The past year has been unprecedented for the American economy. Thus far in 2008, financial markets took a rollercoaster ride, banks had to be bailed out by the federal government, Fannie Mae and Freddie Mac folded, shaking our faith in large American institutions. Across the nation, people watched the value of their investments and retirement funds plummet. As if that weren't enough, increasing prices for fuel and energy coupled with decreasing home values left most consumers with little or no discretionary income. At the same time, credit markets tightened, squeezing the ability for people to finance large purchases. Altogether, 2008 will be recorded as the worst financial crisis in modern history.
Which begs the question, what effect is the crises having on Montanans? We turned to three local experts to get a perspective on how current economic events are shaping the way Montana consumers think, buy and save. The experts include Larry Swanson, PhD., one of Montana's foremost economists and director of the O'Connor Center for the Rocky Mountain West at the University of Montana, Howard Sumner,Broker/Owner of Howard Sumner Real Estate and 25-year veteran of the Billings real estate market and Keith Cook, Region President of First Interstate Bank.
Swanson says that compared to the rest of the country, Montana's economy is holding its own.
Q: How would you assess our state economy given what's going on in the nation?
A: After nearly 20 years of virtually uninterrupted economic expansion in the state and region, Montana's economy appears to be slowing, largely as a result of the economic slowdown nationally. However, these are far from "tough" economic times in Montana - at least, as of now - and it remains to be seen how deeply the national economic slowdown will reach into Montana.
Q: Managing the family budget and investments is challenging for many Montanans. They are wary of spending money on vacations and luxury services. How do consumer attitudes affect our state's economy?
A: Steady growth in Montana has meant more jobs, more income growth, more prosperous communities and greater opportunity for economic advancement for more Montana families. This growth also has contributed to the steady rise in the value of homes across Montana. For Montana families fortunate enough to own their homes, this has greatly added to their wealth. For most Montana families, homes are their biggest source of wealth. And this wealth has grown with rising home values and with the improvements that many Montanans have made in recent years, many times financed by loans made possible by the growing equity in their homes.
In the last year or so, increases in home values have slowed across Montana, with some areas seeing small declines in home values after years of increases. This is beginning to make homeowners nervous. And while wages and salaries have begun to grow at a faster rate in Montana than nationally in recent years, largely spurred by a growing economy and tightening labor market, these increases have a long way to go before they can bridge the gap between average salaries in Montana and in most other places. And the economic slowdown may slow or decrease these continuing gains.
When people are not seeing increases in the value of their homes, and wage and salary gains are slowing, while income from investments and savings slow or disappear, they are less likely to spend money on elective goods and services such as entertainment and restaurant meals, many retail items, home furnishings and improvements, and even some medical procedures and health care measures. Together, this growing cautiousness and fear contribute to slowing business activity locally.
Q: What advantages do we have in Montana compared to the rest of the nation?
A: During times of growing economic anxiety, it is important to take stock of the gains that have been made over the last 20 years as our economy has grown and changed. Many Montana cities are in a much better economic position today than they were prior to this long period of economic growth. As the state's economy has grown, it has also broadened its base and diversified. The economies of our cities and their nearby communities - Billings, Bozeman, Missoula, Helena, Great Falls - increasingly resemble the economies of larger and more prosperous cities in the nation. In Billings, the diversity of professional and business services offered - accounting, legal, engineering, architecture, health care, construction, banking, education - will continue to sustain the economic vitality of both families and the community as a whole. In the surrounding region, gains will continue in the energy industry even as the area's widely coveted amenities and quality environment continue to draw more visitors and new residents to the region.
Out of this recent experience, business owners and residents have come to increasingly understand what types of things can make the greatest difference in how well a community grows and advances. Growth and prosperity cannot simply be taken for granted. They must be invested in and reinvested in if they are to be sustained. Developments such as the new ball park, the expansion of Shiloh corridor and the new shopping center give us a sense of reassurance. There is greater awareness of the role of education and work force development in how we advance ourselves further. Billings is becoming a better place as it becomes a bigger place, and this is the key to a promising future. The continued investment in improvements will help sustain the city and region in good times and bad times.
Howard Sumner says that as long as Montana's population keeps growing, the housing market will eventually balance out and bring steady returns on investment.
Q: What drives the local real estate market?
A: Real estate is driven by population growth and availability of financing which, in turn, drives building activity. In Yellowstone County, population has grown steadily at an annual rate of about .75 to 1. 5 percent over the last 17-18 years. In other words, 1,400 people per year moved to the county generating 575 new housing units each year. An average of 725 new houses were built each year. As of August 2008, only 206 building permits were issued indicating a slowdown in building activity. At this time, we are still seeing growth in total population (from 140,000 in 2008 to projected 144,839 in 2010) and decline in building activity, which means that within 12-18 months, the market will balance itself out.
Q: Many families around the nation are loosing their homes in foreclosure as they are unable to pay their mortgage. What is the situation in our state?
A: Compared to the rest of the country, Montana is conservative in its lending practices. Because of our conservative attitudes, our foreclosure rates at this time are still very low - less than 1 percent. During the 80s housing market decline, the foreclosure rate was 60 percent. To put that number into perspective, you would see 80 foreclosure notices in the newspaper every week, compared to the two to three notices you find now.
Q: How is the national mortgage crisis affecting Montana home owners? Is this a tough time for Montana real estate?
A: What we see in the local real estate market at this time is a far cry from "tough times." In the early 1980s when the then energy-based Montana economy took a downturn, the number of building permits plunged. In 1979, 1,100 building permits were issued. Over the following 11 years, that number diminished to an average of 75. In 2008, the number of buyers is about the same as in the previous years, but the number of sellers has increased. Supply does not match demand, therefore, it takes longer to sell a house (from 48 days on the market in 2007 to 68 days in 2008), and the asking price has not increased as much as in previous years. But as long as the population is growing, there will be demand for housing.
Another effect is the change in rental activity. As nationwide financing becomes more conservative, people that are unable to qualify as potential buyers become renters. Compared to 2007, the average apartment rent went up 8 percent (from $630 to $681) and the average house rent increased 18 percent (from $871 to $1,031.)
Q: What advice would you give someone interested in investing in real estate in Montana?
A: In Yellowstone County the real estate market has provided and will provide steady returns over time. Other places in Montana, such as Bozeman and Big Sky, have provided flashy results in the last few years, but they also suffered from nationwide economic downturn. What I tell my clients is if you want steady growth over time, Billings and Yellowstone County will not disappoint.
Ultimately, an individual's decision whether to buy a home depends on how long he or she plans to stay in it. It has become popular to purchase houses with intent to resell for a profit, betting that the house value will increase over the span of a couple of years. That strategy is wrong for Billings. If you plan to stay in your home for five or more years, the expense of buying it (such as closing costs, agent fees and property taxes) will be justified. Otherwise, you are better off renting.
Keith Cook says Montana banks are safe and open for business.
Q: The financial crisis on Wall Street has many consumers wondering about the stability of banking institutions around the country. Can you talk about how the financial crisis has affected Montanans? Are checking and savings accounts safe?
A: Our customers' checking and savings accounts are safe as they are insured by the FDIC up to $250,000 per deposit with additional coverage of $250,000 for retirement accounts. Recently, to assure the consumers and the financial institutions that it is safe to do business with commercial banks, the FDIC offered unlimited coverage on all non-interest baring accounts through December of 2009.
It's important to understand the background of this financial crisis and how the media misuses the term "bank." The Wall Street crisis is the Wall Street issue. The investment firms you've read about - Lehman Brothers, Bear Stearns, Merrill Lynch - operate very differently from commercial banks. First Interstate Bank and other retail banks in the region are subject to federal regulation, they are insured, and they do not face the problems of the investment institutions. In fact, First Interstate Bank was named one of America's Top 25 Banks for 2008 by US Banker Magazine. Historically, not one penny of FDIC-insured savings has ever been lost by a customer of a federally insured bank. For 99.5 percent of commercial banks, it is business as usual.
Q: Would you agree that banks in Montana lend more conservatively than in other parts of the country? Does this practice serve us well?
A: Yes. One of the reasons Billings is NOT experiencing the massive foreclosures we see in other parts of the country is the conservative underwriting of our loans. We did not participate in subprime mortgage programs and have always required conscientious credit and repayment standards. It didn't make sense to us to lend to people that couldn't meet the obligation. Those "conservative" underwriting practices and the strength of our local economy have insulated us from the severity of the housing problems we see in other parts of the country.
Q: Given the national mortgage crisis, the rules under which credit is given to consumers are changing. In Billings, can consumers with strong credit history and good credit scores still get loans for vehicles and homes?
A: Definitely. The economy in Billings is still strong and although the housing market has softened a bit, we are not experiencing the same problems that the country is seeing in California, Arizona, Florida and the Midwest. People in Billings should not see much difference in credit underwriting standards from the lenders in our community. In Billings we are still in competition for customers and credit is available to qualified consumers.
Q: What about small businesses?
A: If you look around, you'll see construction and expansion indicating strong business activity. We have three refineries, two regional hospitals, retail development - all spending money on projects, maintenance and development, all having access to credit.
Q: What can consumers do to better their credit ratings?
A: Certainly, limiting credit card and store card debt is an important step. Try to maintain a debt to income ratio of less than 50 percent. If meeting debt obligations becomes a problem, consumers should seek counsel from an approved agency like the Consumer Credit Counseling Service that has an office in Billings.
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