Rising land costs among factors driving the price of Bozeman-area housing

From the How Will We Grow? series

Editor’s Note

This is an installment in an ongoing Chronicle series looking to explore the issues facing the Gallatin Valley as we grapple with the opportunities and consequences of growth and the development it brings.

As always, we welcome feedback and suggestions from our readers. Managing Editor Nick Ehli can be reached at nehli@dailychronicle.com or 582-2647, and reporter Eric Dietrich at edietrich@dailychronicle.com or 582-2628.

Why, exactly, is it so darn hard to find an affordable home in Bozeman? There’s no single answer, certainly, but a key part of the puzzle is that the price of land is, well, too high.

As the area’s housing market has recovered from the Great Recession — pushing median home prices to record highs — the cost of infrastructure-equipped land suitable for building has risen accordingly, with a median lot going for $84,500 last year, according to numbers from the Gallatin Association of Realtors.

For builders aiming to hit the $192,000 housing price point the city considers affordable for buyers making $66,780 a year, an $84,000 lot means 43 percent of the target price is sunk into acreage. That puts a significant cramp on the remainder of the project budget, especially at a time when construction labor costs are also high.

While Bozeman-area land prices, unlike finished homes, still haven’t surpassed their housing bubble-era peak, they’ve risen substantially in recent years. According to GAR, the median price of lots in Gallatin County increased $35,486, or 72 percent between 2012 and 2015.

“We have more buyer demand than we can produce inventory.”
- Robyn Erlenbush, ERA Landmark Real Estate

What’s behind the rise? Much of it, real estate observers say, comes down to basic economics — even as the housing market has rebounded in force, the number of new lots being created in Bozeman-area subdivisions has stayed comparatively modest relative to the pre-recession boom.

While a whopping 1,730 lots received final plat approval from either Bozeman or Gallatin County back in 2006 — a number that dipped as low as 20 a year at the depth of the recession — annual production in 2015 was 690.

In comparison, the city issued 793 residential building permits and the county granted 432 land use permits last year.

“The inventory is looking really tight,” said Brian Popiel, chair of the Southwest Montana Building Industry Association. “There’s not much out there.”

Trends in building lot production and real estate price trends for the Bozeman area. Data from the Gallatin Association of Realtors and Bozeman and Gallatin County planning departments. Subdivision lot production numbers exclude Belgrade, where data wasn’t readily available.

Popiel said he estimates the city is currently adding only a quarter of a home lot per new resident, compared to half a lot in the 2000s and nearly a full lot per new arrival back in the ’90s.

According to Robyn Erlenbush with ERA Landmark Real Estate, the number of building lots on the market in Bozeman is down 25 percent over this time last year, with 92 currently available.

In comparison, she said, there are 309 building lots and acreages available in rural Bozeman outside city limits, with sales up 62 percent in the last year, and another 73 on the market in Belgrade.

For the time being, at least, Erlenbush said she thinks the primary bottleneck in the real estate industry is how fast Bozeman’s building industry, mostly composed of smaller builders, can bring houses to market.

“We have more buyer demand than we can produce inventory,” she said.

Looking further ahead, though, both Popiel and Erlenbush said it’s unclear that there are enough subdivisions in the development pipeline to supply the rapidly growing city with home sites proportionate with population growth in the coming years — a supply constraint that could push lot prices up even higher.

“Developers are still very, very cautious,” said city planning director Wendy Thomas, noting that developers — many burnt in the 2008 housing crash — are tending to plat subdivisions in smaller phases instead of charging ahead with larger developments.

“Developers aren’t extending themselves out there as far as they maybe were prior to the recession,” echoed Sean O’Callaghan, Gallatin County’s planning director. “I think there’s a different business model.”

Part of the issue, several planners and building professionals said, is that it’s often harder to secure financing for large development projects in the post-Great Recession world. The cost of infrastructure like streets, water supply and sewer service is also a constraint to some extent, they said.

Thomas, for example, noted the city is currently working on projects to expand sewer capacity to make more development possible south of the Montana State University campus and on the city’s western fringe.

“We have some pipes that are full, or close to full,” she said.

Additionally, Popiel pointed out, some well-financed Bozeman developers like Andy Holloran of HomeBase Montana, behind the 5 West mixed-use building rising on Mendenhall Street, seem to be focusing their time and money on redevelopment projects in downtown instead of more traditional subdivisions.

Thomas also said that single-family homes may not be the right housing option for many Bozeman residents, particularly given the youth and relative transience of the city’s population. Developers are creating a fair number of apartments and condos, she noted, saying she thinks the city is probably keeping up with demand on that front.

As for options available to consumers dead set on finding affordable land?

According to Erlenbush, there are still lots in Gallatin County available in the $30,000 range — out north of Three Forks past Wheat Montana, a third of the way to Helena.

“It’s a supply and demand situation,” she said.