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

Like most first-time homebuyers, Moss and his longtime partners, both Montana State University students, don’t have hundreds of thousands of dollars in cash without turning to a bank or credit union for a loan. This makes their chances of owning a house dependent on the loan terms offered by banks.

And with interest rates rising sharply this year as the Federal Reserve tries to crack down on inflation, the pair have seen that financial landscape tilt under their feet. Higher rates make it more expensive to borrow money, even if they have a higher monthly mortgage payment, limiting their affordability at lower rates.

“We took $50,000 out of our budget,” Moss said.

Moss, a civil engineer, says he and his partner, who run a financial services nonprofit, are fortunate to be in a good place financially — two decent incomes and minimal living expenses, with no kids or car payments. Still, as starter home prices continue to rise, Moss worries that his chances of getting into the Missoula market may have slipped this spring.

“I’m not sure, but it looks like we went over an unrealistic budget and missed an opportunity to buy here,” he said. “It’s a very heartbreaking experience. I hope we are wrong. But I wouldn’t be surprised if we were right.”

Similar stories are playing out across the state, real estate experts told the Montana Free Press in recent weeks. Higher interest rates may be cooling the housing market, which has been fueled to record temperatures by the pandemic over the past two years — but it’s no relief for homebuyers who have seen their aspirations thwarted by Montana’s massive housing crisis.

Real estate agents in Helena, Flathead Valley, Bozeman and Billings say homes are still selling, but properties are typically seeing fewer offers and staying on the market longer than last year, trends that give buyers more bargaining power. In addition, sellers are finding that they sometimes need to call for an overpriced listing—a sign that the market may be reaching a plateau.

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

All four markets are seeing homes stay on the market longer. In Kalispell, for example, single-family homes were on the market an average of 71 days last month, compared to 24 days a year ago, according to the regional MLS.

Given the complexity of Montana’s real estate market, it’s hard to pinpoint the exact reason the housing market seems to be slowing down. But real estate agents generally cite high interest rates as a primary reason, reducing the purchasing power of Montanans looking to buy and undermining demand for market equity.

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

“There’s been a lot of pent-up buyer demand, so homes are still selling — maybe not as quickly as they were six months ago,” Friedner said.

Breanna Buettner, a Helena-based real estate agent with Keller Williams, said rising interest rates can sometimes be the straw that breaks the camel’s back, forcing clients to give up on their home search or risk their financial stability by paying a large mortgage payment. .

“Many of my clients have been looking for a home for a year, and they’re constantly falling short because they don’t have the money to spend over the price,” she says.

Buettner said she hears speculation that higher interest rates may be a blessing in disguise, perhaps hoping investors or out-of-state buyers won’t snap up homes that could otherwise go to existing residents.

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

Beth Klunder, a long-term billing lender at Western Security Bank, said she’s seeing the effects of rising interest rates and rising prices. While Billings has historically been isolated from tourism-related money flowing into Bozeman, Missoula and Flathead, out-of-state buyers have been trickling in over the past two years, she said. The newcomers typically come with cash in their pockets from selling homes elsewhere, and because they’re already used to high prices in their home markets, they often see bargains at prices that send locals sticker-shocking.

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

Today, Klunder said, the same home sells for $300,000, and with interest rates hovering around 5.5%, buyers are looking at a monthly payment of about $2,100. This is a 75 percent increase.

“It’s becoming more and more difficult to qualify people – and people just don’t buy,” she said.

“It’s pricing our people 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 has been near zero since the early stages of the Covid-19 pandemic earlier this year, as fiscal policy aimed at boosting the economy by encouraging consumers and businesses to borrow. As inflation has become a concern this year, with rapidly rising gas, utility and grocery prices hurting Americans, the central bank has repeatedly raised its benchmark rate in an effort to slow the national economy.

As those price increases feed into Montana’s economy, at least some prospective buyers hope that higher mortgage rates will eventually reverse some of the boom in home prices, giving them more opportunity to buy.

Andy Boyce, a Missoula-based biologist, said he’s been looking to buy one for two years, but hasn’t been making offers recently because there’s nothing in the price range he and his fiancee can afford.

Unlike Moss, Boyce said he was less concerned about the monthly mortgage payment than saving enough for the $40,000 and down payment. A lower purchase price, he said, makes it easier to reach the 20% down payment limit, where you avoid having to carry mortgage insurance.

“It’s going to make it easier for us to break that big upfront barrier,” Boyce said.

Meanwhile, Moss and his teammates are in limbo wondering if they still have a shot at building a long-term life in Missoula, or what they’ll have to sacrifice to get there. He said they want to live in a walkable part of town, as opposed to buying on the outskirts of town where they can drive around in their car at the end of their lifestyle. Stop looking at big houses and think of neighborhoods without sidewalks and kitchens without dishwashers.

“At this point, I’m sure if we have kids, I won’t be able to give them the lifestyle we grew up with,” Moss said. “I don’t really know if we can even afford to have a baby.”

The apartment building he and his partner live in recently sold, Moss said, and the new owner is worried about losing hundreds of dollars a month in rent. He has seen fewer of his unsuccessful bids put on the rental market by their new buyers, indicating that investors are buying them rather than buyers who intend to live in them.

As they try to figure out how to balance their dreams with the realities of a cold market, sometimes things seem to move too fast to get a foothold, Moss said.

“It’s hard to feel like we’re missing out, which I thought wasn’t too much to ask,” he said.

“Honestly, like a two-bedroom, one-bathroom — there’s not much room to negotiate,” he said.

This story was published by the Montana Free Press as part of the Long Streets Project, an in-depth report on Montana’s economy. This work was supported in part by a grant from the Greater Montana Foundation, which promotes communication on issues, trends and values ​​important to Montanans. Discuss MTFP’s Long Streets work with Chief Correspondent Eric Dietrich at editrich@montanafreepress.org.