The 2017 Flathead County Real Estate Market

The 2017 Flathead County Real Estate Market The Flathead Real Estate Market continues to improve with record number of home sales in 2017 By Jim Kelley Kelley Appraisal 1001 South Main Street Kalispell, MT (406)755-2015 http://kelleyappraisal.net/ jim@kelleyappraisal.net

TABLE OF CONTENTS INTRODUCTION Page 2 Summary: Page 2 About Jim Kelley: Page 3 EMPLOYMENT Page 4 SUBDIVISION ACTIVITY Page 5 NEW CONSTRUCTION Page 8 LOT CREATION VS NEW CONSTRUCTION Page 11 Flathead County: Page 12 RESIDENTIAL SALES Page 13 Residential Sales (No Waterfront and Less than Two Acres): Page 16 Foreclosures (No Waterfront and Less than Two Acres): Page 17 Residential Sales Volume: Page 18 Price Distribution of the Residential Market: Page 19 RESIDENTIAL SUB-MARKETS Page 21 Kalispell(City Limits): Page 21 Kalispell Area(Within 3.5 Miles of the City Limits): Page 22 Whitefish (City Limits): Page 23 Whitefish Area(Within 3.5 Miles of the City Limits): Page 24 Columbia Falls(City Limits): Page 25 Columbia Falls Area(Within 3.5 Miles of the City Limits): Page 26 Bigfork Area(Within Five Miles of Electric Avenue): Page 27 Lakeside Area(Within Five miles of downtown Lakeside): Page 28 Flathead Lake Lakefront Homes (Flathead and Lake County: Page 29 Whitefish Lake Lakefront Homes: Page 30 LAND MARKET Page 31 HOUSING AFFORDABILITY Page 33 FORECLOSURES Page 34 COMMERCIAL REAL ESTATE MARKET Page 35 Commercial New Construction in 2017: Page 35 Yearly Commercial Sales: Page 36 Percentage of New Commercial Listings that Sold: Page 36 Commercial Listings Leased: Page 37 Income Capitalization Rates on Commercial Real Estate: Page 38 Page 1 of 38 - Kelley Appraisal

INTRODUCTION Summary: This report addresses statistical details of the Flathead County Real Estate market over the last few years and summaries on the 2017 market. In general, 2017 set new records in the number of sales of residential properties, however the commercial market was mostly stable. The following is a list of some key points: 1. The employment picture continues to improve. 2. Subdivision activity continues near its all-time low, but as the inventory of bank-owned has mostly gone away. There is some new interest in development, but mostly within the City limits. There continues to be little interest in rural subdivision development. 3. New home construction is stable in all areas of Flathead County. 4. The number of residential home sales is at a record high with 1882 sales in 2017 and inventories are a near record low. 5. REO sales continue to decline and are no long a material segment of the Flathead Market. 6. Of the County s sub-markets, most areas showed an increase in the number of sales. The largest increase was in Whitefish market. 7. The number of land sales were up, but far from their record high in 2006. 8. Housing is under pressure with prices outpacing the affordability as interest rates start to increase. 9. The number of foreclosures continued to decrease through 2017. 10. Commercial property sales increased in 2017. Page 2 of 38 - Kelley Appraisal

About Jim Kelley: Jim is the owner of Kelley Appraisal and is a 1975 graduate of the University of Montana Business School. He has been a leading provider of appraisals for commercial, residential and investment real estate in northwestern Montana for the last 37 years. With extensive professional experience and education in Finance, Mr. Kelley specializes in appraisals for purchases, sales, commercial loans, residential loans, and litigation. Mr. Kelley has built the most extensive statistical data base for the economic and real estate in northwestern Montana and been a guest speaker in the finance industry on numerous occasions. He was an invited lecturer to college students in China in 2007 on how the real estate and the appraisal business works in the United States. Mr. Kelley's active roles in the Flathead Valley community in the past 37 years extend also into sailboat racing on the Flathead Lake and skiing on the Big Mountain. Kelley Appraisal has extensive experience, education and qualifications in the following: All Classes of Commercial Property Appraisals All Classes of Industrial Property Appraisals Commercial real estate loans Subdivision analysis, valuation and market studies Condominium project analysis, valuation and market studies Complex real estate problems Appraisals using the Uniform Appraisal Standards for Federal Land Acquisitions aka Yellow Book Real estate portfolios Proposed properties and construction loans Legal and tax matters Litigation support and court testimony Partial interests of property rights Estate settlements Estate planning High-end residential properties Rural land and large acreage appraisals Recreational and waterfront properties Historical values and related value trends Forensic real estate valuation Market studies and analysis For information on pricing for any of the services offered by Kelley Appraisal, E-mail jim@kelleyappraisal.net Page 3 of 38 - Kelley Appraisal

EMPLOYMENT In 2017 the unemployment rate was slightly better than is was in 2016. The low was in August with 3.9% and the high was in January with 6.7%. A key number that I look at is the actual number of people that are employed. In 2017 the average number of people employed was 43,929, which is up 2.4% from 42,893 employed in 2016. This increase in the number of workers employed is a very positive development in the Flathead economy. Page 4 of 38 - Kelley Appraisal

SUBDIVISION ACTIVITY Kalispell: In the City of Kalispell, there were 44 new lots created, compared to 39 in 2016. Land Subdivision, City of Kalispell 1997-2017 (includes all types of lots including roads and open space) Source: City of Kalispell Planning Department Subdivision Applications: 1996-2017 Page 5 of 38 - Kelley Appraisal

Whitefish: In the City of Whitefish, there were 105 new lots created, compared to 30 in 2016. Columbia Falls: The final plat was granted on one minor subdivision 3 lot commercial subdivision at Hwy 2/40 Murdoch s. Page 6 of 38 - Kelley Appraisal

Flathead County (Outside the Cities): Flathead County reported that there were 315 lots created outside the cities. The total number of lots created in the County in 2016 were 318 and 218 in 2015. Page 7 of 38 - Kelley Appraisal

NEW CONSTRUCTION In Kalispell, there were 115 Single Family Residences, 26 duplexes/ townhouses and 44 multifamily units for a total of 195 units. The following graph of Kalispell's activity is from the 2016 Kalispell Building Department report. Building Permits Issued for New Residential Units by Type, 1992 2017 Source: City of Kalispell Building Permits 1991-2017 Whitefish reported 57 SFRs, 22 duplexes or townhouses and 24 multifamily units. Columbia Falls reported 11 SFRs, 4 Multi-family, 8 Townhouses and one Manufactured Home. Page 8 of 38 - Kelley Appraisal

Flathead County: Because Flathead County does not issue building permits, the next best estimate comes from the number of septic permits. In 2017, there were 532 final septic inspections, 552 written permits and 618 applications. The 532 septic inspections are a reasonable estimate of the number of completed properties in the County. They include both residential and commercial. These figures can be somewhat misleading, because if there is a community sewer system, several new homes could be under one septic inspection. Page 9 of 38 - Kelley Appraisal

City and County Construction Summary: The following graph shows a 13-year history of the totals from each city with the line graph showing the overall totals. Page 10 of 38 - Kelley Appraisal

LOT CREATION VS NEW CONSTRUCTION The following graphs illustrate the historic relationship between new lot creation and new construction. City of Kalispell: Kalispell had 44 new lots created and 195 building permits. Supplied by the Kalispell Building Department. City of Whitefish: Whitefish had 103 building permits and 105 new lots created. Supplied by the Whitefish Building Department. Page 11 of 38 - Kelley Appraisal

Flathead County: The graph below shows the relationship between lot creation and final septic inspections in Flathead County. Up until 2010, lot creation out paced new construction. From 2010 through 2014, the number of lots created were approximately the same as the number of new construction projects. In 2017 new construction outpaced lot creation with 315 lots created and 532 new construction projects. Since 1991, the total number of lots created was 19,021 and the total number of final septic inspections totaled 14,561. The net difference over the last 26 years is that there have been 4,460 more lots created than there have been construction projects on them. Page 12 of 38 - Kelley Appraisal

RESIDENTIAL SALES The following is a 18-year history of home sales in Flathead County. The key data points are the number of sales and the median price. The market found its bottom from the recent recession in 2011. In 2013 prices started to increase and that continued through 2017. A primary factor in the increased over the last five years, is that bank-owned and short sales are no longer a primary factor in the market. 2017 set a new record in the number of home sales with1882 homes sales reported, compared to 1,680 in 2016. The median price finished at $257,000, which is 7.8% above the 2016 median of $255,000. The 2017 median of $275,000 is also the highest median price for any year that has ever been recorded in Flathead County. Overall, the entire year set records in both the number of sales and price nearly every month. The only months that had fewer sales than 2016 were February and April. All other months set new records. This January, there are 771 homes that are on the market compared to 851 in January of 2017 and 1065 in January of 2016. With 771 current listings, this represents 4.9 months of inventory compared 6.1 months of inventory in January of 2017. As we go into 2018, interest rates will continue to be a key factor. The overall average 30-year rate in 2017 was 4.0% and the current 30-year rate is nearly 3.95%. The 15-year rate averaged was around 3.3% in 2017 and is now nearly 3.4%. Page 13 of 38 - Kelley Appraisal

Overall Residential Foreclosures: Of the 1,882 Flathead County residential sales in 2017, only 1.8% were bank-owned properties and.3% were short sales. Both the percentage and total number of bank-owned sales were down from previous years. Page 14 of 38 - Kelley Appraisal

The following graph shows a month over month history of REO listings. It is noted that the number of REO listings is decreasing. The number of residential REO sales continued to decrease through 2017. The low munber of REO sales as well as the low number of REO listings all suggest we have a strong housing market. Page 15 of 38 - Kelley Appraisal

Residential Sales (No Waterfront and Less than Two Acres): The graph below addresses just residential properties which do not have water frontage and are on less than two acres. This is the type of residential properties that are more typically bought and sold by full-time Flathead County residents. This residential properties show the same general pattern as were seen in the overall market. In 2017 the median price of these homes were $254,050 and the average sales price was $288,576. Page 16 of 38 - Kelley Appraisal

Foreclosures (No Waterfront and Less than Two Acres): On this class of residential property, only 1.8% were bank-owned properties and.3% were short sales. This continues to indicate that distressed properties are no longer a material factor in the Flathead home market. Page 17 of 38 - Kelley Appraisal

Residential Sales Volume: This following graph illustrates a history of residential sales as they relate to the number of new listings that came on the market. This graph shows an increase from 61.6% in 2016 to 70.6% in 2017. Page 18 of 38 - Kelley Appraisal

Price Distribution of the Residential Market: This following table shows the distribution of the listings and sales in each price range and the total months inventory in each price range. According to the National Association of Realtors research department, the national average inventory as of November 2017, was 3.4 months. In Flathead County, the average inventory for properties under $300,000 is 2.3 months and the overall average is 4.9 months. Page 19 of 38 - Kelley Appraisal

This next table show the distribution of residential listings and sales by lot size and shows that the largest percentage of the demand is for homes on small lots that are typically in an urban location. Page 20 of 38 - Kelley Appraisal

RESIDENTIAL SUB-MARKETS Kalispell(City Limits): This data represents sales and listings that are only within the City limits of Kalispell. In 2017, home sales in the Kalispell City limits sales represented 26% of the overall residential market with 4493 home sales. This is up 4.9% from 470 sales in 2016. The median home price in Kalispell was $230,000, which is a 11.2% increase over the 2016 median of $206,775. This 11.2% increase was greater than the 7.8% median price increase that was seen in the overall housing market in Flathead County. This January, there are 136 homes that are on the market within the City limits compared to 91 in January of 2017. With 136 current listings, this represents just 3.3 months of inventory compared 4.9 months of inventory in Flathead County. Page 21 of 38 - Kelley Appraisal

Kalispell Area(Within 3.5 Miles of the City Limits): The total number of sales within 3.5 miles of the Kalispell City limits represents 44.3% of the total number of residential properties sold. The median price increased by 11.5% to $245,250, which is a new high. This January, there are 220 homes that are on the market in the Kalispell area compared to 196 in January of 2017. With 220 current listings, this represents just 3.2 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was also 3.2 months inventory in this same area. Bank-owned and distress sales were also down from the previous years. Page 22 of 38 - Kelley Appraisal

Whitefish (City Limits): This data represents sales and listings that are only within the City limits of Whitefish. The Whitefish City limits sales represented 12.6% of the overall Flathead residential market with 238 home sales. This is a 22.7% increase in the number of sale from what it was in 2016. This January, there are 120 homes that are on the market within the City limits compared to 126 in January of 2017. With 120 current listings, this represents 6.1 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was 7.8 months inventory in Whitefish. Page 23 of 38 - Kelley Appraisal

Whitefish Area(Within 3.5 Miles of the City Limits): The total number of sales within 3.5 miles of the Whitefish City limits represents 21.0% of the total number of residential properties sold. The median price increased by 4.2% to $340,000. This January, there are 210 homes that are on the market in this Whitefish area compared to 250 in January of 2017. With 210 current listings, this represents 6.4 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was 10.4 months inventory in this same area. Bank-owned and distress sales were the same as what they were in 2016. Page 24 of 38 - Kelley Appraisal

Columbia Falls(City Limits): The Columbia Falls City limits sales represented 4.7% of the overall residential market with 88 home sales, which is the most that have ever sold in the city limits. This is a 10.2% decrease in the number of sales from what it was in 2016. This January, there are nine homes that are on the market within the City limits compared to 10 in January of 2017 and 31 in January of 2016. With nine current listings, this represents 1.2 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there were also 1.2 months inventory in Columbia Falls. Foreclosure and distressed sales were down from what they were in 2016. Page 25 of 38 - Kelley Appraisal

Columbia Falls Area(Within 3.5 Miles of the City Limits): The total number of sales within 3.5 miles of the Columbia Falls City limits represents 10.4% of the total number of residential properties sold. The median price showed a slight increase of 24.1% to $265,000. This January, there are 40 homes that are on the market in this Columbia Falls area compared to 55 in January of 2017. With 40 current listings, this represents 2.5 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was 3.9 months inventory in this same area. Bank-owned and distress sales in the greater Columbia Falls area were also lower than what they were in 2016. Page 26 of 38 - Kelley Appraisal

Bigfork Area(Within Five Miles of Electric Avenue): The total number of sales within five miles of Bigfork represents 8.9% of the total number of residential properties sold. The median price increased by 9.0% to $327,000. This January, there are 109 homes that are on the market in this area compared to 123 in January of 2017. With 109 current listings, this represents 7.8 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was 10.1 months inventory in this same area. Bank-owned and distress sales were the same as they were in 2016. Page 27 of 38 - Kelley Appraisal

Lakeside Area(Within Five miles of downtown Lakeside): The total number of sales within five miles of Lakeside represents 4.6% of the total number of residential properties sold with a total of 86 sales. This is a 4.9% increase over the total number of residential sales in 2016. The median price in the Lakeside area increased by 8.7% to $301,605. This January, there are 61 homes that are on the market in this area compared to 71 in January of 2017. With 61 current listings, this represents 8.5 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was 10.4 months inventory in this same area. Bank-owned and distress sales were down from 2016. Page 28 of 38 - Kelley Appraisal

Flathead Lake Lakefront Homes (Flathead and Lake County: In 2017, there were a total number of 52 waterfront residential sales around Flathead, compared to 53 in 2016. The median price was up 12.6% from what it was in 2016. This January, there are 86 homes that are on the market around Flathead Lake compared to 83 in January of 2017. With 86 current listings, this represents 19.9 months of inventory compared 4.9 months of inventory in Flathead County. Last year at this time there was 18.6 months inventory in around Flathead Lake. Bank-owned and distress sales were the same as there were in 2016. Page 29 of 38 - Kelley Appraisal

Whitefish Lake Lakefront Homes: In 2017, there were a total number of 14 waterfront residential sales around Whitefish Lake, compared to 12 in 2016. The median price of those 14 sales were up 18.6% from what it was in 2016. This January, there are 18 homes that are on the market around Whitefish Lake, compared to 23 in January of 2017. With 18 current listings, this represents 15.5 months of inventory compared 4.9 months of inventory in Flathead County. Bank-owned and distress sales were about the same as there were in 2016. Page 30 of 38 - Kelley Appraisal

LAND MARKET The number of residential land sales were up 14.4% from what they were in 2016, however the total number of land sales were only up 6.8%. The next graph shows all land sales, including commercial and waterfront: Page 31 of 38 - Kelley Appraisal

This next graph shows the number of land sales that occurred over the last few years on a monthly basis: In 2017, 46.6% of the new land listing resulted in a sale. Page 32 of 38 - Kelley Appraisal

HOUSING AFFORDABILITY This next graph illustrates the current and historic relationship between housing affordability and the median home price in Flathead County. Since 1984, housing affordability and been closely related to the median home price, then that all changed in 2004 as the housing bubble drove prices above the historic affordability level. In 2011, the median price of $180,000 dropped well below the historic affordability level. In 2012 the median price increased to $187,500 and still below the historic affordability level. In 2013, the affordability index and the median price are nearly the same. Over the last four years, prices have started to outpace the affordability index and this will likely become exaggerated as interest rates increase, resulting in a lowering of affordability. A key factor in affordability is the mortgage interest rate. In 2017 the average 30-year mortgage rate was around 4.0% compared to 3.7% in 2016 and 3.95% in 2015. As interest rates increase, affordability tends to decrease. A one percent increase in the mortgage interest rate equates to approximately a 10% decrease in affordability. Page 33 of 38 - Kelley Appraisal

FORECLOSURES This first table shows a ten-year history of the recording of Notices of Trustee Sales that were recorded at the Flathead County Courthouse. Throughout 2017, the number of notices was generally lower than they were in 2016. Notices of Trustee Sales The previously addressed notices give a 120-day notice that the lender can foreclose if the payments are not brought current. This next table shows the actual number of Trustee Sales that have occurred over the last ten years. Trustee Sales Page 34 of 38 - Kelley Appraisal

COMMERCIAL REAL ESTATE MARKET The number commercial property sales were up substantially in 2017. Commercial New Construction in 2017: Kalispell Building Permits: Nine Whitefish Building Permits: Five Columbia Falls Building Permits: Four Page 35 of 38 - Kelley Appraisal

Yearly Commercial Sales: This first graph shows the annual number of commercial building sales that have been reported by the Realtor s Multiple Listing Service. Percentage of New Commercial Listings that Sold: This graph shows a history of the percentage of new listings that were sold. Page 36 of 38 - Kelley Appraisal

Commercial Listings Leased: This graph shows an eight-year history of the percentage of new commercial listings that were offered for lease and resulted in a closed lease agreement. The red line shows the percentage based on the number offered and the green line shows the percentage based on the overall square footage offered. In 2009, 9.5% of the total square footage and 17.9% of the properties that were offered through the MLS system were leased. In 2017, 28% of the total square footage and 39% of the properties that were offered resulted in a lease agreement. Note: This graph only reflects lease listings that were reported thought the Realtor s MLS system. There are several rental agencies as well as private party leases that are not reflected in this lease graph. Page 37 of 38 - Kelley Appraisal

Income Capitalization Rates on Commercial Real Estate: This graph shows a 17-year history of the average income capitalization rates that I have seen in Flathead County. This data is from commercial appraisal reports that I have prepared over the last 17 years and only reflects the data which I had available to me in each of those years. The overall pattern shows that income capitalization rates have decreased over the last 17 years. The commercial market continues to improve and is lead by the overall housing market. Generally, commercial vacancies have been steadily declining and lease rates have been stable with some increases. Page 38 of 38 - Kelley Appraisal