Signs of a Coming Housing Market Cool-Down Emerge

There’s a saying in the fashion industry that if you want to know what’s about to be “in” in the Midwest, just look to see what was hot on the East and West Coasts a year or so ago. 

The same tends to hold true for the housing market. Though it’s not universally true, what’s happening right now in California and New York, for example, can often be a good predictor of what’s to come right here in St. Louis. 

That’s why you want to pay attention to a new report that shows the home inventory shortage – the leading contributor to the dramatic rise in home values we’ve seen over the past year –  is starting to ease in some of the nation’s hottest housing markets, including California. 

What fueled the rise

The median price of an existing home in the United States jumped to an all-time high of $391,200 in April, an increase of 14.8% from the prior year. The average home stayed on the market just 17 days before going under contract. 

Locally, if no more homes went on the market as of right now, there would be no homes left to buy in about two weeks. For context, what industry experts consider a balanced market between buyers and sellers is six months of inventory. 

Some pundits have looked at the current housing market and tried to make parallels with the 2008 housing bubble that burst in spectacularly awful fashion, leading to a glut of foreclosures and misery. The situation today, however, is being fueled by something far different. 

Then, banks and other lenders were using shady (and sometimes illegal) financial practices that qualified people for loans they rationally should never have been able to obtain. So when home values dropped, many people suddenly owed more on their house than they were worth, which provided them an incentive to simply walk away rather than face the financial obligation. 

Since then, new laws and regulations have ensured that loans more closely match a borrower’s ability to pay them back. The 2021-22 housing boom was sparked by a triple-threat of converging factors. 

Record-low interest rates fueled by stimulus packages designed to keep the country afloat during the COVID pandemic. 

The increase in remote-work options that allowed people to move away from population centers and out to more attractive living locales. And, most importantly … 

A huge boost in the number of Gen Zers coming of age and hitting the housing market. 

This created the huge imbalance we referenced – many, many more buyers than sellers. The law of supply and demand says that when demand outpaces supply, prices rise. 

That’s what happened here. 

So what now? 

You know that feeling after you’ve been working outside on a hot St. Louis summer day and you step into the cool of an air conditioned home? That ahhhh feeling is what the housing market is starting to experience. More signs are showing that the hot-hot-hot pace of U.S. home price increases is about to cool off. 

First, sales of existing homes fell 2.4% in April to their lowest level in nearly two years. That’s the third straight month this number has fallen. Prices have grown too much for many would-be homeowners’ budgets, and rising mortgage rates – they’re up more than 2% locally since the start of the year – are making it more difficult for people to borrow money to fund their purchases. 

That’s reducing demand for homes. Just as prices rise when demand outpaces supply, prices fall when supply starts to outpace demand. 

While we’re not at the point yet in the St. Louis region, the fact that this is starting to occur on the coasts is a good indication of what soon will be happening here. 

“It looks like more declines are imminent in the upcoming months, and we’ll likely return to the pre-pandemic home sales activity after the remarkable surge over the past two years,” said Lawrence Yun, the chief economist at the National Association of Realtors.

More proof

A sign of the times is that we’re next going to look to Google to tell us what’s about to happen in the housing market. Google searches for “homes for sale” were down by double-digits in major cities such as Los Angeles and Boston in mid-March, according to one real estate company. 

We might be seeing a start of that trend locally, too. Traffic to allenbrake.com’s “Search The Allen Brake Team’s Listings” page, frequented mostly by buyers, was down roughly 30% in April from the previous month, while visits to its page showing potential sellers what they could get if they sold their home right now – allenbrake.com/homevalue – increased 136% in that same time period. 

That’s a strong indication more people are looking to sell, which could help correct the supply/demand imbalance and put downward pressure on home prices. 

What this means for you

It’s quite possible we’re nearing the peak of the market for sellers. That means if you’ve owned your home for as little as a year or two, you’ll likely be able to get the most money you’ll ever be able to see from selling it if you act fast. 

That’s great if you’re a current homeowner, but where will you live then? What we’re seeing is that good deals are there if you’re patient yet can act fast when the right opportunity presents itself. This is an ideal market for sellers who can sell now, perhaps rent for a year or so while what’s happening on the coasts makes its way here, and then jump back into the market as buyers.

But beware of those rising interest rates. While home prices might be lower in a year – and that’s still a big “if” – mortgage rates are going to continue going up, as the Fed looks to tame inflation. Because of that, banks will be willing to lend less money to many people than they are today, and the cost of borrowing that money may exceed any price drop on homes.

For example, a home price might drop from $300,000 to $285,000, but the interest charged on a 30-year mortgage could increase by more than that $15,000 decrease by the time it is fully repaid. 

That makes a strong case for buyers to act now to lock in what’s still a historically low mortgage rate and snap up a good home before higher rates reduce their purchasing power. 

How we can help 

The Allen Brake Team has been a mainstay in the St. Louis real estate market for nearly two decades. Led by CEO and Founder Allen Brake, the team actually experienced growth during the 2008 housing crisis because of its client loyalty and the ability to pivot quickly to new market conditions. 

The team is in a similar position today, with a top-flight listing team matched by a squad of buyer’s agents who specialize solely in helping would-be homebuyers find what they’re looking for. They are all backed by an administrative team that focuses on the fine details of each real estate transaction and a dedicated marketing team that helps sellers get maximum return on their investment. 

The Allen Brake Team is here for those looking to sell, buy or invest in real estate anywhere in the St. Louis region, including the counties of St. Louis, St. Charles and Jefferson. For more information, visit allenbrake.com, email info@allenbrake.com or call (314) 375-3030.