Bidding often fierce - and pricey - in a seller's market
Drive around any neighborhood in Missoula, and read the "For Sale" signs. But be prepared for sticker shock if you decide to look closer. No, those home prices aren't misprints. And while it may seem extra zeroes have been inadvertently added, in many cases the asking price is nothing more than the opening bid.
Cara Morgan, a real estate agent with Lambros Realty, knows the trend all too well. Early this spring, she helped one of her clients submit a bid for a small, bungalow-style house in Missoula's university district. The client bid $11,000 more than the asking price of $149,900 - and lost out to another, even higher bid.
That's only one situation among many this year, in which she's seen houses sell for significantly higher than the original price.
"Whenever I have clients looking for a cute little home, nothing fancy, in central Missoula, under $200,000, these kinds of bidding wars can happen to them monthly," Morgan sighs. "I've had individual clients who have already lost out several times this year … The market is just going wild right now."
That theme is echoed in virtually every quarter of the housing market - from low-income housing advocates, to developers, to buyers and sellers. The year is shaping up as a rough-and-tumble market for Missoula's potential home buyers - and a dream for sellers.
"It's very 'Alice in Wonderland' out there right now," says Bob Oaks, executive director of the North Missoula Community Development Corp., which is currently looking to purchase property on Missoula's North Side to develop low-income housing. "You can pretty much see properties appreciate on a weekly basis right now. Stuff that I saw two weeks ago not selling, is selling today at the asking price … I can't find anything that we can afford that fits our needs."
During the month of April, the median price of houses sold in the Missoula downtown area was $165,500 - compared to $146,000 during the same month last year, according to data from the Missoula County Association of Realtors. That's a 13.35 percent jump in one year. Prices in the rest of the county and surrounding areas have seen similar increases.
But those numbers tell only part of the story. Median price, after all, reflects the point at which half the sales are higher, and half are lower. It doesn't speak to the competitiveness among buyers looking for entry-level homes, or the price that buyers are paying for increasingly smaller properties.
"The builders are trying to build affordable housing, and size is an easy area to sacrifice," says Tom Stuckey, a local residential property appraiser, who says that per-square-foot pricing has increased substantially in recent years. "Builders are taking smaller sites and building smaller homes, and yet your average home price is slowly increasing."
Despite this less-for-more trend, data recently collected by the Missoula County Association of Realtors indicate that houses on the market today are generally selling at a higher percentage of asking price than usual, according to association president Germaine Haberman, who also is a real estate agent with Gillespie Realty.
"It's a fair assessment to say most properties are going either at, or over the asking price right now," says Haberman.
And this, despite the fact that the city is well on its way to setting a record for new residential construction. A total of 400 single-family homes and duplexes have been permitted so far this fiscal year, at a valuation of $38.7 million, according to data provided by the city Building Inspection Division. This time last year, 263 single-family and duplex dwellings had been permitted, at a value of $25.5 million. Including all residential and commercial construction, the total valuation of new permitted construction has more than doubled last year's record-setting construction boom.
"Last year was our biggest year; this year is blowing that out of the water," says Steve Hutchings, Building Inspection Division superintendent for Missoula. "And from everything I'm hearing, they're still not building the houses as fast as they're selling. I know people here at the city building who have bought houses that haven't even been built yet."
The factors affecting the explosion are many. Today's historically low interest rates, combined with increasingly aggressive loan approval criterion from lenders, have brought an unprecedented number of potential buyers into the market. Nationwide, the average 30-year, fixed-rate mortgage fell to 5.4 percent as of May 21, according to a national survey of large lenders by Bankrate.com. That's the lowest average rate on record since reliable data began to be collected in the mid-1960s. Last week, several mortgage companies were advertising 30-year fixed interest rates as low as 5 percent for first mortgages in Montana, according to Bankrate.com.
In addition to bringing more buyers into the marketplace, today's low interest rates may have a direct influence on home prices. Low rates can mean lower monthly payments for the same-priced property; but they also mean a higher-priced property for the same monthly payment. Buyers who take out a $150,000 mortgage will pay $805.23 in monthly principle and interest on a 30-year, fixed-rate mortgage at 5 percent interest. That's the same monthly payment paid by buyers who took out mortgages of $109,740 when rates were at 8 percent, less than three years ago.
"It's becoming more like a car loan scenario, where people are looking at the payment rather than the principle," says Tom Swinson, president of Montana Business Capital, which helps arrange financing for real estate development. "That can potentially influence the price of the property, with interest rates so low."
Low interest rates aren't only good for first-time home buyers; they're also attractive to investors who have been hammered by the continuing weakness of the stock market. And then there are the homeowners who - thanks to appreciation in their own home's value - are able to take equity out of their home, and purchase a second, investment property.
"Investors literally from coast to coast are seeing Missoula as an attractive investment opportunity," says Swinson. "They have an incredible appetite for projects here."
Swinson is currently involved in the development of more than 300 new homes in so-called "greenfield" areas - previously undeveloped tracts of land in Missoula's outlying suburbs. The projects are funded by investors from as far away as New York.
"They (outside investors) see the job growth and the activity in the housing market, and the balance apparently indicates to them that this market won't slow soon," says Swinson.
Existing home sales nationwide set a new record in the first quarter of 2003, according to data from the National Association of Realtors. Not surprisingly, the Mortgage Bankers Association of America predicts that mortgage loan originations will set a new record this year. Ditto new-home construction.
But those national trends alone don't explain Missoula's boom in home prices. Just as important, if not more so on the local level, is the tight ratio of available homes to willing buyers. The current ratio between houses appearing on the market and houses sold is approximately 1-to-1, according to data collected by Lambros Realty. Most experts believe that that ratio should be 3- or 4-to-1, in order to be fairly balanced between buyers and sellers. The tight supply has played out in fewer houses actually changing ownership so far this year, than in any year since 2000.
"The increase in prices is really largely a consequence of supply being low, and demand being high right now," says Haberman of the Missoula County Association of Realtors. "We saw this trend starting last year and it's continuing now."
While big-money investors are behind the push to build new subdivisions on Missoula's fringes, many individual investors - both local and out-of-state - are eyeing individual existing properties within Missoula. This fact is nothing new; but some in the local community believe that the priorities of those investors have recently shifted in a way that puts them even more squarely in competition with first-time home buyers.
"When I'm looking to help an investor buy a property right now, the first thing I want to see is the legal description of the lot and the number of bedrooms in the house," says Cass Chinske, a local real estate agent and former City Council member. "With the occupancy-standards ordinance dead, people can put more renters into houses. Also, in the past year, buyers have realized what you can do with this push for infill."
What you can do, according to Chinske, is build additional houses on existing lots - in some cases, lots that previously would have been deemed too small to be subdivided. That's because of recent efforts led by the mayor's office and other advocates to promote infill - that is, increased housing density within the city limits. In the past two years, the City Council has passed two density-related ordinances, one allowing for so-called density credits and another creating a zoning variance for planned neighborhood clusters.
Density credits allow builders to increase housing density by up to 50 percent over the regular zoning for a given location, within certain defined limits. Planned neighborhood clusters allow for a variance in setbacks between structures within a development, making it possible to put more houses in a given space.
Advocates of infill believe that increased density will curb suburban sprawl in the Missoula and Bitterroot valleys, reduce traffic congestion on major roads and provide affordable housing to more people within the city limits.
"Things that work to increase the housing supply will have the most effect on softening the price increases," says Missoula Mayor Mike Kadas. "What's driving prices up so sharply is, simply, more people demanding more houses. The only way to slow the demand inside the city is with increased density."
But Chinske believes that, at least in the short term, the push for infill is pushing many starter homes in Missoula far out of the price range of prospective first-time buyers. He points to the example of one of his neighbors in the lower Rattlesnake. The neighbor purchased a small home on an oversized corner lot, and immediately subdivided the property into two small lots - lots that previously would not have conformed to city zoning restrictions; but which, due to the new density bonus rules, are now acceptable as individual lots. The small second lot is currently for sale, at an asking price of $57,000.
"We're going from the 'Garden City' to the 'City with a House on Every Garden,' " says Chinske. "The density bonus and planned neighborhood cluster capabilities have basically tacked 50 grand onto the asking price of any home on an oversized lot."
That may be, says Kadas, but in the long run, the resultant increase in the number of houses in the city should help keep home prices in check. The important thing, he argues, is to implement design standards for infill.
"We've gone through lots of cycles of infilling over the last century, so it's not necessarily a bad thing," says Kadas. "The biggest long-term detriment to neighborhoods is the quality of the infill. We need to have a clear set of design standards that require that new homes that are being built are within the character of the homes in the neighborhood or what we want to see that neighborhood transition into."
Chris Lounsbury has spent his winter and spring searching for a home to buy. After five years working as a mid-level county employee while renting a small house on Missoula's North Side, the 32-year old Lounsbury has managed to save up a modest down payment.
Nevertheless, for him, home-hunting means a long drive west.
"I knew I was well priced out of Missoula," says Lounsbury, who hopes to spend somewhere in the neighborhood of $80,000 for a home. "I figured I might be able to get something in Huson or Alberton."
Even there, he says, the hunt has been unproductive. "I've found two or three houses in my range, but they all needed so much work that they're not really in my range once you factor in repairs."
Recently, he bid on a house in Alberton - and lost out. "I bid about $8,000 below the asking price, because it had some significant damage. It went for $1,000 more than I offered, without any of the contingencies that I had put in my offer."
So Lounsbury has continued looking - searching ever farther outside the city limits, ever farther from his office at the courthouse.
"It'd be nice to say I can at least find a house within the county, but … well, we'll see," he says.
According to many affordable-housing advocates, entry-level homes in Missoula and outlying areas have never been so far out of reach for low-income home buyers, even as the nation's Home Affordability Index hit a 30-year high in the first quarter of this year, according to the National Association of Realtors.
"Locally, the gap between what our clients can afford and what is available on the market is getting bigger," says Ellie Sigrist, housing services coordinator at homeWORD, a Missoula-based nonprofit. "As that price keeps going up, fewer and fewer in the lower-income bracket can purchase homes."
In 2000, homeWORD opened a Home Ownership Center, which offers home-buying assistance programs to lower-income area residents. At the time, notes Sigrist, the Home Ownership Center kept track of all area listings for houses under $100,000. This year, that price-point was raised to $130,000.
"At $100,000, we just simply weren't finding anything to put in the folder," says Sigrist.
No wonder. As of this past Thursday, only two residential properties were listed under $100,000 within the city limits (including Target Range), according to Haberman of the Association of Realtors. Even in the $100,000-150,000 range, a mere 25 properties were listed, many of them condominiums and townhouses.
"Families are getting priced right out of our central neighborhoods, or else they get stuck renting," says Bob Oaks of the North Missoula Community Development Corp. "That's contributing to the revolving-door phenomenon and declining enrollment at schools like Lowell, while the outlying schools are filling up. It's hard to have an active and involved community where everybody is transient."
Census data paint a dismal picture of housing affordability trends in Missoula. In 1990, 11.2 percent of Missoula city homeowners paid 35 percent or more of their household income toward a mortgage (most experts consider any amount over 30 percent of household income spent on mortgage payments to be an undue burden). By 2000, the percentage of Missoulians spending more than 35 percent of income on mortgage payments had increased to 18 percent - meaning almost one in five residents of Missoula pay considerably more for their mortgage than recommended by financial advisers. The average monthly mortgage payment for city residents increased from $626 in 1990, to $984 in 2000.
Perhaps most striking, the median home value in Missoula County (as gauged by asking price for houses offered for sale at the time of the census) jumped from $65,500 in 1990, to $136,500 in 2000 - an inflation-adjusted increase of 59.7 percent. Yet during the same time period, median household income only rose from $21,033 to $30,366. Adjusted for inflation, that represents only a 10 percent increase in median household income for the period.
In other words, while real wages have increased modestly, home prices have shot through the roof.
"We need to pay our people more - that's the real problem underlying everything here," says Patty Kent, director of housing and development for the Western Montana Mental Health Center, which assists mentally ill people in purchasing property. "The crux is that housing and wages are out of whack. Housing is the easiest thing to pick on, but the problem won't really be solved until we do something about what people earn around here."
Yet despite the increasing disparity between wages and home prices, and despite unprecedented development both within and outside the city limits, few local observers believe Missoula's housing market risks a dot-com-like bubble burst in the near future.
"As the stock market becomes more attractive, or as interest rates rise, you wouldn't expect as rapid of acceleration in real estate prices," cautions Swinson of Montana Business Capital. "But even so, in most real estate markets historically, prices don't go down; sales simply slow during those periods."
Hence it might be time to brush aside the sticker shock, and take the dive.
"Some relative told me that buying a home would be a joyous experience," says Chris Lounsbury. "I've realized - they lied."
Reporter Joe Nickell can be reached at 523-5358 or at firstname.lastname@example.org