Houston Real Estate In Light Of Oil Price Drop – HoustonProperties

Worried About The Drop In Oil Prices On Houston Home Values?

Houston Oil effect on real estate

Oil prices have dropped to a five-year low. Since Houston holds 29% of the nation’s jobs in oil & gas, the Bayou City is more exposed to oil prices than most.(1)

While there are no signs of a slowdown so far, we’ve compiled an analysis of what may happen from a continued and prolonged drop in oil prices on Houston real estate.

We based our research on current market data, Houston’s economic make up, and the impact from the 2008 financial crisis.

NOTE: Please go here for the December 2015 Update. 

Executive summary:

  • There was an 18-month lag between the 2007/2008 financial crisis and a dip in Houston real estate prices.(2)
  • Houston’s single-family home prices fell 2.2% in 2009, and returned to “pre-crisis” levels within 24 months.(3)
  • Homeowners who bought at the peak of the pre-crisis market (including transaction costs) were able to recoup their investment within 4-5 years.(4)
Buyers from the peak of the pre-2008-crisis recouped their investment (including transaction costs) within 4-5 years on average.
  • In any downturn, there is a flight to quality. “In demand” neighborhoods outperformed.  Homes with good floorplans, not immediately located next to railways, highways or thoroughfares continued to hold value.
  • Certain areas of Houston are more exposed to energy jobs than others.  It is likely that properties located near major centers (The Medical Center – Healthcare, Downtown – General Industry, The Galleria – Retail, etc.) could outperform.
  • Houston is currently in such a strong seller’s market (only 2.7 months of inventory, compared to 5.1 months of inventory nationwide, with 5-8 months being a balanced market) that a 20-35% reduction in demand would bring a balanced market.  Historically, Houston’s “balanced market” appreciates around 3-5% per annum.(5)

Real estate is hyper-local.  The quality of your neighborhood and home matters.

Any downturn (from oil prices or other negative events) create a “flight to quality.”  The value of a Top Houston Realtor is candid feedback on which areas and properties are most likely to hold value over time.

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Major Themes And Findings

Not surprisingly, Houston is exposed to the energy industry.

Houston is currently more exposed to the energy industry than most US cities as nearly 25%(1)(7) of our employment is directly or indirectly tied to in the sector (for comparison, New York City has approximately 10% exposure.) (6).

energy jobs growth by metrostudy

houston msa jobs data

 

energy production growth

oil production growth

 

Houston’s energy exposure is down 70% since the 1980’s – thanks to growth in other sectors.

houston msa data

Houston’s energy exposure is dramatically lower than it was in the past. 85% of Houston’s employed in 1985 was directly or indirectly exposed to the energy sector.(4)

Houston’s primary other industries include: Retail And Food Services (24%), Healthcare (11%), Government (13%). Education, Recreation and Entertainment, Real Estate, Finance, Information and Other Services combine to make 14%.(1)(7)

The Health care industry alone accounts for one in every 10 jobs in the region, 9.5 percent of local payroll ($15.9 billion in ’13), and more than 48,000 jobs created since the end of the Great Recession. (9)

 

houston jobs by industry

houston retail jobs growth

 

houston employment for 2015

 

Houston’s real estate market is so strong now, that 20-35% dip would create a “balanced market.”

Houston is currently in a very strong seller’s market (2.7 months of inventory, compared to 5.1 months nationwide and 5-8 months being a balanced market).(5)

A 20-35% drop (either based on a drop in demand or increase in supply from new homes on the market) would bring us to a balanced market.

Historically, Houston’s “balanced market” appreciates at a rate between 3-5% per annum.

We are still seeing a robust market (November 2014 Market Report – which is another record month for the area) and multiple offer situations on homes for sale.

We’re still seeing growth in total property sales (2.8%), total dollar volume (12.3%), and single-family home sales (1.8%).(5)

houston home inventory

houston-nov-sales-data

Source: Houston Association of Realtors December 2014

townhouse

Source: Houston Association of Realtors December 2014

 

CATEGORIESNOVEMBER 2013NOVEMBER 2014CHANGE
Total property sales6,0446,2122.8%
Total dollar volume$1,430,952,766$1,606,455,37612.3%
Total active listings30,34127,374-9.8%
Total pending sales3,2733,4044.0%
Single-family home sales5,0005,0921.8%
Single-family average sales price$245,933$271,23210.3%
Single-family median sales price$182,500$194,8006.7%
Single-family months inventory*2.92.7-7.3%

* Months inventory estimates the number of months it will take to deplete current active inventory based on the prior 12 months sales activity. This figure is representative of the single-family homes market and come from the Houston Association of Realtors.

 

Global Financial Crisis Lesson #1: 18-Month Lag.

While no one knows the direction or magnitude of future oil prices, we could extrapolate what a continued drop in oil prices may look like by evaluating at the impact of the 2007/2008 financial crisis.

In August 2007, the interbank market froze completely, and major banks started looking for emergency funding.

Lehman Brothers collapsed in September 2008.

The average sales price per square foot of single family home price of Houston close-in neighborhoods  increased in both 2007 and 2008.

 

houstn close in neighborhoods 10 year trends

 

In September 2009, average price of single-family homes was 1.6% lower than the previous year.(2)

Houston’s single-family home prices was up 4% by 2010, and returned to “pre-crisis” levels within 24 months.(3)

The main trend that Houston real estate experienced was a drop in total VOLUME but not a massive decrease in the average or median sale price per square foot, like other parts of the country experienced.

CATEGORIESFull-Year 2009Full-Year 2010PERCENT CHANGE
Single-family home sales54,53151,428-5.7%
Total Property Sales63,80360,871-4.6%
Total dollar volume$12,499,040,325$12,364,327,660-1.2%
Single-family average sales price$203,626$211,7654.0%
Single-family median sales price$153,000$153,9900.6%

 

Global Financial Crisis Lesson #2: Different Neighborhoods Trend Differently.

Neighborhoods trend differently, as real estate is local (and in most cases hyper-local).

Certain areas, subdivisions, and condo buildings had an extremely muted impact (compared to Houston, Texas or the nation) as these areas were (and are) consistently in high demand.

These areas benefited from two main factors:

  1. Most sellers who lived there didn’t have to sell (they could either rent out their property or had the luxury of having financial resources to keep their home).
  2. The areas were (and in nearly all cases “are”) in such high demand that they had a continual interest from new buyers (buyers “moving up,” buyers wanting to be close to their jobs, relocation buyers, investors, etc.)

Notable neighborhoods that fit these criteria include: West University, River Oaks, Bellaire, Timbergrove / Lazybrook, Museum District, Houston Heights, Southampton, Rice Military, Afton Oaks, etc.

 

West U Houston Real Estate Stats

 

River Oaks Houston Real Estate Stats
Bellaire Houston Real Estate Stats
Timbergrove Houston Real Estate Stats
Houston Heights Houston Real Estate Stats
Southampton Houston Real Estate Stats
Rice Military Houston Real Estate Stats

 

As in most crises, real estate experiences a “flight to quality.”  (If you want a collection of neighborhoods in consistent high demand in your price point, email me.)

Assuming a “bad case scenario” for oil prices, it’s likely that neighborhoods with a close proximity to major job centers of other industries will trend better (e.g. Medical Center – Healthcare, Galleria – Retail, Downtown – General industrial).

Likewise, neighborhoods with a higher proportion of energy jobs than average, or neighborhoods located in further proximity to the major job centers could trend worse.

 

Global Financial Crisis Lesson #3: Flight To Quality.

High quality homes sell in nearly every market.

Disadvantaged homes sell more slowly or at larger discounts.

In the aftermath of the 2007/2008 financial crisis, we saw a flight to quality in nearly every asset class – including Houston real estate.

Several of the key factors that influenced the price and speed that homes sold in the downturn include:

  • Railways.  Homes in close proximity to railroads tended to sell at larger discounts.
  • Highways.  Homes in close proximity to highways tended to sell at larger discounts.
  • On major thoroughfares.  Homes located on a major thoroughfare tended to sell at larger discounts.
  • Floorplan.  Homes built with a bad or awkward floor plan tended to sell slower or at larger discounts.
  • Quality of construction. While this can be subjective (or determined by a good inspector during the option period) homes built by “known problematic builders” sold at material discounts.

The primary value of a top Houston realtor is to provide candid advice on the resaleability of a home in a downturn.  Not all homes are created equal.

 

Global Financial Crisis Lesson #4: Financing Terms Matter.

Mortgage financing terms are of critical importance. The primary drop in real estate sales from the 2008 crisis did not stem from a lack of demand – it came from the lack of ability to get financing.

Two notable items have the ability to mitigate a drop in oil prices:

  1. We are seeing 90% / 100% financing returning to the market for certain professionals (doctors, lawyers, engineers, etc.).  The impact of this is enormous as it shifts the demand curve up and could counterbalance a fall in demand due to fewer energy jobs.
  2. Together Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new home loans.(8)

What the Fed decides to do about interest rates is anyone’s guess, but it will impact the real estate market.

If the Fed acts more “dovish” due to a drop in the energy industry, the impact of a drop in oil prices will be muted.

Any downturn (from oil prices or anything else) create a “flight to quality.”  The value of a Top Houston Realtor is candid feedback on which areas and properties are most likely to hold value over time.

  • CONSIDERING SELLING? Get a custom home valuation guide.
  • BUYERS: Get a custom recommendation on areas that may be the best fit for you.

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