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The near meltdown of the housing finance industry has sent shock waves through the nation's economy. While Montana hasn't experienced the number of mortgage foreclosures or other financial disasters as some states, it has been a tough year for the state's housing industry. Montana housing statistics for 2008 show a significant reduction in existing home sales and new construction with modest, if any, price appreciation. The number of purchases of vacation homes and investment properties has fallen considerably.
Over the past year, the sale of existing homes in Montana fell 19 percent to 20,400. This decrease follows three years of relatively stable sales totals, with 2005-07 sales of 25,400, 26,800, and 24,100 respectively. (1) New home construction has declined by one-third (34 percent), with 2,074 housing starts through June 2008, compared with 3,138 housing starts for the first six months of 2007. (2) And while average home prices statewide have not fallen--at least not yet--the average sale price of a home grew by less than one-tenth of 1 percent between midyear 2007 and 2008 using the purchase-only Office of Federal Housing Enterprise Insight (OFHEO) index. (3) This after average price increases of 11 percent and 8 percent in 2006 and 2007.
While the number of Montana sales of vacation or investment properties in 2008 is not readily available, it is likely to have followed declining national trends. In 2007, nearly 33 percent of homes sold throughout the nation were vacation or investment properties. (4) This percentage has been as high as 40 percent in 2005, with 11 to 14 percent of homes sold each year considered vacation properties and 21 to 28 percent investment properties. In 2007, the number of vacation properties sold throughout the nation fell one-third in 2007 to 740,000 units, while the number of investment properties sold dropped by nearly 20 percent.
Why the Decline?
Montana is experiencing a mix of direct and indirect impacts of the nation's housing industry crisis. Montana has some direct exposure to the mortgage financing instruments (subprime, Alt-A, etc.), that has represented a large part of the problem, and these loans are probably responsible for some of the home foreclosures we have seen recently in our state. But Montana has avoided the significant mortgage default problems facing other parts of the nation because most Montana home buyers did not purchase subprime mortgages.
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Mortgages are purchased either to buy a house or to refinance an existing property. Refinancing can be used to reduce the length of time remaining in payments and/or the monthly payment amount, freeing cash for other spending.
Two types of loans that created problems for the housing industry are subprime loans and adjust able-rate mortgates. Subprime loans, which typically did not require the same level of credit-worthiness to obtain, had a higher risk of default and thus carried higher interest rates and other payments. Adjustable-rate mortgages (ARMs) shifted some of the risk of changing economic conditions to the borrowers, who could see their mortgage payments increase because of an increase in prevailing interest rates.
Mortgages on Montana properties were much less likely to be subprime or carry variable interest rates. In fact, just 6 percent of loans serviced were subprime. This is less than half the national average) ARMs account for 26 percent of Montana mortgages, compared to a national average of 33 percent. The lower exposure to subprime and ARMs translates to fewer current mortgage problems. While nationwide 3.6 percent of all loans were seriously delinquent (which includes both 90 days past due and in foreclosure), in Montana the number is 1.5 percent (Table 1).
Indirect impacts of the nation's housing meltdown on Montana include reduced credit availability and tighter mortgage loan requirements. The drastic shrinking nationwide of the pool of available money to fund home construction or mortgage activities means that builders and developers have less credit available and less ability to self-finance speculative construction. Prospective home buyers in Montana and out-of-state face tighter mortgage loan requirements, and fewer financial institutions are willing to make these loans.
Conclusion
The building and real estate industries report fewer sales for all of these reasons, and for the time being these industries are not likely to grow. However, home prices do not appear to be falling, and if our h)w delinquency rates persist, in most parts of the state, home values should at least hold. Outside economic forces will likely determine how long this slowdown lasts. Montana's internal economy will fuel a base line of industry activity, but housing industry growth will be tied to growth resuming in the overall U.S. economy.
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An Industry Overview
The U.S. Census estimates that there were 435,533 houses, apartments, and mobile homes in Montana in 2007. The counties with the largest population have the largest number of housing units. Yellowstone County has both the largest population (nearly 140,000) and most housing units (nearly 60,000), and ten Montana counties with 68 percent of the population have 70 percent of housing units (Figure 1, page 8).
The majority of Montana households live in single family, detached structures (69 percent), while the rest live in multifamily units (condos or apartments). Statewide, 70 percent of these households own their homes, but this rate also varies from county to county.
There is room to spread out in Montana, with a ratio of three housing units per square mile compared with the U.S. average of 36 housing units per square mile. If Montana housing density were at the U.S. average, there would be more than 5.25 million homes and a state population of about 12.4 million.
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How Montana Compares to Surrounding States
Montana has more housing units than most neighboring states, with 20 percent more units than North Dakota, 36 percent more than South Dakota, and 75 percent more units than Wyoming (Table 1). Idaho has roughly 50 percent more homes and apartments than Montana, with the Boise area itself representing as many units as one-half of Montana's total housing population. However, there is some debate concerning the rate at which Montana and surrounding states added housing units because building permits are not required in some parts of Montana, but are required in other states.
The median Montana owner-occupied home was valued at $155,500 in 2006. Compared to neighboring states, Montana homes were 50 percent and 40 percent more expensive than North and South Dakota homes respectively, and within 5 percent of the median prices for Wyoming and Idaho homes (Table 1).
Based upon the OFHEO price index, since 2000 the average house price in Montana and surrounding states grew by between 50 percent and 90 percent (Figure 2). In the past year (ending in mid-2008) prices of homes either sold or refianced in Montana, the Dakotas, and Wyoming grew from 3.5 percent to 4.5 percent, while Idaho grew by 1.2 percent. In comparison, during the same time period, California and Nevada home values fell by 16 percent and 14 percent respectively.
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Notes
(1) National Association of Realtors, http://www.realtor.org.
(2) Montana Building Industry Association, http://www.montanabia.com.
(3) Office of Federal Housing Enterprise Oversight, http://www.ofheo.gov.
(4) National Association of Realtors, http://www.realtor.org.
(5) Mortgage Bankers Association, http://www.mbaa.org/dcfault.htm.
Scott Rickard is director of the Center for Applied Economic Research at Montana State University-Billings.
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