Worried About The Impact Of Oil Price Crash On Houston Home Values In 2020?

Worried About The Impact Of Oil Price Crash On Houston Home Values In 2020?

We reviewed key trends from the 2015 oil crash and 2008 Great Recession to see how 2020's oil price crash will impact the Houston housing market.


Worried About The Impact Of Oil Price Crash On Houston Home Values In 2020?

Oil prices have dropped to a 25-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.

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.

EXECUTIVE SUMMARY

  • There was an 18-month lag between the 2007/2008 financial crisis and a dip in Houston real estate prices.
  • Houston’s single-family home prices fell 2.2% in 2009, and returned to “pre-crisis” levels within 24 months.
  • Homeowners who bought at the peak of the pre-crisis market (including transaction costs) were able to recoup their investment within 4-5 years.

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.

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.

KEY RESOURCES:

Buyers from the peak of the pre-2008-crisis recouped their investment (including transaction costs) within 4-5 years on average.

Covid-19 And Oil Crisis Impact On Houston

Current state of the Houston real estate market post COVID-19 and oil price war.


Table of Contents

  1. Not surprisingly, Houston is exposed to the energy industry.
  2. Houston’s energy exposure is down 70% since the 1980’s – thanks to growth in other sectors.
  3. Houston’s real estate market is so strong now, that 20-35% dip would create a “balanced market.”
  4. Global Financial Crisis Lesson #1: 18-Month Lag.
  5. Global Financial Crisis Lesson #2: Different Neighborhoods Trend Differently.
  6. Global Financial Crisis Lesson #3: Flight To Quality.
  7. Global Financial Crisis Lesson #4: Financing Terms Matter.
  8. Sources, Methodology & Disclosures

Not surprisingly, Houston is exposed to the energy industry.

Not surprisingly, Houston is exposed to the energy industry.

Not surprisingly, Houston is exposed to the energy industry.

Houston is currently more exposed to the energy industry than most US cities as nearly 45% of our employment is directly or indirectly tied to in the sector (for comparison, New York City has approximately 10% exposure.


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

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

"Paige Martin and her team are the finest group of professionals in the business" – Jason (Google review)

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.

Houston’s primary other industries include: Trade, Transpo, and Utilities (19.9%), Educational and Health Services (12.8%), Government (12.4%). Recreation and Entertainment, Real Estate, Finance, Information and Other Services combine to make 14%.

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.


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

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

"The Houston Properties Team is the #1 boutique real estate team in Houston for good reason. Paige, Lisa & Shannon are incredibly candid, professional and they go the extra mile. Their analytics system is 2nd to done, their Success Team is exceptional and on the ball, and they have vendors for everything you'll need." – Infinite Ridge (Google review)

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).

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.

Based on the March 2020 market report, we are still seeing a robust housing market. We recorded notable growth in total property sales (6.9%), total dollar volume (11%), and single-family home sales (8.2%).

We expect things to slow down considerably in the 2nd quarter (and possibly moving forward).


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

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

Paige Martin has been recognized as the #1 individual agent in Texas and the #5 individual realtor in the world with the Keller Williams group. We really enjoyed meeting her and appreciated her professional, diligence and follow up. – Calli Ricker (Google Review)

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.

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

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

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.


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

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

"The Houston Properties Team under the leadership of Paige Martin, is one of the most successful real estate teams in Texas. Paige and her team takes the pain out of the real estate experience through hard work, proprietary systems and processes, and a deep understanding of the hyper local Houston real estate market. She's ranked #5 in Keller Williams worldwide and #1 in Houston with good reason. Paige is the best!" – Sandy (Google review)

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:

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).
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

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.

Global Financial Crisis Lesson #3: Flight To Quality.

"Three years after purchasing our home, Paige Martin continues to provide excellent service! After experiencing electrical problems a recently, she was able to immediately put us in touch with her top inspector who walked us through the issue over the phone. Something that could have cost us hundreds of dollars, ended up being an easy fix for free! With Paige and her team, you know you will have help and support whenever you need it, even long after you have purchased your home. That kind of help is invaluable!!" – April Coker (Google review)

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.

Global Financial Crisis Lesson #4: Financing Terms Matter.

"We had the pleasure of meeting Paige Martin. She was recently presented with the following awards:

– #1 Keller Williams Realtor in Houston

– #1 Keller Williams Realtor in Texas

– #5 Keller Williams Realtor in the World

Our short time with her showed us why she's so successful: she's smart, patient, and very professional.!" – Kristin Bond(Google review)

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:

  • 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.
  • 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.
    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.


Sources, Methodology & Disclosures

Sources, Methodology & Disclosures

With all the available information out there about Houston's top areas, it can be confusing when finally making a decision on which neighborhood to choose. Get the advice of the best Houston Realtors and remove the guesswork when looking for one of the best homes in Houston to live in.

  • Houston Economic Highlights
  • https://www.houston.org/living/
  • Median home sale prices were calculated by HAR MLS Geo Market area, HAR MLS Master Planned Community –Designation, or HAR MLS subdivision based on data from January 1 – December 31, 2019.
  • All median Houston home value information was sourced by the HAR MLS database.
  • *Default median housing price values are from single-family homes, except these neighborhoods (where condos, townhomes and single-family homes are considered due to the fact that there’s an above average of condos/townhomes in these market areas.) These exception neighborhoods include: Braeswood Place, Rice/Museum District, Memorial West, Midtown, Downtown, EaDo, Memorial Close In, and Medical Center.
  • For “can comfortably afford” salary assumptions, we used that 28% of gross income could be used toward monthly PITI costs.
  • Data is deemed accurate, but is not guaranteed. Information is provided for informational purposes only.
  • If you’d like to see any neighborhoods, master planned communities or subdivisions added to this bi-annually updated watch list, please let me know.

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