As interest rates threaten to rise, there is legitimate concern (expressed almost daily in the news) that it could chill the real estate market if not send it into a full-out tail spin. However in regards to the St. Louis market, understand that the 9% yearly growth in local real estate is a long way from the 20-30% some markets have seen- and even below the national average of 13%. And ironically that’s the good news. As we near the end of what some experts are calling the “real estate bubble,” our relatively modest growth during the bubble should provide insulation to the negative effects a “bubble burst” would have (like crashing real estate values). Indeed, despite the fact that the St. Louis market seldom sees double digit growth like other cities, we also seldom see the declines those other cities see.

So, should we be worried about a real estate crash caused by increasing interest rates? Never say never. However below are a few factors that I think will affect the St. Louis real estate market more than a quarter point interest rate hike.

1) Hurricane Katrina (and any additional damage inflicted by future 2005 Hurricanes like Rita). As discussed in a previous blog entry, the fallout from Hurricane Katrina could eventually be felt in St Louis in the form of shortages for construction material. Shortages for cement, drywall, and lumber would in turn cause less new construction homes to be built which should in turn keep upward pressure on housing prices.

2) The Local Job Market. This week St. Louis took a big hit with the loss of some 1,700 local jobs thanks to the Federated buyout of local icon May Department Stores. The question to ask is, “How will St. Louis offset these job losses?” Can the growth from fast growing locals like Express Scripts, Build-a-Bear, Panera Bread, Enterprise Rent-a-Car, and others absorb those lost jobs? Can our nice slow economic growth entice corporations to relocate TO St. Louis- like Hardee’s and Arch Coal have in recent years? More important, will displaced May employees and executives leave St. Louis for good, or will we see start-ups and spin-offs blossom as a result? Unemployment and population shifts mean more to a local economy than interest rates.

3) Outside Investors. One of the more interesting trends we are personally seeing is an influx of out-of-state real estate investors who have been pushed out of the California and East Coast markets by astronomical real estate prices. Couple that with the talk of the “bubble bust” and there’s good reason for an investor to pull out of high priced (over priced?) coastal real estate and look toward safer Midwestern markets. One only needs to look as far as the Washington Street Loft District where 40% of the buyers are out-of-towners relocating or investing in St Louis. If this continues, it too will continue to keep an upward pressure on local real estate prices.