained the post-bubble burst losses but have appreciated handsomely as well.  For the St Louis MSA, the median price of homes sold has increased 34% from 2012 through today, an annual growth rate of 4.98%.  The steady and fairly significant, increase in home prices in St Louis has caused some to ask if it is “too much, too fast?”.  In other words, at this rate, are we headed toward another bubble?

I don’t see a bubble…

As the chart below shows, the median home price for the St Louis MSA in 2012 was $128,500 and for 2017 thus far it is $172,000, or 34% more.  This works out to an annual growth rate of 4.98% which, historically speaking, is not out of line.  In 1963, the median home price in the U.S. was $17,950 and today it is $315,200, which computes an annual growth rate of 5.35%. So, over the 55 year period I reviewed, the growth rate has exceeded the rate we have seen in St Louis since 2012 making the increase not out of the norm.

Additionally, as our STL Market Report for the St Louis MSA below the chart shows, we are in the slowest selling season of the year and the inventory of homes for sale is still low at about 3 1/3 months supply.

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St Louis MSA Home Prices 2012 – 2017 (Chart)

St Louis MSA Home Prices 2012 - 2017 (Chart)

St Louis MSA – STL Market Report – December 2017 (Table)

St Louis MSA - STL Market Report - December 2017 (Table)


Washington DC And 3 California Cities Most Likely To See Housing Bubble

St louis housing bubbleNationwide, we’re not in a bubble,” says Glenn Kelman, CEO of online real estate company Redfin, however Washington D.C., Los Angeles, San Francisco and San Diego may be headed that direction, according to Redfin’s data.  Redfin is not in St Louis so our city was not on their list but in the coming weeks I plan to do an analysis of the St Louis market in the same manner they did of other markets and will publish what I find at that time.  In the meantime, here’s the info from Redfin.

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