Are home sales down because of higher interest rates, or are interest rates higher because of a slowing market?

The number of homes sold in St. Louis in 2013 was up 10% over the prior year, and the highest they have been since 2007.  The trend slowed down at the end of the year, and to the real estate industry’s dismay, has not yet picked up that momentum again.

The drop in sales could be attributed to a number of homes that are being offered on the market right now.  According to some professionals, there should be at least a thousand more listings for homes in the St. Louis area.  This means that more St. Louis residents are choosing to stay where they are instead of investing in new property.

Meanwhile, last year’s mortgage interest rates at this time hovered right around 3.52% while today we are looking at mortgage interest rates around 4.3%.

When you look at the lack of homes for sale and the increased mortgage interest rate, you have to wonder which factor is driving the trend.  Are home sales down because of higher interest rates, or are interest rates higher because of a slowing market?

The answer may be neither of the two. While home values in St. Louis are continuing to grow, this is being seen mostly in higher priced homes.  So even though the median sale price is up 14% for a single family St. Louis house, that percentage is being driven up by the sale of homes in the $350,000 to $500,000 range.  Homeowners of medium sized and smaller homes are still struggling with the value of their house.

Almost 24% of St. Louis homeowners hold mortgages that are worth more than the appraised value of their house.  This means selling is not an option for them unless they are able to pay the difference. Instead, they have to wait patiently for rising home values to have a positive effect on their house.

A Decrease in First Time Home Buyers

There is a solution to this problem that has nothing to do with interest rates or lack of houses for sale.  Across the nation, and in St. Louis, there has been a significant decrease in the number of first time homeowners.  Typically a first time homeowner makes up 40% of sales nationwide.  That number has dropped down to 27%.  This is devastating news, both to realtors and mortgage lenders.

First time homeowners make a huge difference in the housing market.  They enter it without adding to it.  In other words, their presence creates a higher demand for houses but is not increasing the availability of homes for sale, since they are not offering one.  This creates a market ideal for increasing home values.  The demand is high, while the supply is consistent.

This is why federally back loans like Fannie Mae’s Homepath and the FHA 203B cater to first time homeowners by accepting low down payments and less than ideal credit histories.  They know that these important buyers help drive the market and could potentially pull that 24% of homeowners out of the red with their existing mortgage.

photo credit via Flickr.com: Ian Muttoo