Affordable housing in Montana

Does Montana have a housing affordability problem? 

According to Bryce Ward, Associate Director of the Bureau of Business and Economic Research at the University of Montana, “the brief answer is yes – sort of, but it’s complicated.”

Ward explores the question in an article entitled “Affordable Housing in Montana – Are We Pricing Out our Residents?” published in the 2018 Montana Economic Report.

He begins by noting that people who claim that housing is unaffordable may be making one of three comparisons. First, they might be comparing across place – asking, “Is housing here more or less expensive than housing elsewhere?” Second, they may be comparing the cost of housing to income – asking, “Do people spend too much of their income on housing here?” Third, they might be comparing the price of housing to the cost of building it – asking, “How much higher is the price of a house relative to the cost (e.g., the labor and material costs) of replacing it?

Each of these comparisons reveals something different about the health of the local economy. Comparing prices across place helps illuminate attractiveness and identifies the set of people who might be able to save money by living in Montana. Comparing prices to income shows the extent to which housing costs are a burden. It helps to identify when housing costs may squeeze out spending on other important items (e.g., food, health care or education). Comparing prices to income helps clarify Montana’s attractiveness relative to competing regions. Comparing prices to the cost of building highlights how well the local housing market is operating and helps to identify places that have a greater difficulty building new housing.

“Is housing here more or less expensive than housing elsewhere?”

Relative to other places rent in Montana is cheap, but home prices are not. In markets across Montana, median gross rent tends to be 15-25 percent below the U.S. median and 30-35 percent below the Western states median. Montana’s median home values though tend to exceed the U.S. median; however, Montana’s median home values fall below the Western states median, except for Bozeman.

Do Montanans spend too much of their income on housing? 

Sort of. While no absolute standard for what constitutes too much income exists, a 30 percent threshold is common. That is, when housing consumes more than 30 percent of income, it is unaffordable. By this metric, housing is unaffordable for a large proportion of renters. Forty-six percent of renters nationally are rent burdened, spending more than 30 percent of income on rent. In the West, this percentage rises to 49 percent, but it is only 39 percent in Montana. While the share of rent burdened households varies across Montana, generally the share of rent burdened households is higher than ideal, but lower than the U.S. and the West.

For homeowners, the story is more complicated. Thirty percent of Montana homeowners with a mortgage spend more than 30 percent of their income on selected monthly ownership costs, which include mortgage payments, real estate taxes, insurance and utilities. This is slightly higher than the U.S. share (28 percent), but below the Western share (33 percent). Again, it varies across markets (Table 2). This metric includes people who purchased homes many years ago. As such, it fails to capture the burden faced by recent buyers or those looking to buy. The ratio of home values to household incomes provides an alternative affordability metric.

Nationally, the median home is worth 3.56 times the median household’s income. In Montana though, this ratio is 4.32 and in Bozeman and Missoula it is 5.68 and 5.81, respectively (Table 2). Bozeman and Missoula fall in the 95th percentile among all metros. Their ratios are higher than those found in Denver (4.85), Seattle (4.98), Portland (5.02) and Miami (5.07).

Is the cost of housing in Montana high relative to the cost of building houses? 

While precisely measuring construction costs across place poses challenges, various attempts to quantify construction costs across the U.S. do not suggest that Montana has unusually high construction costs. For instance, a recent analysis by Issi Romem of BuildZoom found that land values per home in and around Billings and Missoula were high. Average land values per home exceed $300,000 in places around Condon and Red Lodge. This is on par with the land values found in some parts of major metro areas like New York, LA and Chicago. Land values are not only high in high amenity vacation areas, some parts of Missoula and Billings proper have average land values per home that exceed $290,000. This suggests that the value of the land sitting beneath many Montana homes is relatively high. It also suggests that land value and not structure value, drives high housing prices in Montana.

Is Montana less affordable than it used to be? 

Montana is much less affordable than it was 25 years ago. Montana’s home prices more  than doubled (adjusting for inflation) since the early 1990s. Home price appreciation in Montana ranks fourth among all states, trailing behind Colorado, Oregon and Wyoming. Since 1990, Montana’s median gross rent increased by 26 percent (adjusted for inflation). This was faster than the U.S. (16 percent) and ranked Montana 11th fastest among all states. However, rent in Montana grew by less than many other Western states like Colorado (48 percent), Utah (37 percent), Washington (35 percent), Wyoming (33 percent) and Oregon (32 percent).

Housing costs have increased more than income. Montana’s median household income only increased by 21 percent (adjusted for inflation) since 1990. As a result, the share of income devoted to housing in Montana has gone up. In 1990, Montana was one of the most affordable states. Across the income distribution, Montanans spent less of their income on housing than the U.S. average. However, relative to 1990, low-income Montanans now devote roughly 10 percentage points more of their income to housing and high income Montanans devote roughly 4 percentage points more. These increases have largely eliminated Montana’s affordability advantage relative to the U.S. and reduced its affordability relative to other parts of the West.

In sum, assessing housing affordability in Montana is complicated. In many Montana markets, homebuyers face high prices. Prices are high relative to other parts of the country. They are high relative to the incomes typically earned by Montanans. They are also high relative to the cost of building a house.

Prices are also much higher than they used to be. Montana renters though, fare better. Rent in Montana markets tends to be lower than in other parts of the county. Montana renters are less likely than the average American renter to be rent burdened (i.e., spend more than 30 percent of their income on rent). Of course, while these patterns are typical across Montana, they are not ubiquitous. Conditions vary widely across Montana’s various housing markets.

If Montanans are worried about the affordability of housing, standard economic logic suggests that to increase affordability Montana needs to slow housing price growth, while also boosting income growth. This is difficult because slowing housing price growth entails making Montana less attractiveMontana could also attempt to arrest housing price growth by building more. There may be ways to increase supply response by removing land use regulations or by increasing the capacity and efficiency of the development sector, including developers, builders and lenders. However, some impediments to development are impossible to solve. Mountains and water limit the supply of developable land in many parts of Montana.

Since 2000, Missoula, Helena and Billings have all added homes at the average rate given their price growth. Kalispell and Bozeman built substantially more than expected given price growth. In fact, between 2000 and 2015, Bozeman’s housing stock grew at the 10th fastest rate among metro- and micro-areas. Yet, in spite of this growth, housing prices in Bozeman still grew at one of the fastest rates in the country. This fact suggests that it may be difficult to increase supply by enough to substantially lower housing prices.

All together these facts suggest that making housing more affordable in Montana may be difficult. Some degree of unaffordability may be hard to avoid. Montanans, or at least Montanans in certain places, may need to learn to adapt to relatively unaffordable housing.