My housing videos give you an informative, entertaining look at the Billings housing market. They are the main feature of this page. Click on the image to check them out.
Billings Housing Market - Videos Page
If you've watched my videos already and you're looking for updates and analysis, scroll down and keep reading. Thanks. - Doug
"I don't know where I'm going to go or what I'm going to do," Whalen said. "I put everything I had together so I could move up here and do this job. Like the articles tell you, they are one of the highest-paying employers in the state."
That's a quote from a laid-off Stillwater miner. SWC just announced the layoffs of 370 workers.
There's a refrain I've heard a lot these past few years, and it goes like this: "We're much more diversified than the 1980's economy was, so we won't have major economic hard times again."
I'm not an economist, and I'm the first to admit that it's hard to understand something as complex as the Montana or even Billings economy. But I was thinking.. what types of activities underlie and drive our economy in 2008?
Hmmm. Going through the list, we find that residential construction has tanked and sales are falling (commercial construction is still blistering, though). The oil bubble has officially gone bust. Platinum and Palladium prices have fallen off a cliff. Grain prices are in a steep slide with the rest of the commodities. And tourism historically drops off during a recession.
I see all these things and I can't help but wonder.. how well can Billings and the rest of Montana weather a recession? Is our economy diversified enough that these things don't matter much anymore?
Whatever the case, there are now 370 former Stillwater employees who will not be consoled if you tell them how great the Montana economy is. Recessionary times are never easy-- please be supportive of any former SWC employees you know.
Look around our country. Virtually every housing market is going down, HELOCs are disappearing, and the national economy is on the brink of a severe recession. Does this sound like a good time to buy a second home in a luxury area? USA Today thinks it does!
Get in on the ground level of Big Sky ski town (Nov. 6, 2008)
A sample quote:
If you've ever envied second-home buyers who got in early at [Aspen, Vail, and Telluride], before prices went stratospheric, consider Big Sky, a newly emerging town in the Rockies of Montana. But hurry.
I'm not sure what they're thinking. Just because you can "still find tiny starter condos within walking distance of the slopes for $100,000", that means they're a bargain?
USA Today's take stands in sharp contrast to my bearish position in my latest housing video. Big Sky is likely in for some major hurt in the next few years. Besides the aforementioned recession factors, consider these facts:
Finally, these recent headlines show how rough times are already hitting Big Sky, and that high-end areas are not immune:
Moonlight Basin halts construction as Lehman goes bankrupt 9/24/08
Big Sky Resort gets $75m cash infusion, sells stake to Florida company 10/31/08
Yellowstone Club falls into bankruptcy 11/11/08
Just five days after USA Today's article touting the great Big Sky market, the super-elite Yellowstone Club declared bankruptcy. Oops.
Begging for another loan, a lawyer representing the Yellowstone Club today said, "If we don’t have an order today, we’ll have a financial train wreck." Even a club catering to the richest-of-the-rich is in trouble. The Yellowstone Club owes $344,000,000 and has $40,000 in the bank.
What do you think? Is it a good time to buy in Big Sky?
Recently I talked with a prominent Billings Realtor. He stated that prices could not fall significantly in Billings, because our level of foreclosures is not that high. I countered that other markets around the country had seen falling prices even with low foreclosure numbers. In fact, prices fell first and then foreclosures started spiking.
Across the country, we've seen the same thing happen in hundreds of markets this decade. Prices increased at very high rates, construction boomed, then sales dropped as housing became unaffordable, prices fell, and defaults went up.
The surprising thing is that this largely happened even in the face of a seemingly good economy. Outside the Rust Belt, most places still had lots of jobs. But the key was that the jobs did not pay nearly well enough to justify the high prices of housing. Thus, housing did not collapse because of outside economic factors. Housing instead imploded on itself, taking the economy down with it.
Montana is behind the curve, but we could very well see the same thing happen here.
It has been over 20 years since the last downturn in the Billings market. In the 80's oil bust, Billings was affected in a big way. Businesses closed down and thousands of people left town. House prices plunged 30-40%.
While there are many things to learn from studying the 80's market, it's also helpful to remember that every downturn is different. Housing is in danger of a steep drop again, but not for the same reasons it was 20 years ago. Although our latest boom has been modest by comparison to the rest of the country, we've still seen house prices rise to levels that are largely unaffordable by Billings workers. This could lead to housing collapsing even without other major economic trouble.
Once you enter this type of declining market, defaults and foreclosures increase. Here are some reasons why:
All right, enough talk. Let's look at some actual data on Billings foreclosures.
The most readily available foreclosure-related data in Yellowstone County comes from "Notices of Trustee's Sales," or NOTS. A NOTS being posted for a property means that the owner is at least 3-4 months late on payments. If payments are not caught up, the property will be sold at auction (or returned to the bank) within 6 months. Typically, about 1 in 3 properties given a Notice of Trustee's Sale is eventually foreclosed on.
Here is a graph of monthly Trustee's Sale notices in Yellowstone County since 1998. There is no major trend yet, although we have seen some significant spikes in the last few months.
I wanted to dig deeper into the data, so I took a look at the actual principal amount owed on loans that are in default. This graph is based on sampled data from each year.
Loan balances are increasing, which is not too surprising given that house prices are up too. However, the amount of increase in 10 years-- 3 times-- is pretty dramatic. High-priced homes and some very large loans have been going into default this year.
Next, I took a look at the age of the loan being foreclosed on each year. In a normal and healthy market, higher loan ages are expected. When sensible loans are being made, foreclosures should only happen in drastic circumstances such as job losses or disastrous medical bills. Since these can happen equally with a 10-month-old loan or 10-year-old loan, the median loan age tends to be pretty high.
In contrast, in an overheated market marked by lax lending standards and overextended borrowers, you will see much more recent loans going into foreclosure. Now, on to the graph:
Median loan age has in fact been going down considerably in the last 10 years. Combine this information with the graph above, and you get a very interesting picture of the state of housing default in Yellowstone County. Dozens of very recent loans-- some less than a year old-- are going into default for some very high dollar amounts. This to me paints a picture of a market that may soon be in serious trouble.
Remember, next time you hear media reports of "low foreclosures in Montana", that foreclosures are a trailing indicator this time. Foreclosures are not too high yet, but they will be if prices keep coming down.
2008 video, finally, here it is!
Unlike my other videos, this one is not entirely about Billings. This is a wide-ranging look at real estate all around south-central Montana, with some bits about the national crisis. It's all related. Running time: 30 minutes. Enjoy! Let me know what you think.
Move your mouse over the video screen, and you will see options for viewing full screen and embedding this video on your own page.
Factual accuracy is very important to me, and I tried to make this video as true and correct as possible. Click here for the transcript of the video with over 100 references to sources I used. Please let me know if you find any inaccuracies.
Note: The above video is hosted on the Vimeo service, and it is very good quality for internet video. If your browser or computer are not able to handle it, you can try the Google Video version, but note that the quality is much lower.
Kenmark Construction held the first mass real-estate auction in Billings in recent memory. The auction was on Tuesday, September 9. I attended.
This auction was well publicized, and approximately 350 people showed up! The large room in the new College of Technology building was filled up, standing room only.
So how was it? You can read the Gazette write up, but that doesn't tell you much in terms of what actually went on and what it means for the market. That's what I'm here for.
First off, all 13 properties actually sold! That's pretty amazing; I've watched other auctions around the country, and usually few if any properties sell. Kenmark's success was in part due to fairly low reserves on the properties, and in part due to reasonably strong bidding in a Billings market that has not entirely gone bust yet.
Second of all, Kenmark let these properties go for pretty low prices. Bids came in at around 70% of the original asking price. I checked asking prices on comparable non-Kenmark properties. Kenmark's original asking prices were high, but the final bids were still a good 20% off of current asking prices for similar properties.
Also, according to a cursory glance at county records, some properties sold at near or below Kenmark's original construction loans. And that doesn't include land prices.
I've put together a spreadsheet showing the hard data for all of these properties. Please note that this is a rough take, and all data are preliminary.
The $/sf fields indicate the dollar amount per square foot, either for the original asking price or the sale price. I also included Comps $/sf list, which means the current asking price in dollars per square foot for similar properties for comparison.
I also took some video. But, of course, you're going to have to wait a few more weeks to see that in my full next installment of Housing Boom in Billings!
According to the OFHEO House Price Index, house prices are down in Billings from the previous quarter. This is the first quarter-over-quarter price decline since 2001 and the steepest single-quarter decline since 1997.
Some caveats: 1. For now, this is just a blip. It will take a year or two to see if a trend is established. 2. This is not a large decline. It is only 0.5% down for the quarter, which annualized to just over 2%. This may be just the start. But it's important to note: Prices are down. We haven't returned to "normal" appreciation. Prices are not "flat." Home prices have declined. If anyone tells you different, print off these graphs below and show them some hard facts.
Here are the graphs, and my take on them (click to enlarge):
What this graph tells me: All Montana cities experienced 8 or so years of historically unrealistic appreciation rates (Billings averaged 9%). I believe this will require significant price declines to get back to the long term trend. You can't have 8 years of abnormal appreciation and then expect to return to "normal" appreciation with no correction. From the graph, house prices seem to finally be peaking out.
What this graph tells me: It appears that things are going south in a hurry! For the first time since 2003, home prices climbed less than 5% from the previous year. Note that this graph maps *change* from the previous year only. A dropping line means that the *rate* of change is going down. But if the trend continues, the line will soon dip below the 0% mark. That will mark a major milestone-- year-over-year price declines-- and things will start to look reminiscent of the 80's.
What this graph tells me: This is a rougher sort of plot. It shows change from the previous quarter. Since prices can fluctuate quite a bit in a short time, you see lots of ups and downs. However, the recent rapid break to the negative portion of the graph is hard to miss.
Speaking of anticipitation: Some of my commenters seem to be getting antsy for the next video. And I can't blame you! It has been 20 months since my last video. Honestly, things have been pretty dull in Billings real estate since then. But now it's starting to get interesting again, and I am excited about this video.
As noted previously, the release of my next video will mark two years since the first one. But I was wrong, it was not August, it was September 26, 2006. And the next video will be out 9/26/2008. Things are going well, but I still have a few more interviews I want to conduct. And of course, I can't miss the first mass house auction of this boom-bust cycle, slated for early September.
As always, thanks for your support and patience!
I will say right off that buying a house at some point is an important part of a good lifelong financial strategy. But I am writing this post to challenge the too-often made assumption that you should buy a house as soon as possible in your life, or as soon as someone will lend you money for it.
Risk is everywhere in life. Our goal should not be to avoid it, because that is impossible, but we should be actively managing risk. In our financial lives, taking reasonable risks can lead to very good rewards. But failing to properly manage risk can easily leave you in financial ruin -- loss of all your money, bankruptcy, foreclosure.
So I am writing today about managing risk as it relates to housing situations. Buying a house exposes you to a fair amount of risk.. which can result in very good rewards. But taking on this risk before you can manage it properly is a recipe for foreclosure.
What risks do you face when buying?
1. Depreciation risk
While house prices tend to go up over time, there are a lot of fluctuations in the short term. If you buy at the wrong time, your house can drop in value 20%, 30%, or even 50% in just a few short years. We are constantly told that "prices go up long-term", but how many people under the age of 40 really stay in a house for 10 years anymore?
2. Underwater risk
If house prices drop and you had a small down-payment, you are underwater. You owe more than the house is worth. This means that it will be difficult if not impossible to sell it. And sometimes a quick sale is needed-- whether your career takes you out of town, or you need to downsize in a hurry.
3. Transaction cost risk
You will pay a substantial amount of money in transaction costs (closing costs, Realtor commissions) during the buy-sell cycle of owning a home. If you sell within a few years of buying, this can easily wipe out any equity or appreciation gains and leave you with a net loss.
4. Expensive maintenance risk
Is your furnace going to make it through the winter? Probably. But if it doesn't, you're stuck with a sudden and hefty bill. There are many other maintenance issues in a house that can creep up on you. It can be hard to budget for these, especially if they come all at once.
Now let's talk about renting. While it's not sexy, renting is very predictable. You know exactly how much you are going to pay over the course of a year. You can plan ahead, and not worry about unexpected expenditures, housing downturns, or being stuck in an illiquid asset and having to shell out $10k+ in commissions when you need to move.
All of that comes in very handy when you are young without much money, and it's a great way to manage risk. I would contend that it's a good idea to rent until you can handle the risks of owning.
While renting builds no equity and some people derisively call it "throwing money away", this is not necessarily true. First of all, renting can be considerably cheaper than owning in this current housing boom. You can build far more "equity" by putting all that money you save into the bank.
By the way, your total equity for a $150,000 house amounts to only $1677 after the first year of payments.
The second point about throwing money away is that you do the same thing when you buy a house. Consider these monthly expenses when you own: The interest portion of the mortgage, taxes, insurance, and maintenance. This is money you pay out that you don't see again, yet no one seems to consider it "throwing money away."
Of course, paying all those nonrefundable fees allows you access to all the rewards of housing market appreciation-- and the risk of depreciation. It's a risk that's worth taking when 1. you're personally prepared for it, and 2. housing isn't grossly overvalued.
Here are some ways you can prepare to mitigate the risks of owning:
1. Have a significant down-payment.. 10-20% or more. While this is a large chunk of money that will take time to save, a down payment is crucial if you want to be ready for anything. If you urgently need to move or downsize, you can do so even if your home value has dropped. You will have lost some money, but at least you're not stuck in the house.
2. Keep cash emergency savings on hand. Job losses, medical bills, and big repairs happen. You can either prepare for them, or act all surprised and go into default when they happen.
3. Keep your total housing payments (principal, interest, taxes, insurance, maintenance) under 30% of your total income.
4. Watch housing trends. If housing has seen a major boom in your area and prices seem to outpace incomes, be very cautious and consider the risks above!