They said it’d be different this time, but it appears that Houston real estate is at a tipping point. The oil price crash is just beginning to be felt in the market, which has until recently proven inexplicably resistant to a severe and increasingly prolonged downturn in the city’s primary economic driver. Housing costs are at or close to all-time highs, so much so that a study from Rice University’s Shell Center for Sustainability found that Houston has crossed the line from affordable to unaffordable in the past year.
Despite the fact that a barrel of crude—Houston’s lifeblood—is now going for about $45 a barrel.
As a man who spent his formative years growing up in Houston in the eighties oil bust, these high real estate prices seemed like magical thinking at work. Detroit real estate did not boom when GM went bust, nor did Pittsburgh or Cleveland’s markets when the American steel industry cratered. As for Houston, you keep reading that it will be “different this time,” that the Energy Capital of the World’s economy has “diversified,” as locals have been reassured ad nauseam since crude went into its spiral.
But many of the rumors concerning Houston’s diversification have been greatly exaggerated—the economy is little more diversified than it was in the days of Ronald Reagan, Max Headroom, and Duran Duran. The diversification claim is typically made as if its reality were simply obvious, as if area booms in construction, shipping, retail, real estate, and the hotel and restaurant biz did not all trickle down from a booming petrochemical industry.
When defenders of Houston’s diversification do bother to state exactly how our portfolio is varied, they invariably cite the growth of the Texas Medical Center. Nope. Houston remains the “Petro Metro,” as it was once called in a (thankfully) failed grassroots (gas-roots?) branding campaign. According to a March report by Auction.com, the Mighty Med Center’s expansion is dwarfed by that of good ol’ O&G.
Back in 1985, in some of the darkest days of the worst oil bust in living memory, healthcare’s share of Houston’s total economic earnings was 5.3 percent. Oil’s was ten. By 2013, healthcare had risen to 6.7 percent, but O&G had risen even more, to 13.9 percent. That’s right. Oil’s share of the local economy is even greater and proportionately higher than medicine’s than it was in the oil bust. And of the 25 Fortune 500 companies based in Houston, only three are not in energy-related.
And now news about the real estate market is starting to fall into line behind the bad reports from the oil patch and the Louisiana Street boardrooms.
“Housing market shows further weakening,” reports the Houston Chronicle:
John Byerly has been selling real estate for more than four decades and he knows that when a house sits on the market for any length of time people often assume there’s something wrong with it and will pass it by.
He also knows it can take a little longer to sell a house in the fall after school has started.
And he’s well aware that in Houston, as goes the price of oil, so goes the housing market.
“As long as (oil) stays at $100 a barrel, no problem. People are just spending money like there’s no tomorrow,” Byerly said. “When it gets down to $35, $40 dollars a barrel, welcome back to the real world.”
With crude prices now in that range, Byerly and others like him are dealing with what increasingly seems to be a new reality for Houston real estate.
The far northern ‘burbs were supposed to explode in the wake of Exxon’s huge new corporate campus going in near the Woodlands. It hasn’t happened:
“The Exxon Effect is slower than expected,” said Lawrence Dean, senior advisor with Metrostudy Corp.’s Houston office, a housing research firm. “It’s caught a lot of developers and builders by surprise.”
Instead of immediately buying homes in the north Houston suburbs, new Houston energy transplants are signing nine- and 10-month apartment leases. These new residents want to learn their new city and figure out where to settle down, Dean said.
They have a great many apartments to pick from, as a spokesman for the Greater Houston Partnership fretted openly about Houston’s new abundance of luxury, upscale apartment complexes and other things:
“I’m very concerned about the overbuilding in apartments,” said Patrick Jankowski, senior vice president of research at the Greater Houston Partnership. “I’m very concerned about the overbuilding in office space. I’m concerned that the dollar will continue to strengthen.”
News radio station KTRH reported along similar lines:
While earlier reports suggested Houston’s real estate market was withstanding the oil decline, the effects are now starting to show. “I’m seeing not only new construction not being bought up, but I’m seeing a slowdown in the resale market,” says Michael Weaster, realtor with Xcel Properties in Houston. “There are more houses coming on the market, and I see prices either stabilizing or coming down…I’m having trouble getting some of my listings sold.”
Weaster says it was only matter of time before all of the recent layoffs in the energy industry brought on by the drop in oil prices started to trickle down to housing. “It’s got to mean something when Chevron announces all these layoffs, Shell announces all these layoffs in the energy business—these jobs are not replaceable.” And with the price of oil showing no indication of a significant increase anytime soon, Weaster predicts home sales and prices will continue to decline in Houston for the near future. “They say Houston isn’t tied to oil as much as it was in the 80s, but that just isn’t true in my opinion,” he says.
Houston old-timers promised God that if they were given one more oil boom, they wouldn’t screw it up the next time. He gave us one, but it’s looking like we screwed it up again.