Rising interest rates stifle Montana buyers

Looking for a home to buy in Missoula’s pressure cooker housing market over the past year, Jeff Moss has been thinking a lot about interest rates.

Like most first-time home buyers, Moss and his longtime partner, both Montana State University alumni, don’t have the hundreds of thousands of dollars needed to buy a home without turning to a bank or a credit union for a loan. This, in turn, makes their chances of home ownership dependent on the loan terms banks can offer.

And with interest rates rising dramatically this year as the Federal Reserve tries to fight inflation, the couple have seen that financial landscape crumble under their feet. Higher rates make it more expensive to borrow money, capping their purchasing power at a lower price, even if they could afford a higher monthly mortgage payment.

“We basically knocked $50,000 off our budget,” Moss said.

Moss, a civil engineer, said he and his partner, who works for a nonprofit financial services organization, are lucky to be in a great financial position – they have both good incomes and minimal living expenses. without children or car payments. Even so, while he’s seen starter home prices continue to rise, Moss worries their chance to break into the Missoula market has slipped away this spring.

“I’m not sure, but it looks like we went over an unrealistic budget and missed the opportunity to buy here,” he said. “It’s quite a heartbreaking experience. I hope we are wrong. But I wouldn’t be surprised if we were right.

Similar stories are playing out across the state, real estate professionals have told Montana Free Press in recent weeks. Higher interest rates may chill a housing market fueled at record temperatures by pandemic-era demand over the past two years – but they don’t necessarily provide relief to would-be buyers who have seen their aspirations hampered by the pandemic. great Montana housing crisis.

Realtors working in Helena, Flathead Valley, Bozeman and Billings generally said homes were still selling, but properties were generally seeing fewer offers and staying on the market longer than they expected. were trends last year that give buyers more bargaining power. Additionally, sellers find in some cases that they need to cut back on the stretched listed prices – a sign that the market might be plateauing.

The median sale price for single-family homes in Missoula fell slightly in July, according to Montana Regional MLS data, falling to $525,000 – $37,500 below the June median, but still up $162,500, or 30%, over the past two years. Similar trends are evident in Kalispell, Helena and Great Falls. In Great Falls, the median home price last month was $285,000, a 24% increase since July 2020.

These four markets are also seeing homes stay on the market longer. In Kalispell, for example, single-family homes averaged 71 days on the market last month, according to the regional MLS, up from 24 days a year earlier.

Given the complexity of the Montana real estate market, it is difficult to pinpoint a specific reason why the housing market appears to be cooling. But real estate agents generally cite higher interest rates as a key factor, noting that they dampen the demand side of the market equation by reducing the purchasing power of Montanese who want to buy.

Whitefish-based Glacier Sotheby’s estate agent Angie Friedner said she’s seen the market in her area start to soften in some price ranges as buyers’ purchasing power dwindles.

“Because there was so much pent-up demand from buyers, homes are still selling — probably not as quickly as six months ago,” Friedner said.

Breena Buettner, a Helena-based real estate agent with Keller Williams, said rising interest rates have sometimes become the straw that breaks the camel’s back, forcing clients to either give up their home search or risk their stability. financial situation by accepting larger mortgage payments. .

“A lot of my clients had been looking for a house for a year and constantly outbid because they didn’t have the money to go over the asking price,” she said.

Buettner said she hears speculation that higher interest rates could be a blessing, perhaps discouraging investors or out-of-state buyers from snapping up homes that might otherwise go to existing residents. .

But, she says, “What I fear is that it will limit the purchasing power of local Montanese.”

Longtime Billings lender Beth Klunder of Western Security Bank said she also saw the effect of rising interest rates and prices. While Billings has historically been isolated from the tourism-related money flowing into Bozeman, Missoula and Flathead, out-of-state buyers have been pouring in over the past two years, she said. Newcomers usually arrive with cash in their pockets selling homes elsewhere and, accustomed to higher prices in their previous markets, often see a deal on prices high enough to leave locals in shock.

Klunder said three or four years ago, before COVID-19 hit, a typical starter home in Billings — built in the 1960s, with maybe 1,000 square feet on the ground floor plus a full basement and garage – usually sold for $200,000. At the 2.875% interest rate available at the time, factoring in property taxes and insurance, a first-time home buyer would be looking at a monthly payment of about $1,200 a month, he said. she declared.

Today, Klunder said, the same home will sell for $300,000, and with interest rates closer to 5.5%, buyers are looking at a monthly payment of around $2,100. That’s a 75% increase.

“It’s getting harder and harder to qualify people – and people just aren’t going to buy,” she said.

“That’s the pricing for our premises right out of the market,” Klunder added. “And if it continues like this, people just won’t be able to buy a house here in Billings.”

The Federal Reserve’s benchmark interest rate has been set near zero since the early stages of the COVID-19 pandemic until earlier this year, a fiscal policy intended to stimulate the economy by making it easier to underwrite consumer and business loans. As inflation has become a major concern this year, hurting Americans with rapidly rising prices for gasoline, consumer goods and groceries, the central bank has repeatedly hiked its benchmark rate in the purpose of cooling the national economy.

As these rate hikes ripple through Montana’s economy, at least some aspiring homebuyers are hoping that higher mortgage rates will eventually reverse some of the pandemic-era home price growth, giving them more opportunities to buy.

Andy Boyce, a Missoula-based biologist, said he had been looking to buy for a few years but hadn’t made any offers recently because there was nothing available in the price range he was looking for. and her fiancé could afford.

Unlike Moss, Boyce said he’s less concerned about how much his monthly mortgage payment will be and more about having enough saved up for a down payment of more than $40,000. Lower purchase prices, he said, would make it easier for them to reach the 20% down payment threshold where they could avoid buying mortgage insurance.

“It would make it easier for us to get over this big down payment hurdle,” Boyce said.

Meanwhile, Moss and his partner are in limbo, wondering if they still have a chance to build a long-term life in Missoula — or what they’d have to sacrifice to get there. They would like to live in a walkable part of town, he said, rather than buying on the outskirts of town, somewhere where their way of life would eventually revolve around their cars. They’ve already given up looking at bigger homes and thought about neighborhoods without sidewalks and kitchens with dishwashers.

“At this point, I’m pretty sure I won’t be able to give my kids, if we have them, the lifestyle we grew up with,” Moss said. “I honestly don’t know if we can even afford to have a child.”

The housing complex where he and his partner currently live was recently sold, Moss said, leaving them worried that the new landlord would raise their rent by hundreds of dollars a month. He has seen some of the houses for which unsuccessful offers have been put on the rental market by their new buyers, he added, indicating that they were bought by investors rather than buyers who intend to live there.

As they try to balance their dreams with the cold realities of a booming market, sometimes it seems like things are moving too fast to find a footing, Moss said.

“It’s hard to feel like we’re potentially losing what I thought wasn’t a lot to ask for,” he said.

“Honestly, like a two-bedroom, one-bathroom – there’s not a lot of room to compromise,” he said.

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