Higher interest rates are stifling Montana homebuyers

Searching for a home to buy in Missoula’s pressure cooker housing market over the last year, Jeff Moss has been thinking a lot about interest rates.

Like most first-time home buyers, Moss and his longtime partner, both Montana State University alumni, don’t have the hundreds of thousands of dollars of cash necessary to buy a home without turning to a bank or credit union for a loan. That, in turn, makes their chance at homeownership dependent on the loan terms banks can offer.

And with interest rates rising dramatically this year as the Federal Reserve tries to beat down inflation, the couple has seen that financial landscape tilt under their feet. Higher rates make it more expensive to borrow money, capping their purchasing power at a lower price point even if they could stomach a higher monthly mortgage payment. 

“We’ve essentially knocked off $50,000 off our budget,” Moss said.

Moss, a civil engineer, said he and his partner, who works for a financial services nonprofit, are fortunate to be in an excellent position financially — they have two good incomes and minimal living expenses with no kids or car payments. Even so, as he’s watched prices on starter homes continue to rise, Moss worries that their chance to break into the Missoula market may have slipped away this spring.

“I’m not sure, but it seems like we may have crossed into an unrealistic budget and missed the chance to buy here,” he said. “It’s a pretty heartbreaking experience. I hope that we’re wrong. But I won’t be surprised if we’re right.” 

Similar stories are playing out across the state, real estate professionals told Montana Free Press in recent weeks. Higher interest rates may be cooling off a housing market stoked to record temperatures by pandemic-era demand the last two years — but they aren’t necessarily providing relief to would-be homebuyers who’ve seen their aspirations stymied by Montana’s great housing crunch.

Real estate agents working in Helena, the Flathead Valley, Bozeman and Billings generally said homes are still selling, but that properties are typically seeing fewer offers and staying on the market longer than they were last year, trends that give buyers more negotiating power. Additionally, sellers are in some cases finding they need to dial down ambitious list prices — a sign the market may be reaching a plateau.

Missoula’s median single-family home sales price dipped slightly in July, according to data from Montana Regional MLS, declining to $525,000 — $37,500 less than the June median, but still up $162,500, or 30%, over the past two years. Similar trends are playing out in Kalispell, Helena and Great Falls. In Great Falls, last month’s median home price was $285,000, a 24% increase since July of 2020.

All four of those markets are seeing homes stay on the market for longer, as well. In Kalispell, for example, single-family homes averaged 71 days on the market last month, according to the regional MLS, versus 24 days a year prior.

Given the complexity of the Montana real estate market, it’s hard to pinpoint a precise reason why the housing market appears to be cooling. But real estate agents generally cite higher interest rates as a key factor, noting that they dampen the demand side of the market equation by reducing the purchasing ability of Montanans who want to buy.

Angie Friedner, a Whitefish-based real estate agent with Glacier Sotheby’s, said she’s seen the market in her area begin to soften in some price ranges as buyers’ purchasing power has decreased.

“Because there was so much pent-up buyer demand, homes are still selling — probably just not as quickly as they were even six months ago,” Friedner said.

Breena Buettner, a Helena-based real estate agent with Keller Williams, said rising interest rates have sometimes become the straw that breaks the camel’s back, forcing clients to either give up on their home search or risk their financial stability by taking on larger mortgage payments.

“So many of my clients had been looking for a home for a year, and constantly getting outbid because they don’t have any money to go above asking price,” she said.

Buettner said she hears some speculation that higher interest rates could be a blessing, perhaps discouraging investors or out-of-state buyers from snapping up homes that could otherwise go to existing residents.

But, she said, “What I fear is it will limit the buying power of local Montanans.”

Longtime Billings lender Beth Klunder of Western Security Bank said she’s seeing the effect of rising interest rates and higher prices as well. While Billings has historically been isolated from the tourism-adjacent money that flows into Bozeman, Missoula and the Flathead, out-of-state buyers have flocked in the last two years, she said. The new arrivals typically come in with cash in their pocket from selling homes elsewhere, and, accustomed to higher prices in their prior markets, often see a deal in prices that are high enough to leave locals with sticker-shock.

Klunder said that three or four years ago, before COVID-19 hit, a typical starter home in Billings — built in the 1960s, with perhaps 1,000 square feet on the main floor plus a full basement and garage — would typically sell for $200,000. At the 2.875% interest rate available then, factoring in property taxes and insurance, a first-time home buyer would be looking at a monthly payment of roughly $1,200 a month, she said.

Today, Klunder said, the same house will sell for $300,000, and with interest rates closer to 5.5%, buyers are looking at a monthly payment of approximately $2,100. That’s a 75% increase. 

“It’s getting more and more difficult to qualify people — and people simply aren’t going to buy,” she said.

“It’s pricing our locals right out of the market,” Klunder added. “And if it continues this way, people simply won’t be able to buy a home here in Billings.”

The Federal Reserve’s benchmark interest rate was set at nearly zero from the early stages of the COVID-19 pandemic into the beginning of this year, a fiscal policy intended to boost the economy by making it easier for consumers and businesses to take out loans. As inflation became a major concern this year, hurting Americans with rapidly escalating prices for gas, consumer goods and groceries, the central bank has repeatedly bumped up its benchmark rate in an effort to cool down the national economy. 

As those rate hikes echo into Montana’s economy, at least some aspiring buyers are hoping higher mortgage rates will ultimately reverse some of the pandemic-era growth in home prices, giving them more opportunity to buy.

Andy Boyce, a Missoula-based biologist, said he’s been looking to buy for a couple years, but hasn’t been putting offers out recently because there isn’t anything available in the price range that he and his fiance can afford.

In contrast to Moss, Boyce said he’s less concerned about the size of his monthly mortgage payment than he is about having enough saved up for a $40,000-plus down payment. Lower purchase prices, he said, would make it easier to reach the 20% down payment threshold where they could avoid taking out mortgage insurance.

“It would make getting over that big down payment barrier easier for us,” Boyce said.

Meanwhile, Moss and his partner are in limbo, wondering if they still have a shot at building a long-term life in Missoula — or what they would have to sacrifice to get there. They’d like to live in a part of the city that’s walkable, he said, as opposed to buying on the outskirts of town, in a location where their lifestyle would end up revolving around their cars. They’ve already given up on looking at larger homes and have considered neighborhoods without sidewalks and kitchens that aren’t equipped with a dishwasher.

“At this point, I’m pretty much certain that I’m not going to be able to give my kids, if we have them, the type of lifestyle that we grew up with,” Moss said. “I don’t frankly know if we can even afford to have a kid.”

The housing complex where he and his partner currently live sold recently, Moss said, leaving them worried that the new owner will bump up their rent by hundreds of dollars a month. He’s seen a few of the houses where they’ve put in unsuccessful offers put on the rental market by their new buyers, he added, an indication they were bought by investors instead of buyers who intend to live in them.

As they try to figure out how to balance their dreams against the cold realities of a hot market, it sometimes seems like things are just moving too fast to find a footing, Moss said.

“It’s tough to feel like we’re potentially losing what I thought was not a lot to ask for,” he said.

“Honestly, like a two bedroom, one bath — there’s not a lot of room to compromise down from that,” he said.