It's official: My new housing video will be released in August 2008, exactly two years after the first video. Two years, can you believe it? I will be taking a close look at all that has transpired in Montana housing since 2006, and where we might be headed from here.
Watch this blog in the coming weeks for various posts of local and general housing interest.
If you're new here, please take a look at this intro page and watch my first videos.
Real estate statistics are notoriously hard to come by in Montana. This is a non-disclosure state, meaning individual sale prices are not public. And few (if any) newspapers regularly publish Real Estate stats. So for local statistics, you have to find what you can on the web.
Here are some snippets from around the state (note that I am providing links for the sources, but they may go out of date).
Here are the Missoula stats from May 2008. Note that the median price (a trailing indicator) is down slightly, while sales are down a whopping 31% year over year. This means that there is more pain to come.
Here in Billings, sales are beginning to drop off. Closed sales are off slightly, and pending sales are off big. Source: Big Sky Business Journal Hot Sheet, June 16 2008
Bozeman is one of the most overheated major markets in Montana. Prices there are way out of line with the low incomes, and the entire town's industry lately seems to be based on real estate. And now they're feeling the first effects of the downturn: Prices down 10% in 6 months. Source.
This from Helena. Days on Market are shooting up to near 5 months, and prices are down 5%. Source.
Finally, here's a stunner from the Bitterroot Valley. Sorry for the size, but I wanted to show all the stats and statements to you. All the red underlines are my notes.
Did you catch that? Inventory is 886 and there were 15 sales in one month. The Bitterroot Valley (south of Missoula, including the town of Hamilton) has a 5 year supply of houses! Typically a healthy market has a month or two of supply, but the Bitterroot has 59 months worth. Prices have not come down much yet, but with supply and demand like that, they will soon. Unbelievably, this real estate broker reassures buyers that "It's a GREAT time to buy!"
Let's reframe this in terms of the current high gas prices. Suppose there are 886 people in your town attempting to sell their pickup trucks. Last month, only 15 people in town bought trucks. Would you think it was a good time to buy? Would you pay near full price for one, knowing the supply and demand balance? Would you imagine that truck prices would rise or fall in the near future?
I hear this one quite a bit. And it almost makes sense and gives some comfort.. after all, we never had $500k starter homes in Montana. We never had 40% annual appreciation like Arizona did. So any downturn here would be minor, right?
Well, now we're speaking relatively. The reality is that Montana housing can not and will not fall as far as California's will.. but that's a small comfort! Why? Consider this: In Southern California in the last year, prices have fallen 26.7 percent. In ONE year. CNN Money is reporting that many metro areas could see 50% or greater drops when this is all over
Will Montana's landing be softer than a 50% plunge? Undoubtedly. But that still could mean 20%, 30%, or even 40% drops.. very painful! Realtors love to say this: "All Real Estate is Local." They're right. So let's ignore Florida and Nevada, let's look around at our overbuilt and overvalued local housing market, and see the potential for a significant downturn.
As an aside, if you listened closely you will have heard a subtle shift in the talking points from Montana real estate professionals. Here's roughly how the progression has gone in the last few years:
If we do see significant declines in the next year, expect to hear more spin. Things like: "It's a buyer's market now" and "You never know when prices will shoot back up, so you'd better jump in now!" and "We've worked the excesses out of the system, it's a perfect opportunity to buy."
Hint: California Realtors said the same thing when California housing was down 10%. Some suckers purchased houses, thinking they were getting bargains. Then housing dropped 20%. And again, it dropped 30% from the peak.
The above graph shows the dilemma. Once you're at the right side of the red line, after a small price dip, where do things go from there? Eternally optimistic Realtors seem to believe that prices will always follow the green line and head right up again. But they could stay flat, or fall further. If you bought after the small dip, with zero money down, you could be underwater for a decade or more.
It helps to realize that housing tends to have great momentum. Prices rise. Everyone jumps in. Real estate booms. Then prices drop. Speculators bail. Foreclosures rise. And prices then tend to fall further. America has a long history of manias propelled by human nature.
We actually have a great advantage here in Montana, being on the very trailing edge of the nationwide boom/bust. Looking across many other states, we can begin to see the devastation in the wake of the housing crash tsunami. Which is a better course of action for us: Shrugging and saying "the wave can't hit here", or moving to higher ground while warily watching the rising water on the horizon?
As you may have noticed, this has not been the place for recent housing updates! However, I have been keeping up somewhat with the market, so let me compress many months of housing news into some key points.
There are a number of interesting housing stories that I look forward to reporting on; Tentative date for my next video is sometime this summer. I know this has been a long break, but thanks for your patience.
In the mean time, I would highly recommend:
Missoulapolis
which is a conservative political blog that has been talking a lot about Montana housing lately. The author, like me, is very skeptical of what she reads in the newspapers, and takes it upon herself to offer commentary on the latest housing reports.
Spring and summer came too soon, and I haven't been able to devote much time to my next video. Rest assured that I have some good stuff that you will enjoy whenever it comes out!
In the meantime, I would like to hear your stories. What are you seeing in the market? Any significant shifts? Market still hot, or cooling down?
If you have some interesting insights into the Real Estate market or industry, please let me know. I'd like to do some interviews for my next video. All viewpoints welcome. billings @ topoimagery.com
Hi, my name's Doug. In summer 2005, I began researching the Billings housing market. The longer I looked, the more I began to believe that the Billings market was in the midst of a bubble.
A housing bubble is defined like this: "A housing bubble is characterized by rapid increases in the valuations of real property such as housing until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This in turn is followed by decreases in home prices that can result in many owners holding negative equity, a mortgage debt higher than the value of the property. Bubbles may only be definitively identified in hindsight, after a market correction" (from Wikipedia)
Now that may sound ridiculous to you. A housing bubble in Billings? Those only occur on the coasts, if at all. You can still get a very good house here for $200,000, while Californians are pushing half a million. Our prices are still cheap and everyone wants to live here. Right?
Asset bubbles are complex things. I think that a number of factors have led to the unprecedented nationwide housing boom, and Billings has not escaped any of them. Among them are very loose lending standards, risky loans, speculation, and psychology (the "expectation of appreciation").
Everyone thinks real estate is a good investment, no matter what. Throw away those old standards when buying a house (20% downpayment, plan to stay 7+ years). It's just like 1999 and stocks all over again. It's a mini-mania. There's no way you can lose. Until you do.
When you hear real estate market conditions, most of them come from Realtors or others in the industry. No offense to Realtors, some of them are really good. But they have a definite interest in a booming housing market, and some of them make overly optimistic or even reckless statements in order to support it.
It's hard to get an objective look at the housing market. This is my attempt to provide you with that. The point of this page is to raise awareness about the Billings housing boom. And to get you to seriously consider the idea that this boom may go bust and cause a lot of pain.
A house purchase is the most expensive item most people ever buy. It is foolish to not be prudent on such a major purchase. So consider the possibility that prices won't go up forever. Consider the possibility of a downturn. Most Realtors dismiss these ideas outright. But most Realtors have short memories.
In September 2006, I gathered all my data, took some photos and videos around town, and produced a video about the Billings market. It's amateur, self-narrated, and long (20 minutes), but makes the best case I know how for an overheated Billings market. Take a look.
Original Video
December Update
That's my story. Have a look on this page, and let me know what you think!
billings @ topoimagery.com
You may have noticed headlines lately about some major trouble in the subprime lending markets. Despite reassurances that this trouble is "limited to subprime", I believe that this may be the beginning of the end of this massive credit bubble. Look for more troubles in the Alt-A and Prime lending markets as the year goes on. As standards tighten, sales will likely fall and speed up this nationwide downturn.
State Representaive Bob Lake wrote an opinion piece last year about how Fannie and Freddie should not be prevented from continuing "innovative" financing since housing is becoming unaffordable. At the bottom of the piece it is disclosed that Rep. Lake is also a real estate agent.
The following comment from an anonymous reader was at the bottom of the article for awhile. I will reprint it here because it perfectly describes the problem with our lending situation:
Rep. Lake, I beg to differ re. your premise that the more readily available loans have made housing "affordable" to us who are not millionaires. I propose that the easy lending practices have made housing LESS affordable for just about every American. Please do some research regarding suicide loans and how they have fueled the current housing bubble. Americans do not need easy loans to get a house. What they need are home prices that are in line with incomes. I feel the Fannie/Freddie fiasco has only served to price most Americans out of the market. It's true that many have "purchased" in the past few years, with the "help" of easy loans and low interest rates. I believe that in the next few months, we will see increased foreclosures as Americans find that the house they were told they could afford by their friendly lending institution becomes beyond their reach to pay for in reality. Lesson learned. As a lower income person, I think the best way to make housing "affordable" for future generations is to get rid of Fannie May and go back to 20% down, 15 or 30 year fixed. Get sanity back into American society and economy. We'll all be stronger for it. Thank you, A (very) concerned American
This week's Big Sky Business Journal has an article on housing. This is the first major housing update since the BSBJ's September article, which I critiqued near the bottom of this blog.
Unlike the September article, which only quoted many local Realtors, the new article contains a contrarian voice.. me! There are also some good quotes from Paul Polzin. Read it and see what you think. Thanks to Evelyn for an interesting article, and for quoting me.
I have two responses that I would like to post here.
Rents set to skyrocket?
In response to my assertion that the price/rent ratio is out of line with historic norms, here's what real estate agent Howard Sumner has to say:
That there is a huge disparity between the current rental rates and mortgage payments, is not something with which Sumner would disagree. His figures show a disparity of about $650 a month.
But, that means only one thing to Sumner: "People will be shocked at the increases in rent over the next 90 days". The "softening" in the rental market, Sumner attributed to a jump in the number of multi-family units that has been built in the recent pass.
Sumner recognizes that this disparity is a problem. That's a good start. But instead of believing, like I do, that housing is overvalued, he claims that renters will see shocking rises over the next few months. This claim is made with no data to back it up.
Barring a major shortage of rental units, rents are generally determined by local wages. There can be no speculation or risky loans . Rental rates can only be as high as people can afford. This is why the price/rent ratio is so crucial. While rents tend to steadily track wage growth, house prices can fluctuate much more and get out of line with fundamentals.
We really need to get some data on rental vacancies. I'll see what I can do. In the meantime, I did some quick looking into the Billings Gazette print archives. I looked at single family home rentals in print Gazette classifieds from 2003 through 2007. For each year, I looked at the last Friday in February. Here are the numbers I found:
If indeed rents were set to skyrocket, you would expect very tight supply. Instead, we see a fairly large number of houses for rent. The number is pretty much in line with what we've seen for the last few years.
Interestingly, several of the houses for rent are advertised as brand new and never lived in. Because there's so much inventory for sale out there, many units are being rented out since thay cannot sell. This is especially true in the condo market. Most downtown condos are for lease as well as for sale. Many other condo projects around town are having trouble selling, and are going up for rent. There are a lot of vacant units out there.
I don't see where Sumner gets his idea that the price/rent problem is going to be solved by rising rents. Unless he provides some hard data on why rental rates are going to have "shocking" rises, I'll be skeptical until I see it.
Have interest rates kept housing affordable?
Later in the article, Sumner takes on my claim that housing is unaffordable. Here's the exchange:
But affordability is exactly the problem with the price of housing, claims Armknecht. He stated, "Billings house price index, published by the Office of Federal Housing Enterprise Oversight shows house prices up 50 percent in the last five years. Most estimates show wage inflation to be around 15 percent during that time. Home prices have risen so fast that incomes can no longer support them."
Sumner's numbers indicate quite the opposite, much even to his surprise, he said. With the average price of a home climbing from $114,000 in 1999 to 180,000 in 2005, it may indeed appear that house prices are out stripping the average buyers ability to buy. But consumer purchasing power has been advancing at the same time, said Sumner. The median family income in Billings increased 18 percent, while interest rates dropped 20 percent from 1999 to 2004. A homeowner who could afford a $141,129 in 1999 could afford a $195,374 home in 2004.
I believe that Sumner's analysis is muddled, misleading, and sidesteps my point. Based on the phrase "Sumner's numbers indicate quite the opposite", he needs to show that my statement "Home prices have risen so fast that incomes can no longer support them" is incorrect.
To do so, he says that consumer purchasing power increased. Since wages have trended upwards and interest rates generally downward, he is correct. However, he conveniently only looks at the years 1999 through 2004, ignoring the trends and data since then.
I will assume that "consumer purchasing power" is a function of wages, prices, and interest rates.
Interest rates are at the crux of his argument. Rates dropped from over 8% in 2000 to below 5.5% in 2003. This did make housing more affordable. But what happened since then? Interest rates were fairly flat, then started ticking upwards. Did prices slow after 2004? No, they roared through more huge increases in 2005 and 2006.
Sumner suggests that housing took off because of low interest rates. I believe that prices shot up because of other speculative factors. The continued price increases in 2005 and 2006 in the face of modest wage inflation and rising interest rates support my view.
Here's a table with some figures:
There are lots of numbers here, but bear with me. Let me explain the columns. First column is the year. Second column is the average sale price in Billings for that year (source: Prudential Floberg Realtors). Third column is the average interest rate for a 30-year mortgage for that year (source: Estimate from Investech.com research). Fourth column is the income needed to afford the average sale price, using the year's interest rate (source: Billings Association of Realtors on-line calculator assuming 0 down, 1% property tax, and 0.5% insurance). Finally, the fifth column has each income adjusted back to 1999 dollars by taking into account 3.5% wage inflation per year.
That's a lot of numbers, but the most important column is the final one. This should be a good measure of "consumer purchasing power" since it accounts for both wages and interest rates. If in fact houses are as affordable now as in 1999, then numbers in the final column should be fairly flat. Instead, we see that the income needed to buy the average house was 21% higher in 2006 than in 1999, even when factoring in lower rates and wage inflation.
Housing is still unaffordable, even with lower interest rates. I don't think "Sumner's numbers indicate quite the opposite" at all. What do you think?