HOMEBUILDING IN MONTANA'S HOT MARKETS: Assessing the Response of Builders to Higher Prices.

• Author: Bridge, Brandon
• Position: RESEARCH

The housing price growth that has pushed the issue of housing affordability to center stage began in earnest around the year 2000. Growth in prices accelerated to average 7.4 percent per year between 2000 and the peak of 2009, more than twice as fast as the 3.5 percent gains per year in median household income over the same period. With strong price growth resuming after the recession, the result is that housing prices have more than doubled since 2000 in five Montana counties, with 18 out of the 26 counties with available data reporting price gains of at least 70 percent through 2017.

Those price gains have caused hardship for buyers and a windfall to sellers, of course. But they have also sent a market signal to builders and developers. Have builders and developers responded to higher prices by expanding the supply of housing through new construction? Or have constraints on the marketplace--imposed, say, through local building regulations or by shortages in the construction workforce --held rates of housing construction in check?

A state-level analysis conducted by EcoNorthwest, a Portland-based consulting firm, recently investigated that question. By comparing the response of builders to fluctuations in prices before the year 2000, the firm estimated how much housing would have been built had the historical, pre-2000 relationship between new building rates and prices continued unchanged.

Their conclusion was that 23 states showed an under-production of housing in the years since 2000, amounting to a total of 7.3 million housing units. That is to say, had builders in those states responded to prices after 2000 the same way they did prior to that year, 7.3 million more housing units would have been built than actually were. The shortfall was dominated by California, which accounted for almost half the total. Montana was not included in the group of underbuilding states in the EcoNorthwest analysis.

Housing Under-Production in Montana Markets

Housing markets are fundamentally local, and the finding that in Montana as a whole builders have responded to higher prices since 2000 in essentially the same fashion as they did prior to that year may not hold true for markets within the state. Using the same methods as the EcoNorthwest study, we examined the pre- and post-2000 relationship between rates of homebuilding and housing prices by:

* fitting a statistical model between total residential building permits, on the one hand, and housing prices...