Flathead County Housing Market Expected to Moderate in 2023

The Flathead County housing market is expected to moderate in the coming year amid a nationwide housing market cooldown influenced by a range of factors, including increased lending and construction costs driven in part by growing interest rates from the Federal Reserve that are meant to curb inflation.

That moderation, however, is in comparison to a rapid acceleration sparked by the pandemic, which has seen median home prices in the county increase from $380,000 to $608,000 since 2020, marking some of the fastest housing price growth in Montana, according to Amy Watson, an economist with the Montana Department of Labor and Industry (DLI).

Watson said the DLI uses projections from the S&P’s IHS Markit analysis company as part of their effort to understand the housing market in the state and nation. Those projections show Montana median home prices continuing their over-the-quarter decline until the end of 2024. 

In Watson’s estimation, while supply in the Flathead has increased from its pandemic low, the housing market remains undersupplied. One data point she notes is the county’s absorption rate, which, in data collected by the Northwest Montana Association of Realtors (NMAR), is calculated by dividing the number of available homes on the market by the number of homes sold the month before. That calculation produces a figure showing how many months of inventory are listed for sale. That absorption rate in Flathead County was at 2.95 months in the third quarter of 2022. At its peak during the third quarter of 2020, the absorption rate for homes in the county was 1.6 months.

Despite increased costs of lending, Flathead County’s housing market should have some degree of insulation because of its ability to attract high-income buyers, including those who can purchase homes without financing, according to Watson. In the first year of the pandemic in December 2020, the 30-year, fixed-rate mortgage average in the U.S. fell to 2.67%, whereas now it’s at 6.42%, Watson said, citing data from the Federal Reserve Bank of St. Louis. She explained that, on a $400,000 traditional mortgage, the new average amounts to an increase of $890 in monthly mortgage payments.

“That dramatic increase in the mortgage rate over such a short period of time, it makes lending for current homebuyers more expensive, and it also has the impact of affecting existing homeowners that have existing mortgages that maybe were able to refinance and lock in that low rate,” Watson said. “It makes it less likely they would sell their homes and look for a new house.”

Erica Wirtala, the public affairs director for NMAR, said that in talking with bankers and lenders, it becomes clear that every interest point adds almost $1,000 a month to someone’s mortgage payment.

The slowing down of the housing market has had the effect of bringing people “back to reality” when it comes to buying and selling homes, Wirtala said. Buyers purchasing homes sight unseen, in some cases with cash offers, or with offers above asking price, have been replaced to some degree with people exercising a more cautious approach.

“The days when your realtor’s banging a sign in your front yard and there are six offers before it’s even finished, and those are cash offers $100,000 over the asking price, things like that, they’re not seeing that anymore, and they’re kind of going back to the old model of having an open house, and people kicking the tires around on the place,” Wirtala said of sellers.

With that degree of normalcy returning, Wirtala said she expects the seasonal trends in the Flathead housing market will also become more firmly reestablished. In a typical year, the market is hot in the summertime, cools off in the fall and winter amid the start of the school year and the onset of the holiday season, and then begins to pick up again in the spring.

“If you looked in 2020, and the number of closed sales, there was a peak in October of 2020,” she said.

As for how the changes to the housing market will affect the construction labor force, Watson said she does not expect layoffs or employment losses, adding that the slowdown could allow the construction industry to close the demand gap that it has so far been unable to bridge.

“There’s been significant demand for construction workers, particularly in residential, and we see that demand continuing, but it will be moderated as well,” Watson said.

In Kalispell, although the market looks to be flattening out, there are indications that development is continuing at a rapid pace and that demand remains high, according to PJ Sorensen, a senior planner for the city of Kalispell. Planning staff in Kalispell, like their counterparts in Whitefish and Columbia Falls, are still compiling annual reports looking at housing data and trends, including over the last year. Sorensen said that development proposals were also continuing to come through his office. In 2021 the city added 878 new residential units, nearly doubling the number added in 2020, which nearly doubled the number (244) added in 2019. He noted that several years ago the city was nearing a zero-percent vacancy rate, meaning the demand for housing existed even before the last few years of population growth.

“I don’t know when exactly it will go away, because we’re still experiencing population growth,” he said of housing demand in Kalispell.

Further complicating a clear picture of the near future is the fact that some of the new area residents who work remotely aren’t connected to the labor market in a traditional way, meaning if the labor market slows down there may be less of an exodus of people moving out.

It can also be hard to predict when new housing will come online, since projects and their financial viability are dependent on fluctuating market conditions, and in some cases are planned to materialize over the span of years. Sorensen said he’s also heard of at least one delay to a development coming online because of supply chain issues stalling out the completion of the build.

As for how the housing market will impact rental prices, Sorensen said increased supply leads to downward pressure on some rental prices. As Watson, the DLI economist, explained, increased costs for aspiring homebuyers could also leave some of them turning to the rental market for housing.

It’s similar to a problem identified in Whitefish’s 2022 Housing Needs Assessment report, which notes that local households “are mostly priced out of market rate ownership housing — it has simply gotten too expensive.”

Dave Taylor, the planning and building director for the city of Whitefish, emphasized that it’s difficult to forecast with much certainty how the housing market will play out in the coming year because of the number of variables in play. In terms of the number of building permits issued in 2022 by the city over the last year, Taylor said there was a little bit of a slowdown. The city issued permits for 118 new units of housing, which is the lowest since 2017. The city is small enough though that issuing a permit for a large development in a given year can skew perception, Taylor said. In 2021 the city issued permits for 220 new units of housing, and in 2020 they issued permits for 302 new units. Looking at a five-year period beginning in 2016, the city showed 12% growth in housing, which Taylor said was indicative of a continued upward trend. 

The city’s 2022 Housing Needs Assessment report showed that over that period 980 new units of housing were needed, and 1,067 units were built.

“Despite this, home prices and rents rose at historically high rates, availability dropped, and local residents and employees struggle more than ever to afford and find homes,” the report stated.

That report was part of a broader effort by the city to update its strategy going forward to combat its housing crisis. Among the one-year priorities in the city’s 2022 community housing roadmap are increasing community housing staffing; securing funding for community housing, including through establish public-private development partnerships; implementing pro community housing policies for growth, short-term rental regulation and annexation; and expanding tenant rent assistance, protections and education.