Real Estate and Construction: Boom or Bubble?

• Author: Sheehan, Derek
• Position: MONTANA ECONOMIC REPORT

The home price escalation in 2021 feels a bit like the housing market of the early 2000s. The question is whether this is a speculative bubble or a boom driven by demand. A proper understanding of Montana's current housing market will require a more in-depth analysis than is shown here. For now, well settle for a comparison of key market dynamics today versus what we saw in 2007.

One fundamental evaluation is the relationship between changes in housing prices to changes in rents, roughly owner and renter housing costs. Many economists expect what we saw from 2011 to 2019 (Figure l). Home prices and rents fluctuate year-to-year but follow similar trajectories over time dictated by the economic fundamentals--supply and demand of housing. A departure from this relationship is one indication speculation is driving housing prices into an unsustainable bubble.

We can see in Figure 1 that a deviation from this relationship occurred in the lead up to the Great Recession, peaking in 2007 where prices were 22.43% higher than rents. In 2021, prices are 18.29% higher than expected rents. Thus, Montana is approaching 2007 levels. However, there are two key differences between housing markets in 2006 and 2021. First is housing construction and interest rates.

What Is Different About 2021?

The first difference is housing construction occurring before the peak, from 2000 to 2007, and from 2011 to 2021. From 2000 to 2007, Montana added an average of 7,390 new housing units each year. This means there was substantial building activity and a growing supply of homes during the boom. This led to a decline in prices after housing demand evaporated in 2008. Prices continued to decline until 2011. Since 2011, Montana has produced...