All posts tagged Missoula Organization of Realtors

Today, both a pessimist and an optimist could find persuasive indicators to satisfy their outlooks for the Missoula housing market.

The pessimist might cite data indicating a continuation of the downturn, such as the still-declining annual number of existing home sales, the now 6-year slide in the number of single family building permits issued by the City of Missoula, the persistently high county unemployment rate, and continuing declines in inflation-adjusted income.

The optimist might counter by pointing to data giving hints that a meaningful recovery in the local housing market and the overall economy may at last take hold, such as the year-long 2011 increase in median sale prices of existing homes, an all-time historic low in mortgage interest rates, signs of a clearing from the home sales market of foreclosures and short sales, and late-2011 plus early-2012 declines in unemployment at all levels – local, state, and national.

Clearly, the data send mixed signals. But that, in itself, is a hopeful sign, as the past three of our annual reports to the community, for 2009 through 2011, contained very little data supporting an optimist’s perspective on the near-term future. Today, for example, much more so than in recent years, we can have greater confidence that our housing market, as well as our overall economy, is likely to escape a ruinous “double-dip” downturn.

Which is not to say that we are free of grave concerns – perhaps most prominently, affordability of decent housing. While our local housing market, like the national market, has seen several years of increasing affordability, the impact of those gains in Missoula has been much weaker than in the U.S. as a whole.

In this regard, the local rental market is especially worrisome. Rental prices, both in our region and nationally, have firmed considerably over the past year. Though the increase is moderate, it exceeds the inflation rate, while income gains have lagged the inflation rate. And in this time of severely strained government budgets, prospects for increased assistance from public programs – locally, statewide, or nationally – are at best dim and at worst nil.

Harvard’s State of the Nation’s Housing 2011 observes that “income gains have lagged housing costs for decades for an increasing share of renter households, and affordability pressures are making their way up the income scale. Rising demand is already pushing rents higher while stubbornly high unemployment is keeping the lid on wage increases. If these trends continue, affordability problems will worsen as the economy recovers.”

Concerning that economic recovery, one of the few certainties the data provide is that it is the weakest ever experienced – in no small measure owing to the absence of a pronounced turnaround in housing. For most Americans, the Great Recession’s officially declared end-date of June 2009 and 34 months since of recovery seems ludicrous.

Experts at the national and local levels have been confounded by the feebleness of recovery. Billionaire investment guru Warren Buffett admitted in February 2012 that he was “dead wrong” in his 2011 forecast that the U.S. housing market would begin to recover by now. In the same month, Patrick M. Barkey, Director of the Bureau of Business and Economic Research (BBER) at the University of Montana, said that Montana’s economic recovery “remains stuck at the starting gate” – citing data showing that the state’s economy actually slowed down in 2011 after having grown in 2010 (Big Sky Business Journal, Feb. 21, 2012).

Nonetheless, our consensus opinion remains, as in the past, that the Missoula market has telling advantages that help us cope better in these difficult times. One of these is the lesser severity of decline locally versus nationally, in the overall economy generally and in the housing market specifically. Another advantage is that Missoulians are resilient and pragmatic people: When confronted with challenges such as those of recent years, we collectively roll up our sleeves and say, “Let’s make things better.”

In 2011, particularly its final months, and early 2012, we began to see signs of success in that effort. With your help, those signs will proliferate this year and beyond.

Download the 2012 Missoula Housing Report

The housing downturn of the past several years may qualify as one of the most confounding economic events in US history. It seems that most forecasts issued by economists and housing ex-perts proved wrong.The housing downturn of the past several years may qualify as one of the most confounding economic events in US history. It seems that most forecasts issued by economists and housing experts proved wrong.

Events of 2010 illustrate the string of mistakes:

As 2010 dawned, expert consensus held that the year would be one of increased home sales in the US, with median price holding or possibly increasing. Result: fewer home sales and lower median price.

At the year’s outset, expert consensus held that mortgage rates would stay level or increase. Result: Mortgage rates went lower through most of the year, before trending up at year end.

In last year’s report, we cited a prediction by the National Association of Home Builders’ senior economist that new home sales in 2010 would increase by 25% over their 2009 total. Result: new home sales dropped by 14%.

At the local level, our outlook in last year’s Housing Report fared only a little better than the national experts’ fore-casting. We observed, for example, that home prices, except at the top-most ranges, appear to have bottomed. Result: median home price once again declined.

So we approach this year’s Conclusion and Outlook with perhaps more caution than in the past.

Nonetheless, we again will assert our belief that housing prices in the Missoula market have bottomed or, more precisely, that they will have bottomed by year-end 2011. Also, with somewhat more confidence, we believe our market will experience a gain in the number of existing home sales – with the important caveat that our greater confidence stems in part from anticipating a greater number of foreclosure and short sales.

Mortgage rates can with somewhat more confidence be predicted to increase in 2011, resulting from a number of trends that include an uptick in the US inflation rate, stricter mortgage loan standards, and increased costs of meeting the regulatory require-ments of recently enacted legislation, such as the Dodd-Frank Act and the Real Estate Settlement Procedures Act.

If we do experience this 1-2-3 punch in 2011, median sales prices would be very unlikely to increase, and rather more likely decline for the fourth year in a row.

Nationally, further price declines are forecast by many expert observers, some of whom have shifted in the first months of 2011 from seeing a housing market poised for a recovery to forecasting a renewed downward drift. This looks like a double-dip [in hous-ing] is pretty much on the way, if not already here, according to Standard & Poor’s executive David Blitzer. Joining the chorus, Wells Fargo & Co. projects home prices will drop 8% in 2011’s first half, consistent with other analysts’ expectations that home prices will decline 5% to 10% by mid-year or late summer.

Such a decline, were it to occur, would contribute to affordability gains, as it has for the past three years. However, affordability is threatened by a February 2011 report by the Obama administra-tion on redesigning the government’s role in housing finance. Each of three alternative ideas for dissolving Fannie Mae and Freddie Mac would raise the cost of mortgage loans and push homeownership beyond the reach of some families.

As for rents, affordability gains in 2011 are also unlikely in our local market. The real estate market in Montana typically lags that of the US by about a year, and nationwide rents spiked significantly in 2010, owing mostly to additional demand by 1) former home-owners who were foreclosed or who walked away from underwater mortgages and 2) would-be homeowners who can’t meet the stricter standards of today’s mortgage loans.

A ray of hope in local rent affordability is offered by the significant 2010 increase in multi-family building permits issued. It’s unlikely, though, that apartments will be constructed and offered at a pace that will boost supply enough to measurably reduce rental costs in 2011.

The national affordability outlook in State of the Nation’s Housing for 2010 is equally unenthusiastic, noting that, with federal budget deficits looming, the resources necessary to make a noticeable dent in the nation’s widespread housing affordability problems are unlikely to appear anytime soon.

Given this cavalcade of dreary assessments for 2011, it wouldn’t be unreasonable to hope that expert consensus will be just as consistently incorrect now as it was in last year’s forecasts.

But we do have at least a little substance, not just hope, on which to pin our prospects for the near future. For example, US demographics in the next decade or so will powerfully increase housing demand. The baby boom generation is reaching senior and retired and empty-nest status by some ten thousand every day, strengthening demand for senior housing.

Meanwhile, the generation of boomer offspring – the echo boom – is even larger than the baby boom contingent and will create a strong demand for housing for at least the next 15 years.

Locally, the climate for growth has improved significantly, according to Pat Barkey, an economist and director of the University of Montana’s Bureau of Business and Economic Research. Two years have elapsed since the recession’s lowest point, and families and businesses are starting to adjust, and both are now positioned to spend more.

In our local community, we have other conditions working in our favor. For the most part, we continue to have escaped the full extent of harmful impacts of the housing downturn experienced across the country. We also enjoy a diverse econ-omy, ranging from a renowned university to natural resources production to nearby scenic attractions that draw national and international travelers. And we are a historically resilient population that bands together more tightly when adversity strikes. These qualities will prove decisive in overcoming today’s unprecedented challenges.

Download the 2011 Missoula Housing Report

Over the past few years, high-ranking federal government officials have warned us to “never waste a good crisis” or told us, in a variation of that warning, “it’s a shame to waste a good crisis.” Missoula seems to have taken heed of these admonitions, at least with regard to our real estate market.

How? Amidst the recent downturn some genuinely good, or at least constructive, changes have taken shape. For example, the Missoula housing market, partly as a result of not having home prices previously bid to the stratosphere, has not crashed in terms of homes sold, prices paid, or properties foreclosed. Also, houses have gotten more affordable, especially for first-time home buyers.

Further, homeowners have been reminded that a house is a consumer good, not a tradable commodity or a cash-spewing ATM. Many of us, including leaders of our federal government, have learned through painful experience that some renters are not qualified or suited to be homeowners. Lenders have been reminded that mortgage loans carry risks, and risks must be properly assessed and priced.

This is not to say that the crisis that would be a shame to waste is not a crisis. Much of the data presented in this report document declines and difficulties that are all too real, imposing strains on families and households ranging from sleeplessness all the way to joblessness, divorce, and even homelessness.

With these impacts, the only thing about a “good crisis” that might truly be good is getting out of it. Fortunately, a variety of economic and real estate signals at national, state, and local levels have turned from blinding red to at least a weak shade of green, or a caution indicating yellow.

For example, home prices, except at the top-most ranges, appear to have bottomed, with entry-level homes showing some recent modest gains. December’s increased home sales nationally were likely aided by mortgage interest rates hovering around 5%, the lowest level in decades.

Nationally, new home sales in 2010 are predicted to increase by 25% over their 2009 total, according to National Association of Home Builders senior economist Bernard Markstein. He says a share of this gain will result from a significant drawdown in housing inventory, which at the end of 2009 stood at 1971 levels.

More broadly, shoppers are again opening their wallets. Unemployment may have peaked. The current generation of Americans in the prime household-formation years of 25 to 44, the so-called Echo Boomers, exceeds the Baby Boomer generation in size by more than 5 million members, even without considering population-boosting immigration.

Yet some lights, especially those that influence housing, are still red. Missoula real estate shows signs of a bifurcated recovery: While homes sold for $275,000 and less recently registered gains in sales and price, those priced above $275,000 continue to show deterioration in number of sales and median price.

Also, an unknown number of properties are being held off the market until prices improve. If many of these are offered at about the same future date, prices may again retreat. Another factor is that the foreclosure rate, which ultimately dampens new home sales and prices, could potentially spike, as banks haven’t yet dealt with all of the homes currently under water financially.

A main concern is the ongoing and unprecedented liquidity crisis. Fannie Mae and Freddie Mac were originally established to make sure there was always liquidity in the secondary markets. But they are now on federal life support, with billions of dollars being fed to them until their futures can be determined.

Lenders will continue to assess their risk, which may directly impact the availability of certain programs and underwriting guidelines. The direct impact to the borrower could be larger down payments, additional fees, and higher mortgage insurance premiums, depending on the type of financing.

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

This catalog of data seems all-in-all to send mixed messages about 2010 and the early years of our new decade. The consensus forecasts of real estate and economic experts anticipate a slow recovery of the US economy and a likely even slower recovery of US housing.

Locally, a similarly slow progression is likely, according to a many of the speakers at the Missoula Business Forum last December. But one of those speakers, University of Montana economist Larry Swanson, added that our region benefits from starting its recovery from a hole that’s not as deep, in many respects, as it is for much of the country.

We concluded in last year’s Housing Report that “Missoula’s housing market … would be envied by most of the country. This state of affairs … provide[s] realistic potential for a stronger local housing market when the economy begins to rebound.”

We were partially correct in this forecast, as a few important measures, such as number of homes sold and housing affordability improved in 2009. But other measures deteriorated further. As a result, strangely enough, we are left in early 2010 with the same conclusion as in 2009: “This state of affairs … provide[s] realistic potential for a stronger local housing market when the economy begins to rebound.”

It is the economic rebound, nationally as well as locally, that remains elusive. The potential repercussions of the Smurfit Stone & Macy’s closures are yet to be seen, but are likely to slow recovery. The question remains; are recent positive economic indicators, in such measures as home sales, gross domestic product, and unemployment signaling a resumed economic expansion? Or are these “false positives,” with our economy headed for a dreaded “double-dip” or “w-shaped” recession, in which positive signals prove to be only a brief respite before the economy nosedives again?

With the data provided, it is our conclusion that we are likely at the beginning of a recovery, and that Missoula’s economy and housing market will show renewed strength in the near future. Only time will tell if we’re right about that. What we know for certain is that Missoulians will fight through adversity and celebrate the strengths we gain through community.

Download the 2010 Missoula Housing Report

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