In this post, I will try to explain where the market seems to be going from here using several different graphs.  I'll try to let the graphs do most of the talking.  Click on any graph to get a higher resolution version.

Inventory is the measure of the number of properties for sale in a given area.  High inventory may be an indicator of housing oversupply.  When inventory gets very high and sales drop substantially, lower prices across the board are the usual result.

Here's a look at total inventory (including all houses, farms, and land) in Billings in the last year.  You can see that we are running nearly 30% above last year, and so far have not seen a major seasonal reduction.




This next chart is interesting because it takes a look at the distribution of all that inventory.  You can see that the $200,000+ market has increased from 42% of the market in January to 50% of the market today.  The high end has seen the greatest increase in inventory.




Next up, here's a look at sales.  Realtors are quick to tout the complete Year to Date figure that shows us running ahead of 2005, but a look at August figures shows what may be the first signs of sales weakness.  So far I have not been able to get September sales figures.




Finally, what are all those properties selling for?  This next chart shows mean sales prices of all properties from summer 2005 and summer 2006.  September 2006 showed a price drop from August.  These are mean (average) figures, which are far from giving an accurate picture of everything going on.  For example, they may just be showing that more lower-priced houses are selling than higher-end ones.  But it's worth noting that it's the weakest showing in awhile.

To have a clue about the future, you need to at least understand history.  Here's my attempt at gathering historic information about the Billings housing market and presenting it in a way that makes sense.

Click on any graph to get a higher resolution version.

Most of the following graphs use the House Price Index, or HPI, to show historic home prices in Billings.  But first, a long boring explanation of the HPI.  You can skip it if you want.


The House Price Index

When house price statistics are reported, the most often heard are the median or mean (average) sales prices. The median takes all homes sold during a period of time and reports the sale price where exactly half the homes sold for more and half sold for less.

This is an interesting figure and can give a general idea of price direction, but it's far from perfect.  Even if median prices decline from a year ago, it's not clear whether the same size house is selling for more or less than the previous year.  Maybe it's just that larger or smaller homes are selling better.  What you really need is to track the sales of a single house being sold year after year.

The House Price Index attempts to do this. It tracks sales of the same homes throughout the years, compares their sales prices, and derives an index from that.

The Office of Federal Housing Enterprise Oversight (OFHEO) reports HPI numbers quarterly. HPI's baseline quarter was the first quarter of 1995. In all metro areas, the HPI for 1Q 1995 is 100. Not that all areas had the same price during that time, but all figures in a metro area are expressed as a ratio to prices in 1995.

Here's a simplified example of how it works. Suppose in Billings, a house sells for $200,000. One year later, suppose the same house sells for $210,000. So prices have risen by about 5% in that year. The HPI would rise 5% as well, say from 150 to 157.5. Now do the same thing every quarter using a sample of thousands of homes, and you arrive at the index.

So on to the graphics.  Billings experienced a downturn in the late 80's, followed by a gradual recovery, and now prices are shooting off the charts.  Here's a graph of all the available HPI data for Billings, measured against the Consumer Price Index (inflation).




That's an impressive rise, but how does it compare nationally?  Take a look at the next graph.  This shows Billings HPI numbers plotted against those for Boston, Miami, Vegas, and Dallas.  Clearly, the Billings boom pales in comparison to those in California, Florida, the Northeast, and Southwest. But it's still significant, and far beyond appreciation in Dallas.  All cities rise unrealistically above the inflation curve, if history is any indication.




Now, a little closer to home.  This graph shows HPI figures for different cities in Montana and around the region.  Billings is about average, if a little behind.




Now on to some traditional industry figures.  Here are the price stats from the Realtors.  The mean (average) sale price for a house is now 2.5 times what it was in 1992.




Our last figure is a simple but effective pair of pie graphs.  It could be subtitled Why Demand from First-time Homebuyers is Drying Up

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?

Here's a collection of news articles from the Billings Gazette in the past few years.


06/06/2005: Homeowners with zero-interest loans at risk if 'bubble' breaks

Highlights: A national view of interest-only loans. It also has local mentions, noting that most locally-owned banks hand out risky loans sparingly, if at all. But Wells Fargo in town does deal in exotic loans. The volume they deal with is not mentioned, but a manager says they mostly go to "investors."

Interestingly, I recently found the following graphic on an FDIC page. It says that 33% of Montana subprime loans in 2005 were interest-only or pay-option. So lots of people with bad credit are getting very bad loans. That's a lot of potentially toxic loans floating around! So much for the idea that only a small number of savvy investors are getting the risky loans.




06/21/2005: Billings' housing construction growth: Busy, but no bubble

Highlights: This article is interesting because it perfectly describes a housing boom, all the while denying that a boom even exists! There's also a Realtor adamantly stating that only other places have housing bubbles, not Billings. And finally, builders say that houses are snapped up as fast as they are framed. Clearly the market has turned in a big way since then. Right now there are dozens of spec homes that have been sitting around for months.


03/05/2006: Affordable housing strictly a relative term

Highlights: RE agent Howard Sumner talks about buying his first home back in the day, then gives the prudent advice of 30% gross income for PITI (Principal, Interest, Tax, Insurance). What Howard doesn't tell you is that, under his terms, it would take a salary of $60,000 to buy the median home (asking price $200,000) in Billings. Also of note, in the year 2000 48% of the homes for sale were under $100,000. Now only 10% of homes are in that range.


03/05/2006: Real estate career requires attention to detail

Highlights: An article about the Realtor boom. Billings has seen an increase of 38% in the last five years. Most of the story is about a high school guidance counselor-turned Realtor.

Letter to the Editor of the Billings Outpost

Highlights: This is a letter to the Editor of the Billings Outpost I wrote in June 2006

09/07/2006: Home prices rising, but slower than year ago

Highlights: This is the report on the latest House Price Index (HPI) figures, released for second quarter 2006. Contains a lot of Realtor optimism, but also a suggestion from Paul Polzin (of the University of Montana) that It's Not Different Here and that Montana is following national trends.


09/29/2006: Faculty turned off by housing costs

Highlights: Montana State University, in Bozeman, is having trouble hiring faculty. And no wonder, since the median house price in Bozeman is approaching $400,000. The university president says that a "perfect storm" is brewing. By the way.. Bozeman, with a population around 30,000, has over 900 single family homes for sale. Now that's massive inventory.


10/05/2006: Sheridan housing group sells 1st home

Highlights: This article gets to the crux of the problem. A family in nearby Sheridan, Wyoming, making a decent income, cannot afford even close to the median home. They have to rely on an affordable housing project. Next time you think huge home price gains are a good thing, think of this family