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In a culture where national news sources reign supreme and are often used to get the bigger picture of our economic state, any objective assessment of the year must go beyond a comparison with prior years and consider the year in relationship with our state, region, and country.

For the US, median home prices at the end of December 2008 were down by about 25% from their peak in mid-2006, and in 2008 fell by 7%, the largest one-year decline in the past 38 years. For Missoula, median home prices for 2008 were down 2% from their highest-ever level in 2007, representing the only year-to-year decline this decade.

Foreclosures nationally surged by 81% from 2007 to 2008. For Missoula, foreclosures in 2008 increased by 18% over 2007. In the US, building permits issued for new construction fell by 63% from 2005 to 2008. The equivalent decline for the city of Missoula was 49%.

Due to the relative strength of the Missoula housing market as compared to the national picture, housing affordability has not improved locally to the same extent it has improved in some regions in the US. For the US as a whole, the mortgage payment on a median priced US home had fallen to about 17% of average family income by year-end 2008, from more than 25% two years ago. Affordability arguably remains thegreatest challenge in our local market.

Regarding the future, expert consensus is that the recovery of the US economy in general and the housing industry in particular will be a slow. A few indicators have recently brightened the national housing picture, for example, with home sales nationally jumping by more than 6% in December 2008 from the previous month’s sales – the largest one-month gain in nearly seven years.

December’s increased home sales nationally were likely aided by mortgage interest rates hovering around 5%, the lowest level in decades, and an increased number of distressed sales. Historically low interest rates also prevailed at year-end 2008 in our local market, yet did not immediately spur home sales. Caution among would-be Missoula homebuyers may be a natural reaction to nationwide indicators and fears – such as a pervasively gloomy near-term outlook for the US economy, consumer confidence that’s at an all-time low, and the absence of mortgage liquidity, among other factors.

So Missoula’s housing market, as well as its overall economy, enjoys a level of health and stability in early 2009 that would be envied by most of the country. This state of affairs, combined with favorable indicators such as mortgage interest rates, as well as the historical resilience of Missoulians, combine to provide realistic potential for a stronger local housing market when the economy begins to rebound.

Download the 2009 Missoula Housing Report

For 2007, data related to the Missoula housing market reveal two indications that are of greatest importance:

1. Some data indicate a softer real estate market – data such as that for number of homes sold, median sales price of homes, and building permits issued.

2. Missoulians’ income growth remains strongly positive and unemployment continues to trend downward. Yet, despite this “good news,” the “bad news” about housing in recent years is truer than ever: more Missoula families are finding their incomes insufficient to own or rent modest homes and apartments, and many more families are paying an overly large share of their incomes for housing – threatening their financial well-being.

Regarding a possible softening of the local market, signals – in the form of the data presented in this report – are highly mixed. That makes it very difficult to come up with reliable answers to critical questions regarding the future: Is the Missoula real estate market headed for a “delayed” downturn on the scale that much of the rest of the US is already experiencing? Or is the data of 2007 the weakest that Missoula will see, because our market’s continuing strengths will save it from the worst effects seen elsewhere?

We will likely be able to answer those questions with considerably more confidence toward the end of 2008. However, a look at events nationally would strongly suggest that home prices in Missoula would, at a minimum, soften further in the current year. In “The State of the Nation’s Housing 2007,” the Joint Center for Housing Studies of Harvard University observes that –

Home sales and starts usually head down before prices. Declining sales, and the inventory overhang left in their wake, increase the length of time homes are on the market as well as buyers’ resistance to higher prices. Eventually motivated sellers – like home builders and investors with unoccupied homes for sale – reduce their prices.

To the extent that decreasing sales of homes and increasing days on market are reliable indicators of price declines to come, we may see lower sale prices in our market for 2008 and perhaps into 2009.

Answers are not likely to come so soon, or so readily, concerning the relentless advance of home and rental prices at paces that exceed the ability of most Missoulians’ incomes to keep up. More worrisome still is that this inability to keep up is occurring while economic times have been relatively good. We may collectively shudder to think what might happen if income gains diminish and unemployment increases.

In this case, too, as with home prices, indicators at the national level are ominous. “The State of the Nation’s Housing” reports that, “In just one year, the number of households with housing cost burdens in excess of 30% of income climbed by 2.3 million, hitting a record 37.3 million in 2005.” Crossing the 30% threshold greatly imperils family finances, as “severely cost-burdened households in the bottom quartile [of household spending] had just $436 a month left to cover all other needs [but housing] in 2005.”

Yet, we would assert that the Missoula market has at least two significant advantages working in our favor. The first is quite practical: If any downturn we may experience lags the national market, we have more time to find solutions. The second is less tangible, but we’d hope no less real: We are resilient people with the blessing of a diverse economy.

To capitalize on these and any other advantages we may enjoy, we must understand that increased housing costs are triggered not only by price hikes in materials and labor, but also in a wide variety of other inputs, such as infrastructure (public and private utilities) and government fees and permits. As such, the challenge to keep home prices and rents within reach of working families with average or below average incomes is a challenge that requires a cooperative, community-wide response.

Builders, developers, real estate brokers, business owners, and leaders in government and nonprofit organizations all recognize the importance of having a workforce that lives in the community and are focusing on making that happen.

Download the 2008 Missoula Housing Report