The Houston Housing Market: Things Are Looking Good Around Here…Can It Last?

It’s no secret that the Houston economy has been outperforming the national and international markets for some time.  (At least I hope it’s no secret or else we haven’t been doing our job with enough vigor to set the record straight.)  At any rate, the fundamentals of the Houston market are strong.  Houston’s job growth over the last two years has focused in the Professional & Business Services and Health Care & Social Assistance sectors.  While the latter sector’s growth can be explained by the rise in ambulatory health centers around the expansive Houston suburban areas, I think the former sector’s growth requires a bit more explanation for the outside observer.  In Houston, Professional & Business Services is read Consultants & Engineers.  Much of the growth in this sector can be attributed to the supposed “white-collar” engineer jobs (to use an old term) within the area’s energy sector.  Houston is the hub for oil and gas technology around the world and, as such, demands a very large number of highly-skilled personnel to meet the growing international demand.  Moral of the story, we have highly compensated job growth.

But the question remains, can it last? Currently Houston is adding 85,000 jobs a year, a 3% growth rate.  This is uncharacteristic growth in a stable (or recovered) market.  In the twenty years leading up to the latest recession Houston averaged 50,000 jobs per year, or 40% fewer than our current pace.  So if you wake up 6 months from now and the newspaper reads “Houston Added ONLY 50,000 Jobs in the Last 12 Months” rest assured that we’re still doing just fine.  As long as oil prices remain above $70 per barrel there will be growth, and therefore money, in the Houston economy.

As a result of adding jobs each of the last twenty-four months, word has gotten out about the “jobs oasis” just north of Mexico.  Demand for all types of housing (new homes, resale homes, and apartments) has sprung back quicker than almost anywhere else in the nation.  In the last twelve months the Houston market has closed over 57,000 homes through MLS, started 20,900 new homes, and absorbed 17,000 apartment units.  All together the Houston housing market has proven demand for almost 95,000 housing units.

Again, though: can it last? Well first off, the supply of homes listed through MLS is less than the six months Metrostudy considers equilibrium for the market.  When the supply of homes is below equilibrium sellers are able to hold firm on their asking prices.  In the new home market, new home starts are up 29% as builders attempt to stay in front of the mounting demand.  In the apartment market, new apartment construction was slow to react to the surge in demand created by the recession.  The apartment market has already absorbed more than 12,000 units in the first six months while expecting to deliver a total of ONLY up to 8,000 units this calendar year.  The disconnect between a shrinking apartment supply and growing demand has led to higher occupancy rates and record rental rates. The “Rent vs Buy” Index (as created by Forbes Magazine) shows that for single-family rental homes and Class-A apartments, it is more favorable, on a monthly payment basis, for a Houstonian to purchase a home rather than rent those kinds of units.  Class-B apartments are not far behind this distinction with average monthly payments above $800 per month.  Rabid job growth is creating new households and apartment pricing is making these new (and relatively new) households seriously consider owning again.

Over the last quarter our clients have been hesitant to allow themselves to believe in the health of the market in which they’re operating.  Much of this hesitation can (or at least will) be levied on the econo-political uncertainty in the national and international markets.  The after-effects of the global recession still resonate within the budgets of nearly every government and the resulting political paralysis threatens to send us back into the abyss each evening (or so the news hawkers would like you to believe).

How long will it last? At the end of the day, politicians will work in their own best interest.  More and more, however, their respective countries’ best interests (not falling off of the Fiscal Cliff) are coming in-line with their own.  I would never venture to forecast when Congress would act on anything, but dragging my/your/OUR country into a recession helps no one.  The United States is currently growing at 1.5%, a disappointing number, yes, but significantly better than most countries in Europe.  China’s growth has slowed significantly this year, decreasing the demand for oil and other goods.

An international recession would affect us at home but the real estate professionals strong enough to be active today are five years better prepared for such an event.  For Houston, energy prices are in their sweet spot for the local economy, the real estate over-hang has been handled, interest rates are historically (almost comically) low, and job growth is surging, accommodating increased household demand.  The question isn’t can it last but rather can we get there with there being defined as Houston’s housing demand as dictated by the market fundamentals.  Based on historical ratios and current housing demand, the Houston market should be closing 30,000 new homes each year.  The growth period is where the money is made and for the time being, in Houston, there’s money to be made.   Yes, I may be a bit of an optimist, but in Houston, our worst has been, or is being, dealt with, allowing Houstonians to work for the better times ahead.

Source: Madison Inselmann, Metrostudy