South Dakota’s Unusually Strong Housing Market
On September 18, 2024, the US Federal Reserve (FED) announced it was lowering the Federal Funds target rate by half a percent (0.50% or 50 basis points). The current target range for the Federal Funds Rate is now 4.75% – 5.0%, down from 5.25% – 5.5%. This is the FED’s first interest rate cut in four years. The full impact of lower interest rates will not be realized for several months, but the FED’s decision is already starting to have an impact on mortgage rates and housing affordability. Unfortunately, lower mortgage rates can do little to change the affordability picture in South Dakota given the unprecedented and continuing rise in home prices.
In truth, the FED telegraphed its intent in its communications after the July meeting. Consequently, mortgage rates started falling shortly after the FED’s July meeting, and now, during the week of September 26, 2024, the national average for a 30-year fixed rate mortgage was 6.08% according to Freddie Mac. Setting aside the timing of when interest rates started to fall, one might ask how a half-point reduction in mortgage rates affects South Dakota homebuyers.
The total cost of homeownership is a complicated matter depending on home prices, the amount financed, interest rates, insurance costs, property taxes, and maintenance costs. For the sake of simplicity, we focus here on the core components of principal and interest payments, which depend on the home’s price, the buyer’s down payment, and mortgage rates. To isolate the effect of mortgage rates let’s assume a buyer pays $381,906 for a home — the median home price in South Dakota from January 2024 through August 2024 — and puts down only 5% as a downpayment. We assume only 5% because that is more typical for first-time homebuyers.
Figure 1 shows how a 0.5% reduction in mortgage rates would affect the monthly principal and interest payments of our hypothetical home buyer. Figure 1 shows the homeowner’s principal and interest payments would be $2,194 with a 6.08% mortgage, compared to $2,421 with a 6.58% mortgage. The half-point reduction in mortgage rates would save our homebuyer $226 per month or $2,712 per year. They would actually save $81,360 over the life of the loan, assuming they held the loan for the full 30 years without refinancing. Lower mortgage rates clearly impact affordability. If the FED continues to lower interest rates, it will help to make monthly payments more affordable. That is not the full story, though.
The home’s selling price, not the interest rate, has a bigger effect on principal and interest payments. Previous issues of the Dakota Outlook have shown that home prices in South Dakota have risen dramatically in recent years. Figure 2 summarizes this story by showing how dramatically prices have risen. The figure reports the cumulative change in median home prices since July 2016, the earliest date when Realtor.com reports state-level price data. The red line shows how nominal prices (i.e. not inflation-adjusted) have increased over the last eight years. The blue line shows how real prices (i.e. inflation-adjusted) have changed. Inflation-adjusted prices are reported in 2024 dollars.
Figure 2 shows that prices rose slowly but steadily up until January 2021, when the median home price in South Dakota was $245,120. During 2021 and 2022 price rose very quickly before stabilizing slightly towards the end of 2022. The most recent prices we have from August 2024 show that the median nominal home prices in South Dakota increased by $170,085 (80%) in only eight years. Roughly half of that price growth took place during 2021 and 2022.
Importantly, changing home prices can not be blamed on inflation alone. Even after controlling for inflation, as measured by the CPI, the median home price in South Dakota still rose by $103,776 in eight years, a 37% increase. Of course, homebuyers will take little comfort in knowing that median home prices have only increased by 37%, as compared to 80%, once inflation is taken into account.
On the other hand, South Dakota’s homebuyers may take some small comfort in the knowledge that homes in the state are still relatively cheaper than in many other parts of the country. Figure 3 shows that many of the Midwest and Plains states have lower-priced homes, as measured by the median home price, than states on either coast or throughout the Rocky Mountain region. Figure 3 does not tell the whole story though. South Dakota’s current prices may seem in line with our neighbors, but the state’s housing market has seen prices rise more dramatically than most of our neighbors. We offer our apologies to our Alaskan and Hawaiian readers for excluding them from Figures 3 through 7.
Home prices in South Dakota have risen much faster than those in many other states. Figure 4 shows this by displaying the change in median annual inflation-adjusted home prices from 2019 to 2024. We see that inflation-adjusted median home prices in South Dakota increased by $91,693 in five years — nominal prices increased by $146,688. Only nine states experienced greater price growth than South Dakota. Montana and New Hampshire residents saw their home prices increase more than any others in the nation, with median prices rising by $213,435 and $164,908, respectively. In contrast, the median home price in Louisiana rose by $1,064. Only eleven states saw home prices rise more than South Dakota.
Figure 4 shows that the Rocky Mountain and Northeast states generally saw the greatest change in their home prices. States like South Dakota and Tennessee were regional outliers to some degree, though Tennessee was slightly more so. Figure 5 displays the same story but provides slightly more context by reporting the percentage change in median home prices across the country.
Looking at price growth in terms of percentage change is useful because we can focus on changes in relative magnitude rather than absolute magnitude. For example, assume the median home price in California increases by $50,000, rising from $1,000,000 to $1,050,000. New homebuyers will not be happy, but they are unlikely to lose sleep over it. On the other hand, if the median home price in Louisiana increases by $50,000, rising from $200,000 to $250,000, then there will be many very upset homebuyers.
Figure 5 shows that South Dakota’s median home price went up by 32%. When looking at these developments in percentage change terms, only six states saw their prices go up more than South Dakota. The context provided by Figure 5 also begs the question of what could have caused these price increases. The states with the greatest price growth tended to be more rural, which may tie into the story of urban flight in the wake of Covid. On the other hand, many other rural states in the US have not seen similar levels of price growth in recent years. It is also not the case that states like South Dakota, Montana, Maine, and Vermont had the same political responses to Covid.
The picture gets murkier still when we look at price changes over just the last year. Figure 6 shows how median home prices changed from 2023 to 2024. Figure 6 focuses on nominal price changes given the recency of the data. The median home price in South Dakota increased by $16,066 from 2023 to 2024, as measured through August 2024. Median home prices in North Dakota rose by $21,312.
North Dakota, Nevada, and South Dakota experienced the largest price increases west of the Mississippi during the last year, and South Dakota’s price change was even larger than Nevada in percentage terms. Only seven states saw prices rise more than South Dakota in the last year, including Nevada, North Dakota, New Hampshire, Pennsylvania, Vermont, New Jersey, and New York. North and South Dakota stand out on the Great Plains and the Midwest for their strong price growth. In contrast, much of the Southeast and Sunbelt actually saw prices fall over the last year. Median home prices in Florida fell by $16,125. Colorado (-$14,840), Nebraska (-$7,939), and Montana (-$7,382) were some of South Dakota’s neighbors that saw median home prices fall, reversing their recent trends of continual price growth.
If median prices in a state fall, it could be due to several factors. A few broad possibilities include (1) existing sellers lowering their asking price to encourage buyers, (2) a greater number of homes priced below last month’s median price could come onto the market, and (3) fewer homes priced above last month’s median price could come onto the market. Each of the three examples above is greatly simplified, but they generally outline the market dynamics that could push the overall median price up or down.
The Realtor.com data, which only reports monthly aggregates for a few key variables, does not allow us to explore the second and third possibilities, but we can see the number of listings that lowered their prices. Figure 7 reports this information and shows that two regions of the country have had relatively stronger housing markets over the last year than others. First, the Northeast, and then the Northern Plains along with Montana and Wyoming generally had fewer houses with price reductions. Nationally, South Dakota had the fourth lowest share of active listings with price reductions (23%).
Again, we cannot say why fewer houses had price reductions. It could be that sellers were more patient, buyers were willing to pay higher prices, the mix of houses on the market had changed in some way, or a combination of these and other factors. The Realtor.com data provides some evidence against the patient seller hypothesis though. The average number of days a house was on the market in South Dakota was little different than in other states and had remained relatively constant over the past few years. In other words, it does not appear sellers are holding out and refusing to lower prices.
There doesn’t seem to be a supply issue either. The number of new listings coming onto the market every month isn’t falling relative to long-term norms — the ratio of new listings to active listings increased dramatically across the country in 2021 and 2022 and remains above pre-covid averages. At the very least, the relative number of new listings in South Dakota is generally in line with states in the Southeast and much of the Midwest whose prices have fallen or at least risen more slowly than South Dakota’s.
The best indications we have with the available data are that South Dakota’s high prices are being supported by robust demand. Further analysis is needed to determine if this could be due to strong income growth in the state, relatively stronger household balance sheets following Covid, or any number of other potential causes. For now, we leave simply with the acknowledgment that changing FED policy will help improve home affordability, but South Dakota remains in the unenviable position of having lived through rapid and continuing price growth. The state should continue to focus its efforts on expanding housing supply and growing wages and income as the long-term strategies for improving home affordability.