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Crude Keeps Plunging, Threatening To Drag Down Houston’s Residential Real Estate Market With It

As the price of crude keeps plunging and the oil and gas layoffs mount, more and more bad news is coming from Houston’s residential real estate market, even as some developers are building or planning still more luxury condo projects.

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Flickr Creative Commons | emmiegrn

As the price of crude keeps plunging and the oil and gas layoffs mount, more and more bad news is coming from Houston’s residential real estate market, even as some developers are building or planning still more luxury condo projects.

Welcome to the Bayou City, where unbridled optimism dies hard.

First, a little about jobs (or the lack thereof). A year ago, just as oil started its plunge, Patrick Jankowski, chief researcher at the Greater Houston Partnership (Houston’s chamber of commerce), predicted that Houston would add 62,900 jobs in 2015. In April, he announced that number would need to be revised downward, but wouldn’t say by how much: “We’ll still have job growth this year; it could be 5,000 or 50,000 jobs. I don’t know yet because I don’t have enough information.”

A few months later, the GHP came up with a range of 20,000 to 30,000 jobs added, but Jankowski went on to announce that 2016 might see overall job losses. That grim forecast later proved to be 2015’s reality, at least through September, as only December, the GHP announced that Greater Houston had in fact lost jobs through the first nine months of 2015, and it was October’s total of 21,000 new jobs that finally put the region in the black.  Up that point, we’d lost 13,000 jobs.

Worse, the bulk of the cuts have come in O&G, still indisputably the locomotive that pulls the rest of Houston behind it.  Just how many of those high-paying gigs the city and its suburbs have lost is devilishly hard to count, but one high-end estimate puts the Houston-area number at 50,000 since last December, while the GHP claims 29,000 for 2015, and also predicts 18,000 more to come in 2016. According to the Houston Business Journal, plunging stock prices caused two Houston companies to lose compliance with the New York Stock Exchange and Nasdaq in 2015.

According to the GHP, the bulk of jobs added over that same time have come in fields like medicine, construction, retail, hospitality, and government, and they will continue to do so for the foreseeable future.

It’ll be different this time. We diversified.

When you make the comparison to the oil bust that devastated Houston’s economy in the 1980s, that’s the mantra you inevitably hear from those who have remained bullish on the Houston economy since oil went in the tank late last year. (For the record, comparing 2015 to 1982 exasperates the hell out of Jankowski: “This is in no way going to look like the ’80s and hopefully this is the last time I have to say that to anybody,” he said when the GHP released its official economic outlook for 2016 in December.)

Almost all of those people cite the booming Texas Medical Center as exhibit A in defense of Houston’s diversity, but as we pointed out in October, though it’s true that the Med Center has grown, O&G has grown even more. At its peak it was proportionally even more important to Houston’s economy last year than it was in the 1980s.

Many of those optimists struggle to come up with an exhibit B, but some of those who do cite a boom in the construction industry, which brings us back to real estate, and how we are just starting to see how oil patch job annihilation is trickling down into the residential real estate market.

It’s becoming apparent in home sales. Since we last looked in on the market, they have fallen 10 percent in October and 10.5 percent in November. Townhouses and condos fell 10.3 percent in November, and now the apartment market is starting to soften. That comes on the heels of a Forbes report that shows Houston has permitted more residential projects than any other large U.S. urban area between 2011 to 2014.

That extends to rentals. Neal Verma owns 16 apartment complexes in Houston, totaling 6,000 units. A quarter of those are Class B (8 to 20 years old) and the remainder Class C (older than 20 years.) Verma told the Houston Chronicle in December that many of his Class B tenants work in O&G, and many of his Class C tenants are construction workers. He is seeing a decline across the board. As oil workers get their walking papers, they move out. As oil companies tighten their belts, they stop building new office buildings, and thus construction workers pack up their toolkits and beat feet out of town as well.

The decline isn’t drastic—yet. Verma said that his complexes have dipped from 100 percent occupancy to 95 percent at his Class B properties and 98 at his Class Cs, but there’s no way to spin those numbers positively, especially not with a grim year ahead. The bulk of Houston’s top paying white-collar jobs are in energy, and construction stands atop the heap for blue-collar jobs. Now that the oil downturn has cooled construction, we have seen the first ripple, and barring a sudden, drastic upswing in the price of crude, it seems inevitable that these losses will soon become apparent in retail and restaurants, if they have not already.

When the locomotive runs out of steam, the train grinds to a halt, no matter how diverse the cargo in the boxcars behind it. DFW, Austin, and San Antonio have hitched up a few more cars to their trains, but despite its best efforts over the last 30 years, Houston has still yet to do so. The good times all too easily erase memories of the bad.

And yet even as job losses mount and leasing weakens for some of Houston’s most affordable apartments, construction and planning of luxury condos continues apace. Oddly, all but two of the dozen or so now underway sport unit prices starting north of $500,000. Indeed four of them will have a seven-figure baseline: 3615 Montrose’s 30 units and four penthouses will range from $1 million to $2.5 million; the Aurora’s 36 units and four penthouses will set you back anywhere from $2 million to $5 million; the Monroe’s nine units will go for $1.4 million to $3.8 million; while the least pricey of the Belfiore’s 46 units will set you back a mere $2.5 million. (There is one exception to the Miele appliance/neolith countertop rule: The 24-story Ivy Lofts, Houston’s first experiment in large-scale micro-living. The project just east of downtown is offering wee 300-square-foot condos for $119,000.)

With all that upscale development underway, you’d think crude was going for $350 a barrel and not $35. Where are all these millionaires coming from?

Suburbia, according to Charles Sims, developer of the Aurora:

Potential buyers, many of them empty nesters from the suburbs, are seeking a new way of living, Sims said. They’ve made their money and are beyond worrying about seesawing oil prices.

“Our clients are business owners, entrepreneurs and professionals who have built a business, raised their families and are now looking for a shift in lifestyle. They’re ready for a change,” Sims said last week in a sales center in an Uptown Park storefront. “I don’t think the vagaries of stock market and oil patch will make a significant impact on their decision of if they do that or not.”

So, this wealth is coming from nearby places like Sugar Land, The Woodlands, and Memorial, and also, increasingly, faraway China.

Houston now has the largest Chinatown in the South, and leery of their own unstable and lagging economy, many of their wealthy overseas countrymen are investing in Houston real estate. And when Chinese investors buy American, they tend to buy big:

Overseas buyers tend to hunt for trophy properties. This helps explain why the median purchase price to international clients ($268,284 last year) is significantly higher than for all sales ($199,575). That’s particularly true of Chinese buyers, where the average purchase price topped $590,000 and the median exceeded $523,000. Canadian and Mexican buyers, by contrast, appear to buy much more modest homes.

But how many well-heeled, gray-haired suburbanites are out there, and how long until Chinese investors start to see that Houston’s economy is starting to sputter as much or more as their own? Will oil fall another 33 percent to a historic (inflation-adjusted) low of $20 a barrel, or vault back up to $100, as one “outrageous” forecast foresees? The gulf between those conflicting predictions says it all: nobody knows, and those who do know ain’t telling.

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  • Jorge Jaramillo

    Economists what the heck do they know, we’re going right back to what made the economy tank the last time overheated housing and now oil, did these companies think that the Saudis were just going to standby and do nothing? They did what any American oil company would do and have done if they were in their position,squeeze the competition out. Why are US companies surprised, they should have seen it coming but as usual blind greed and profits blinded them.Same old story.

    • Jack Lance

      If American oil companies tried to do what the Saudis are doing now, they would be slapped with anti-trust lawsuits and public outrage. People only complain about predatory pricing schemes when it cost them money . What they don’t realize is that this will cost them money in the long run once the Saudis get their way they will set the price and cash will flow to the Middle East and away from America. Talk about lessons never learned…!

      • wessexmom

        And how exactly did you arrive at that conclusion? Right now, the Saudis are panicked because in current markets they have too little control. They are now just one of many oil-rich nations, which means both their market share and their power is shrinking. Their recent actions are an attempt to hold on to what remaining market share they still have. But such efforts will have little impact on the larger global picture, so how exactly do you see them “getting their way”? By not limiting production, the Saudis royals are bleeding their own economy dry, and that could have serious domestic repercussions for THEM down the road.

        • Jack Lance

          “Getting their way” is the destruction of American oil production ie the Shale oil revolution. This is commonly seen as the strategy behind their refusal to limit production and support prices. As far as your Geo-political assessment of Saudi Arabia I for the most part agree with you . However this “strategy”, I refer too, although risky for them in so many ways, some of which you elude too, does seem to be working.
          OPEC may be dysfunctional, but Saudi Arabia is not a Paper Tiger and still has a huge influence in the World oil market.

    • Chris Hall

      It’s more than just the Saudis defending market share — it’s about the fact that they’re also involved in a little war in Yemen and they need the oil to fund the government…which in turn funds their war in Yemen.

      But the job losses says less about the oil and gas market in the Middle East and more about the oil and gas market here.

      Much of the growth was unsustainable because so many drillers were drilling with borrowed money. In short, a lot of these companies were investing in upstream projects with break-even points $40 to $60 per barrel higher than what oil prices are now.

      After OPEC refused to cut production and the Chinese economy slowing down, the drillers were left with a problem being overextended in debt and companies were left with too much oil in stock.

      Here’s the truth — oil prices will come back up. Depends on who you believe as to when, but supply and demand will once again be in balance and the oil market will correct. Do I think it will be the first half of 2016 as some analysts have said? I don’t know. That really depends on Saudi’s war in Yemen and the Chinese economy. But I don’t think that the oil market — or Houston for that matter — is doomed.

  • Jay Trainor

    Today’s price is under $31 per barrel. Looks like the market is determined to test that $20 prediction….

  • mediablowhards

    The so-called Texas Miracle was built on unsustainable levels of debt and wildly unrealistic and overinflated oil prices.

  • dormand

    One report published a couple of years ago pegged the median oil patch salary in Houston at
    $200,000.

    With oil prices edging $30, any company that attempts to maintain its head count will be out of business in a short period of time.

    In a commodities industry, prices will inevitable rise and fall. Any company that locks in fixed costs during peak price eras is bound to lose many when prices fall.

    On the favorable side of the plunge in oil prices, we will probably see a tad more humility from Russia and Saudi Arabia as they gasp to keep their noses above water.

  • Fantasy Maker

    With Iran now selling roughly 4 million barrels of oil on the open market you will continue to see the price of oil going lower.There is at least a daily 2 million barrel over supply on the market with nobody who can afford to stop production so they can fund their country’s obligations ( all of OPEC as well as Russia,) as well as companies who have hundreds of billions in long term projects that were started in 2012, 2013, 2014 with those projects not even close to breaking even yet.
    Of course the trickle down is going to affect everyone in the oil patch negatively including banks, real estate,construction, home furnishings, office rentals, retail etc.