Why Bozeman's House Prices are Skyrocketing
Updated: Oct 18, 2019
It takes twice as much income today ($104,000) as it did in 2012 ($52,000) to purchase an average-priced home in Bozeman. Housing prices went up 12% last year alone. The median home price in Bozeman now exceeds $440,000.
Skyrocketing housing prices are actively pricing out members of our community who are no longer able to afford to live here, or who have despaired of ever being able to purchase a home here. Given a long enough run, this process will hollow the Bozeman community from the inside. Our current rapid escalation in housing prices is nothing short of a community crisis—and should be treated as such.
Our skyrocketing housing prices are due to simple supply and demand. According to Bozeman's recent housing needs assessment, we need to be building 900 units per year to keep up with growth; currently, we're only building about 800 units per year. When we build 10% less housing than needed to keep up with demand, it shouldn't be a surprise to see double-digit increases in housing prices.
This post covers many of the reasons why demand is outstripping supply (leading to ballooning prices). These reasons relate to demographics, regional challenges, or land use regulations. There's good news at the end: many of these causes are within our power as a city to address, meaning we can stop and reverse the current trend.
We're Not Building Enough
Many peer cities are growing far faster than Bozeman without experiencing the same degree of housing price inflation.
For example, 20 years ago, Meridian, ID, and Bozeman both had a population of 30,000 people. Today, Meridian is 99,000 people to Bozeman's 47,500. For every person that has moved to Bozeman in the last 20 years, three have moved to Meridian. Yet despite making Bozeman's growth look rather hum-drum, the median house in Meridian costs $110,000 less than the median house in Bozeman.
The difference? On a per-capita basis, Meridian is building houses 80% faster than Bozeman (source). We are simply not building enough new units to keep up with demand.
Starter Homes: We're Not Building Them
More affordable types of housing (e.g. duplexes, rowhouses, small homes) are often described as the "missing middle" of the housing spectrum—"middle" because these units are within reach of many first-time home buyers, and "missing" because they're simply not being built.
Most of the housing currently being built in Bozeman is targeted toward the higher end of the market. Although higher-end housing does help through a process of "filtering" where existing homeowners trade up, making room for first time home buyers to acquire a starter home, current research shows that filtering is only about half as effective at creating available affordable housing as just building affordable housing in the first place.
Why are so few "missing middle" housing units getting built?
Building housing in Bozeman is expensive for lots of reasons: we have a regional skilled labor shortage and shortage of construction materials. Impact fees and city-required fees for affordable housing and parks increase costs.
But the biggest driver of expensive housing in Bozeman is land. The city sets limits on the minimum size and dimensions of a parcel of land you can build a house on, and strict limits on how many units can be built per parcel. This, in turn, puts a floor on the minimum cost of a parcel of land, and a cap on any given parcel's productivity.
Bozeman's lot-related minimums are multi-faceted: it's not just a minimum square footage (recently reduced to 4000 SF), but also requirements for a minimum lot width (50 feet), minimum "setbacks" between the property line and the house, required off-street parking, lot coverage maximums, floor area ratio maximums, and more.
At present, land prices start at around $100,000 per parcel. Developers have a three-to-one rule of thumb where, in order to be sellable, the value of the structure should be about three times the value of the lot. $100,000 minimum for a lot implies a $300,000 minimum for a structure, yields a $400,000 minimum cost of building anything in Bozeman—and prices just go up from there.
Geography and Regional Economy
Bozeman has several geographic and regional factors working against it:
Our climate dictates a shorter building season than many other locations.
High-paying construction work in the Yellowstone Club and Big Sky lure away many of Bozeman's skilled construction workers.
Bozeman currently has a very tight labor market. With unemployment rates at 2.7%, finding workers is a challenge in every industry in Bozeman. In a cruel Catch-22, Bozeman's housing shortage makes it difficult to attract new workers to build more housing.
Demographics are Working Against First-Time Home Buyers
Baby Boomers are living more independently and choosing to stay in their homes longer. When they leave their homes, it's more often to trade down to something that looks more like a starter home. Compounding the competition for "missing middle" housing, a significant number of Gen Xers were set back a decade behind their homebuying cohort by the financial crash in 2008. As a result, both Baby Boomers and Gen Xers are now competing with Millennials looking for starter homes (source: Curbed).
It's Burdensome to Build in Bozeman
The City of Bozeman also works against itself in several ways:
A Complex, Slow Permitting Process, coupled with chronic city understaffing of both the planners who approve permits and the inspectors who certify buildings during construction. Under optimal conditions it takes eight weeks in Bozeman to get the same building permit that the City of Belgrade provides in one week or less. Bozeman's short building season is exacerbated by a shortage of building inspectors who are required to inspect projects during construction. Due to permitting and inspection delays, local home builder Patrick Eibs says it takes 30 weeks to build in Bozeman the same townhouse he builds in Belgrade in 21 weeks.
Single-Family Zoning. Over half of residential property within Bozeman city limits is set aside for single-family residences. Townhomes, duplexes, and apartments are banned across these areas of Bozeman. Our zoning does not allow these neighborhoods to change over time to meet our evolving housing needs, and pressures the remaining 49% of city land to accommodate 100% of Bozeman's growth. Sightline explains more.
Our Development Code is a labyrinth. The book of rules that tells developers what they can and cannot build is longer than the Christian New Testament. It's well-established in research that onerous land-use regulations increase housing costs, and Bozeman has a bevy of such regulations. The sheer complexity of the rule book discourages many would-be small and independent builders and developers (who lack the resources to hire architects and attorneys for the sole sake of navigating our development code) from participating in adding to Bozeman’s housing stock.
Parking Minimums. Bozeman's development code requires a tremendous amount of land to be dedicated specifically for parking, regardless of the demand for parking or the availability of nearby on-street parking. The majority of homes in Bozeman's historic neighborhoods would be illegal under current development standards for failure to provide sufficient off-street parking. Moreover, parking for "missing middle" housing types must also be paved—an ironic and self-defeating requirement in a city striving to reduce stormwater runoff from impermeable surfaces and that has foregone paving portions of its streets (e.g. South Black Avenue) due to the expense of paving and a lack of obvious necessity.
The Wage Factor
Finally, let's not forget about the other side of the equation: wages. For such an educated population, Bozeman's wages are astonishingly low. Much of this has to do with the fact that many people choose Bozeman, then figure out how to make a livelihood here (as evidenced by our anomalously high share of workers engaged in small businesses and entrepreneurial endeavors). Our cost burden is higher than in many cities with comparable housing prices because our incomes are so much lower. For example, although houses are 5% more expensive in Denver than in Gallatin County, the median monthly household income is 21% higher in Denver.
What Can We Do About It?
Given the many factors contributing to our new housing shortage, there's no "silver bullet" that's going to bring median home prices back below $400,000. That said, reining in the current trend actually only requires a relatively modest increase in new housing—100 additional units per year or so (1.25m new homes were built in America last year). A combination of small but effective strategies could be enough to tip the scales back in favor of homes becoming more affordable over time.
There are some simple and obvious things we can do right now to start pushing things in the right direction:
Streamline and expedite our permitting process. This doesn't mean lowering our standards. We can carefully review a set of plans in four weeks instead of eight weeks—and we should. If our current staffing levels can't processing 1000 permits per year, we need to hire more staff (and if can't hire enough staff because we don't pay high enough wages, we need to offer higher wages).
Liberalize rules for ADUs. In Vancouver, 35% of single-family parcels have an ADU. Increasing the proportion of single-family lots in Bozeman with an accessory dwelling unit from less than 1% (today) to 10% would add 2200 housing units. See my post about more ADUs in Bozeman. If we could increase from building 20 ADUs per year to building 200 ADUs per year (spread across the 10,000+ parcels where ADUs are permitted), ADUs could almost single-handedly reverse Bozeman's rising housing prices. Seattle just adopted Vancouver's rules; Bozeman should consider doing the same.
Re-evaluate the rule-book. Our Unified Development Code, like many rule books, has become an accretionary monster: things just keep getting added, growing ever larger over time. Many of Bozeman's development code rules were created at a time when our housing needs were unlike our current needs. It's time to hold up each of the 450+ sections of our development code and ask a simple question: does this regulation benefit the current and future needs of the community? For more, see my related post: Four Anti-Affordable Housing Laws in Bozeman
Last year homebuilders built 1.25 million houses in America. If we can succeed in attracting two hundred more of those units to be built in Bozeman each year, we can stop (and likely reverse) the current trend of double-digit annual increases in housing prices. More than we can: we must—Bozeman's next generation depends on it.