This is THE question on everyone’s minds in Bozeman right now. We’re entering the busy season of real estate (which never really seems to slow down anymore) and home prices continue to rise in Bozeman and the surrounding areas. To answer this question, we take a look at Bozeman’s previous bubble in 2005-2006 and ask local experts their opinion on the current real estate market and whether they think the bubble will burst.
THE PAST
In 2003 the median home price for a single-family home in Bozeman was $189,000. By the time we reached the height of the bubble in 2006 that price had jumped to $310,000. In 2008 the financial crisis hit and the median home price dropped 9.7% to $258,225. There are similarities to the current Bozeman real estate market now and that time. Things are busy and moving just as they were in 2005. Amber Docken, a loan office at Fairway Independent Mortgage said, we are definitely seeing some of the same exuberance in the market that we saw last time. Because of this, many of her clients are experiencing the challenge of competing against multiple offer situations. We are seeing homes sell for over purchase price with 5+ offers within days of the home coming on the market. This contributes to the belief that “I’ll get priced out if I don’t buy now” which can be a dangerous mindset. It leads buyers to purchase a home they might not otherwise buy. This is what happened to a lot of buyers in the lead up to the last crash only to find themselves unable to move when they realized they had purchased the wrong home.
According to Sherrie Kitto, a loan officer at Cornerstone Home Lending, Inc, one of the big differences this time around is the type of mortgage financing available. “Mortgage qualification standards were much less stringent before the meltdown.” Back then a borrower with a 600-credit score could purchase a home with no money down on a stated income loan. Almost always, these loans were structured as a 2 or 3-year Adjustable Rate Mortgage (ARM) with a 2 or 3-year prepayment penalty. This wasn’t an issue when we were seeing rapid home value appreciation. It only became an issue when the Alt-A (sub-prime) lenders shut down almost overnight. There was still a large home inventory, but the pool of qualified buyers was drastically cut therefore pushing prices (home values) down. The real trouble started when all of the ARM loans reached their adjustable period and rates increased. Homeowners were in a position where they had negative equity and could not refinance out of their high payments. This, along with unemployment, was what caused the unusually high foreclosure rates we saw after the bubble burst.
THE PRESENT
Will we see the market drop in Bozeman anytime soon like we did in 2008? Most real estate professionals agree, no we won’t. The market is no longer built on high-risk loans but on qualified buyers rather than artificial demand from unqualified buyers. While we most likely won’t see a drop, we will eventually see a flattening or correcting of the market. Inventory remains low, with a lot of home buyers. Bozeman continues to grow evident by MSU enrollment and the US Census showing our population increasing faster each year. It’s easy to understand the concern about the bottom falling out, however, there is no actual evidence to support this. Interest rates are stable, buyer demand is high and inventory is low. The market will eventually see a decline as all financial markets do, but it doesn’t appear to be in Bozeman’s immediate future.
One thing to note, according to Jim Applebee, a real estate agent at our office, as we begin 2018 we are seeing a severe shortage of building lots which are pushing available lot costs higher and will cause a steep jump in home prices that cannot continue long-term. As we see new neighborhoods begin and grow it will increase the supply of lots and stabilize lot prices, but that will probably take a couple years.
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