Will Bozeman’s Real Estate Bubble Burst?

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This is the question on everyone’s minds in Bozeman right now. As we enter real estate's busy season, home prices are continuing to rise in Bozeman and it's surrounding areas. To answer this question, we take a look at Bozeman’s previous housing bubble and ask local experts their opinion on the current real estate market and whether they think the Bozeman 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 in Bozeman dropped 9.7% to $258,225. Now, we see quite a few similarities in Bozeman's current real estate market. The real estate market is moving quickly just as it was in 2005. Amber Docken, a loan officer at Fairway Independent Mortgage says that we are definitely seeing some of the same exuberance in the market that we saw in 2005 and 2006. 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 hitting 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? 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 market's 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.

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.

THE FUTURE

Many are curious if home prices will keep rising in the area. Most real estate professionals agree that prices in the Gallatin Valley will continue to rise for the foreseeable future, Amber believes that consumer behavior has changed significantly in the past 10 years. Consumers are making their decisions based more on lifestyle rather than where they can find jobs. More and more people are able to work remotely which allows them to have this flexibility, making Bozeman popular with people seeking a different lifestyle. Even with a decline in the general economy, the Bozeman area should continue to see stability and even slight increases. According to Sherri, as prices continue to rise in Bozeman, buyers will look for homes in the areas surrounding Bozeman. This is a trend we are already seeing as buyers look to alternatives such as Manhattan, Three Forks and Livingston to find affordable housing options.

This time around, from a local level, there are limited options to impact the current growth cycle as pointed out by Amber. Zoning laws could be amended to restrict the future development in the Gallatin Valley which could prevent an oversupply of homes. There are other areas in the west that have done this through an Urban Growth Boundary which act to artificially limit the growth. It seems that Bozeman will continue to become more of a metropolis with developing suburbs surrounding it.

WHAT DOES ALL THIS MEAN?

During the lead up to the bubble in 2005-2006, Bozeman saw many small changes. This time around, the changes are feeling more transformative. The actual feel of Bozeman seems to be shifting which begs the question, how does this look for locals? How does it look for newcomers? We’ve all seen and heard of this happening in other Rocky Mountain towns, such as Boulder Colorado or Bend Oregon. There is plenty of controversy over Bozeman’s growth. There are some locals who are fighting it and plenty that embrace it. How do we handle the growth, increase in real estate prices and population? We could complain or try to grin and bear it or, realize that you have to take the good with the bad. Understand that Bozeman's growth is inevitable and remember why we all love it here so much in the first place. Our area continues to grow because people want to live in a place where outdoor adventures, community, and the small town feel is balanced with the amenities of a city. As for the real estate bubble bursting, Bozeman will most likely see solid growth and appreciation in our market for a long time…we just may have some small ups and downs along the way.