WHERE HOUSING IS HEADED: How Will Today's Imbalances Be Resolved?

• Author: Barkey, Patrick M.
• Position: MONTANA ECONOMIC REPORT

Forecasters spend a lot of time analyzing trends in data for a simple reason: Those trends form the foundation of their projections. And for buyers, the trends in housing prices are alarming. After rising faster than incomes for seven consecutive years, home prices took a sudden and surprising jump upward across Montana in the wake of the pandemic outbreak, pressing affordability for buyers in some areas to the breaking point. So, the question becomes, what lies ahead?

Ultimately, the price of housing, like most goods and services, depends on the interaction of supply and demand in each regional market. But there are many unique aspects of housing that lie behind those familiar concepts. Since new housing takes time to plan, develop and build, surges in demand, like what we saw in late 2020 through 2021, are reflected mostly in prices. Since housing is expensive, it is usually financed with borrowed money, making interest rates a critical factor for demand.

But housing's uniqueness in our economy goes much further than that. Shelter is a basic human need, and economic and political systems that fail to house their populations are judged as failures. That fact no doubt accounts for what is possibly the most unique aspect of housing, and that is the dozens of policies and regulations imposed by governments at all levels that support, modify and in many cases restrict its production. The future of housing depends critically on the future of those policies as well.

Market Responses to Higher Demand

The COVID-19 pandemic served up plenty of surprises, but few were bigger than what happened to housing markets. The Great Recession of 2007-09 hammered real estate markets, but the COVID-19 recession did just the opposite. After a March and April 2020 period when the economy virtually froze, buyers emerged with a new desire for residential space that surged across regional markets that were already supply constrained. The result was an acceleration in housing prices in almost every market in Montana, as well as in the entire country.

As shown in Figure la, price growth that was averaging about 7% per year in the nation as a whole between 2013 and 2019 surged up to a stunning 23.6% annual rate in the summer of 2021. In some markets, price growth was even higher. Gallatin County median sale prices were just under $700,000 in 2021, up 30%.

No one predicted this outcome, yet in hindsight it is easy to see some of the forces that combined to bring it...