The Big Sky Business Journal had an interesting article in the September issue:




Rate of Increases Slow, Not Price Declines

Notice how even the title sounds pretty defensive. This article contains a few signs of trouble, then lots of reassurance that the market really is OK. I encourage you to read it completely.

Frankly, I think it contains a lot of spin and misleading statements. Here's my breakdown.

Talk started around Billings, a couple weeks ago, when some seventy or eighty listings, dropped their asking price, through Multiple List Services. It had been a long time since anything like that had happened in the Billings housing market. Following close upon the heels of national press about "declining" housing prices, and the predictions of some economists that 2007 will bring a five percent drop in housing prices, eyebrows were raised.

So finally it seems to be happening. Mass price reductions, probably spurred by waning demand and high inventory, hit the MLS. Apparently it was unusual enough for some people to sit up and take notice.

But local Realtors are quick to point out that Billings is not the rest of the nation. The declines have to do with a slowing in the rate of increases in housing prices, not an actual decline in prices

Realtors on the defensive. First they point out that Billings is different. Then they say that slower appreciation does not mean falling prices. OK, that's fair. For now. But if "appreciation deceleration" continues very long at all, it will result in "negative appreciation", or "depreciation", or, put another way, a "decline in prices." Keep in mind that the rest of the nation only talked about "slowing" for months and months. Now they're seeing actual declines in prices.

Appreciation rates in the Billings market have been between 12 and 15 percent, three years in a row, said Dean Luptak, Coldwell Banker The Brokers. It shouldn't be too surprising to see a five or six point correction. "Our normal appreciation is three to five percent," said Luptak, "and that is a healthy thing."

OK, folks, we're in some serious need of concrete definitions here! In most market terms, a correction would be represented by a dip on the chart, i.e. a price decline. So is Luptak saying that after a year of 12% price increases, we will see a year of 5% price declines? Unlikely, since that would be contrary to the spirit of the rest of the article. The attitude throughout the article is that prices do not decline in Billings. Maybe he's talking "deceleration" again, where correction means slowing appreciation and a return to 3% to 5% increases.

The price reductions seen by Multiple List were from sellers and agents that were still building-in the higher appreciation rate that they had become used to. "They were trying to do a good job for their client," said Luptak. "But the market was no longer accepting it. The math tells you that housing needs to have a price correction for the market."

Such market swings get exaggerated by the media, complained Luptak, "They come out with 'the sky is falling.'"

Actually, in the local media, we have rarely seen anything questioning the assertion that prices will go up forever. And Realtors were quick to cheer price rises on the way up, which the media dutifully reported. I didn't hear any complaints about a lack of fairness and balance when prices were rising.

Luptak is not alone in the observation; even nationally there are those questioning the media's interpretation of the market fluctuations. Said one critic, "It means that the supply is adjusting to demand -- an indicator that new-home prices may hold steady. Overall national home prices have, as of June 30, NOT declined. . . the answer nationally has been 'slower increases' and NOT lower prices."

Incorrect as of August 2006. Prices have not only slowed, they have now fallen. Existing home sales showed a nationwide 1.7% price drop from a year ago (source: NAR). New home sales showed a nationwide 1.3% price drop from a year ago (source: Forbes).

"Billings is absolutely bullish," he said, "We have some serious demand coming to this town."

The theme continues: It's Different Here because thousands of people are coming to Billings. Please note that every city that has seen a price run-up during this boom has claimed that everyone is coming to their city. Interestingly enough, this same edition of the Big Sky Business Journal contains this front-page headline:

"Overall our houses are still appreciating, just not at the same rate they have been."

Once again, a decrease in the rate of appreciation will soon result in depreciation if it goes on very long.

Billings is unlike other areas in the nation, said Luptak, in that it has had the "lowest priced housing west of the Mississippi," according to the Coldwell Banker's price comparison. "Billings housing was running the least expensive for a community of this size, until recently," said Luptak, "When Casper and Minot slipped under us."

The Coldwell Banker study is very interesting and deserves closer scrutiny. I will do a detailed analysis soon. To summarize, I believe the study is flawed, and Billings is definitely not the lowest priced west of the Mississippi.

Bob Sanderson, founder of Engineering Inc., which does a lot work for clients who are developing subdivisions, said that his company has seen no difference in the between 2005 and 2006. "We haven't had a single project canceled," he said, "that is what we would look to as a sign" of more lots than the market needs.

Look for those cancellations soon if the spec homes don't start moving and prices start dropping. The high end is already beginning to pile up.

"Our experience is that Billings doesn't necessarily mirror national trends, and it's often on the tail end and doesn't seem to react as strongly. I don't think we had the price increases that they do in some of the boom areas, and maybe even in some areas in Montana. Billings has moved along at a much more steady pace."

Once again, It's Different Here in Billings. For my response, see the Market History post. It's true that Billings hasn't seen the peaks and troughs of Boston, California, and Florida. But neither has it been a smooth, steady pace. The rapid price increases since 2000 have moved Billings beyond the fundamentals, beyond where it should be. 50% price increase in five years still qualifies as a boom, even if it is a smaller one.

In their 41 years of business, Sanderson said his firm has experienced a very steady increase in business year after year, they only experienced "a big swing" in the late 80s. Things have changed since then, he said. "Our clients are much more sophisticated and savvy folks."

Here it is suggested that the builders learned something from the 80s-90s market. But have they really? Is it different this time? High inventory, dozens of spec homes sitting around, and ongoing construction suggest that it is not.

"Our market is more balanced. There is more inventory," said [Billings Realtor Howard] Sumner. It's just reached a point where, "You can't have any fluff in the price, there's too much competition."

Combine high inventory with weak sales, like we're beginning to see, and things start looking ugly. Not only can you not have any "fluff", but prices may drop.

Sumner, too, is high on the Billings market. "When you buy in Billings it is like getting a corporate bond. You will get a steady decent rate of return of six to ten percent. It's real value and it will hold."

I must say that this quote by Mr. Sumner is irresponsible. Housing is a market that can go up and down. To say that prices will go up, at a historically unrealistic rate, after a huge boom that appears headed for a bust, is just plain wrong. Conveying this attitude may put many homeowners and homebuyers in peril.

Mr. Sumner knows, I hope, that in the late 80's market, prices dropped. Adjusting for inflation, it would have taken a 1986 homebuyer 13 years just to break even on their house (ignoring selling commission). What if this happens again? What if John Q. FirstTimer buys today counting on that 6-10%, then needs to sell in two years, and instead is underwater?

If Billings returns a steady 6 to 10 percent, risk free, then there are a lot of stupid investors out there who are missing out on our perfect, stable market.

That's my take on this article. Frankly, it sounds like the Realtors are getting a bit worried and are trying to reassure buyers. What do you think?