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!