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:

1. "We're not in a housing boom, and there will be no bust"
2. "Housing was red-hot for a few years, but we're returning to a normal market now. Montana is escaping the housing bust."
3. "The market is just taking a breather now, and it will return shortly"
4. "Yes we have price declines, but they're not as bad as California's"

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?