- The percentage of price reductions is still fairly moderate at around 38 percent in Houston
- It’s easier to build and buy in Texas than in places like California, so the market is more liquid and less prone to giant spikes and crashes
- 2012, 2013, and 2014 were marked by pent-up demand, low supply and rising home prices
In the last 14 months, oil prices have fallen by 60 percent. For most American consumers, this has been a pleasant bonus. Lower gas prices give us more money in our pocket to do things like buy houses.
For U.S. oil companies, on the other hand, it’s hard to make a profit when the market slashes your prices. Oil company profits are way down. Stock prices are crushed. Investments in drilling and refining are being slashed. Layoffs are, inevitably, underway.
[graphiq id=”cbyZCcg39U9″ title=”Crude Oil Production in the United States” width=”600″ height=”520″ url=”https://w.graphiq.com/w/cbyZCcg39U9″ link=”http://time-series.findthedata.com/l/36300/Crude-Oil-Production-in-the-United-States” link_text=”Crude Oil Production in the United States | FindTheData”]
This means that cities in the oil business may have a much different economic outlook than the rest of the U.S. And no American city has tied its prosperity to the fate of the oil and gas markets more than Houston, Texas.
I was visiting with some of Altos Research’s Wall Street clients, and every one of them wanted to know: “What’s happening in Houston?”
Given that Houston has a reasonably resilient housing market, and that you can imagine a year or more lag time between oil market shock and a city’s economic reverberations, we should just now be seeing the signs of regional economic slowdown in Houston’s real estate market.
Measuring demand for real estate in Houston
We have a basket of indicators that we use to measure buyer demand for homes. One of the most insightful measures is the percentage of homes on the market that have taken price reductions. We know that in any market, some houses set their list price a bit too high and take a price cut before they sell — usually about 35 percent in a normal market and as low as 15 percent in a hot market.
So when price reductions are below 30 percent, we know demand is strong (more people are buying so sellers don’t have to cut prices as often as they’d expected) and home prices should experience solid gains for the next 12 months.
When price reductions are between 30 percent to 40 percent, demand and supply are in balance and we forecast moderate home price gains for the coming 12 months. As price reductions climb above 40 percent, that’s when you should expect prices to decline.
Like the rest of the country, Houston’s real estate recovery started in 2011 — and you can see that in the price reductions stat which began a multi-year decline at that time. 2012, 2013, and 2014 were marked by pent-up demand, low supply, and of course rising home prices. Houston had a booming oil economy in those days.
As of October 24, 2015 we can see that while the seasonal peak of price reductions will be significantly higher than any time since the recovery started, the percentage of price reductions is still fairly moderate at around 38 percent. This means that Houston has shifted from a hot market, to a more balanced market.
We’re also nearing the December seasonal peak for price reductions, when sellers cut prices to get the deal done before the holidays. We would expect to see things start to level off in January when new stock hits the market.
So at this point, Houston is not in the red zone for the first half of 2016, though the early inklings of risks may be in the data.
As critical as oil is to the Houston economy, it’s important to remember that the city also has other dynamics working in its favor, including positive sun-belt immigration, favorable zoning and development laws, low mortgage rates, and a broadly growing US economy. It’s easier to build and buy in Texas than in places like California, so the market is more liquid and less prone to giant spikes and crashes. This is evidenced by the fact that Houston weathered the housing bubble much more smoothly than other sun-belt cities.
As of right now, it also appears to be weathering the great oil storm. We’ll check back on this topic in February to see if the second half of 2016 holds weakness for Houston real estate.
Michael Simonsen is the co-founder and CEO of Altos Research.