The Ripple Effects of High Housing Costs

Even before the pandemic exacerbated house prices, the cost of homeownership was already exceeding monthly incomes, which subsequently eroded the labor force, blurred the path to homeownership and disrupted the traditional formula of wealth accumulation for younger generations.

“When you look at what’s happened over a five-year period, house prices have gone up and eclipsed growth and incomes,” said Patrick Barkey, director of the Bureau of Business and Economic Research (BBER) at the University of Montana at its annual economic outlook seminar in Kalispell in February. “Then the pandemic hit. The doors opened and everyone wanted accommodation… Prices went up by 25% last summer.

Between higher demand and national policies such as near-zero interest rates and the conventional 30-year mortgage rate falling below 3%, the Federal Reserve is preparing to raise rates in March, which will likely cause a fall in real estate prices.

Although median house prices have already fallen from their peak in 2021, with Flathead County hitting $635,000 in December 2021, housing supply won’t outstrip demand anytime soon, meaning market pressure will remain high.

Housing unaffordability has ripple effects across the economy, Barkey says, and with inflation at 7%, the high cost of living is straining bank accounts, which has a disproportionate impact on the labor market as employers struggle to recruit workers because they cannot find a place to live.

“We have inflation because we have a healthy economy,” Barkey said. “We have some very familiar issues today that came back surprisingly quickly. We had labor shortages and boy, do we have them now.

High costs also push people out of cities, creating urban sprawl that impacts the job market as people move away from amenities.

“That’s when you’re trying to hire a mid-level employee,” Barkey said. “It’s getting hard to swing that. When you talk about essential jobs… Like the public service and teachers, the economy doesn’t function well without these workers. High national housing prices are a problem. It changed the way our economy evolved.

At the Kalispell Chamber of Commerce, CEO Lorraine Clarno says the housing crisis continues to have a big impact on job growth in the Flathead and several manufacturers and other businesses tell her that housing continues to impede job growth.

“Attracting (workers) to our region continues to be a challenge,” Clarno said. “Hopefully with the new Kalispell City units coming online in the next few months, we will see some relief. But supply is not going to exceed demand any time soon.”

At the seminar, Clarno said that one of the top interview questions employers ask potential employees is whether they have stable housing.

“More than 50% of renters spend 30% to 50% of their household income on rent,” Clarno said.

Despite a low unemployment rate of 2.5% in Montana in January, Barkey says the labor force participation rate has dropped significantly since the start of the pandemic, with workers over 55 dropping out of the labor force.

In addition to labor, high house prices are an indication of economic inequality, as the path to homeownership leaves younger generations with fewer opportunities, Barkey said.

“When you look at the assets and liabilities of a typical American household over its working life, one of the most important assets is real estate,” Barkey said. “You buy the first house and that’s a big part of your economic security. With high entry levels for housing, people cannot participate in this game.”

At First Interstate Bank in Kalispell, mortgage manager Annika Harris told the seminar that the number of young residents and families wanting to buy their first home has dropped significantly.

“When a monthly mortgage payment exceeds 50% to 80% of gross monthly income, homeownership isn’t really an option for many,” Harris said. “Many young people get discouraged and resort to renting or leaving the area. At the same time, home ownership is an essential means of creating wealth. I don’t really know what the future holds for young local families.

Harris describes the housing market as a “rising rate” environment, which will be difficult for lower-to-middle-class families to break into.

“This area will continue to grow,” Harris said. “It’s very desirable… Affordability is going to continue to be a big challenge for residents.”

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