Housing Prices: Rate of Increases Slow, No Price Declines

Posted by: Editor on Sep 25, 2006 - 05:00 AM
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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.

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.
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."

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.'"

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."

But, it is true that across the state there has been a "softening" in those things that have been pushing up housing prices. The "cooling off" has also been seen in almost every region of the country, according to data from the office of Federal Housing Enterprise Oversight. But that worries Luptak not at all.

"Billings is absolutely bullish," he said, "We have some serious demand coming to this town." "Overall our houses are still appreciating, just not at the same rate they have been." 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."

"We don't have the same drivers that they have in places like California or Florida," agreed Dr. Ann Adair, Senior Economist with the Center for Applied Economic Research. "We don't get the huge peaks that they do and so we don't get the big slow downs, either." "We had a strong housing market for awhile but it's now weaker because demand is not as aggressive. Interest rates went up one and a third percent, which means fewer people can qualify, and there were a lot of people who recently jumped into home ownership and they are not turning over yet."

At the Center they have a "Real Estate Program, which has been monitoring Montana housing prices for the past six years. While there have been some ups and downs associated with fluctuating interest rates, "We haven't seen a situation where we are losing value in the housing except for in Eastern Montana," said Dr. Adair. And, even some of that is turning around, given the increased activity in the oil fields of Eastern Montana.

The deceleration was felt by lenders awhile ago and many have already adjusted their portfolios. "No one has turned off the faucet," said Wayne Nelson, President of Stockman Bank's Heights Office and a specialist in the real estate market, "We are just being more cautious." That means, "We just make sure that projects make good economic sense, and maybe are more solid than a few years ago."

"It's cyclical," said Nelson, "and we have had a wonderful market locally. There is some uncertainty in the business cycle. There has been a lot of speculation in a lot of the markets, including one or two markets in Montana, we have seen a tremendous amount of speculation. But, that's common. Real estate is a good place to put your money."

Builders, too, are being more cautious, said Nelson. They are, after all, the ones who "initiate the conversations" with lenders. "A year ago you would see a lot of spec home in the $400,000 to $600,000 range, but not a lot will build a spec home at that price now." The pre-sold custom home market, has been doing well, however, according to Nelson.

Billings builds "roughly" 600 new homes a year, pointed out Nelson. And, a lot of people have been bringing on lots -- "we may have a little more supply than what we can absorb, right now."

Looking at the stats there's little to indicate much change. Permits for new single family homes in Billings this year so far stands at 295, compared to 302 last year. Dollar volume shows an increase, at $105.8 million year-to-date, compared to $92.2 million this time last year. New multi-family units are higher at 56 permits this year, compared to 48 last year.

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.

"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."

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."

Look at the numbers, said Howard Sumner, another Billings Realtor who also has experience as a developer. There are 1,093 residential listings right now, compared to 894 last year, "so inventory is up over 20 percent." But if you look at "closed sales" through August 2006 there are 1,765 compared to 1,687 at the same time last year -- 80 more closed transactions.

"We are not getting as many replacement buyers in the market as we did last year," said Sumner, and that just started happening this fall."

The average sale price of a single family home, according to Sumner's statistics, is $192,042, compared to the average sale price at the end of 2005 of $180,224.

Median price as of August was $168,000 compared to $161,000 in 2005 -- "About four per appreciation," said Sumner, "that is decent, not a bad thing."

In 2005, 10 percent of the homes in Yellowstone County sold for less than $100,000, so far this year only seven percent have sold for less than $100,000. "That is a 30 percent change in the availability of low end homes.

Moderately priced, first time home-buyer homes, in the $100,000 to $140,000 comprised 24 percent of the market. This year so far it comprises 21 percent of the market. Two percent of all homes, on Multiple List, in 2005 were over $400,000. That has doubled to four percent this year -- "that is a huge shift," said Sumner.

The market segment of $180,000 to $250,000, usually nice housing for couples who both work, comprised 22 percent of the market last year and is 26 percent of the market this year. "An indication that prices are moving up -- people have more money in Yellowstone County."

Average days on the market has changed. In 2005 the average was 45 days, and inn 2006, it's at 52 days. But that is not out-of-line, historically, speaking, pointed out Sumner. The average was 55 days in 2000 and 51 days in 2001.

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

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."