There’s a reason why the benchmark for U.S. crude oil is West Texas Intermediate.
Oil lubricates the entire Texas economy.
Of late, that benchmark grade of crude oil has made headlines: it’s now fetching record low prices on commodities markets.
Earlier this week, black gold began trading below $27 a barrel, reaching lows not seen since May 2003.
While consumers are elated by gas that’s well below $2 per-gallon, energy companies feel nothing but pains. By some accounts, energy companies had laid off close to 260,000 workers in 2015, and the pain may continue into this year.
The Greater Houston Partnership, in its annual report, said that energy accounts for about one-third of the region’s GDP, 10 percent of the region’s employment, and more than one-fifth of the region’s wage and salary income.
The causes of the downturn are far from a mystery. From an economic cooling off in China to record global crude inventories, the slump seems be continuing the course it followed in the last two years. Even unrest in the Middle East, which historically roiled energy markets, registered nary a blip this time. And, Iranian crude oil will likely enter the global market this spring, adding to the glut and the potential for further price declines.
Adjusted for inflation, crude is trading at the same level as in late 2002.
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The Greater Houston Partnership predicts that 2016 will be even tougher for the industry. They reported that Texas Railroad Commission issued only 727 drilling permits in December, the fewest for the month in records dating back to 2003. The commission typically issues 1,400 or more in the month. That measurement is akin to building permits for the housing industry.
The impact has been uneven so far, said the Partnership. Office leasing is down, but retail construction is up. City sales tax collections have slipped, but vehicle sales set a new record. Home closings have fallen. Airport and port traffic continue to grow. And employers continue to add jobs, just enough to offset losses in energy.
Houston real estate market ended the year cool
According to year-end numbers released by the Houston Association of Realtors (HAR), a brew of plunging oil prices and the resulting layoffs, mixed with persistently low levels of housing inventory made for the drop in sales that economists had forecast.
HAR reported out that December single-family home sales slid 9.7 percent versus December 2014 while total property sales dropped 9.9 percent. Homes priced between $150,000 and $500,000 saw flat year-over-year sales, while homes outside of that bracket saw declines.
“With oil dropping to levels around $30 a barrel, I think it’s fair to say that the Houston housing market is going to remain cooler for at least a little while,” said HAR Chairman Mario Arriaga with First Group, in a statement. “The good news is the local economy is vastly more diversified than it was during the oil bust of the 80s and other industries are continuing to hire, so it really is going to come down to consumer confidence.”
Christi Borden, Realtor with Better Homes & Gardens Real Estate Gary Greene, and a HAR board member, says that Houston shouldn’t be painted with a broad brush.
“Houston should be painted with a very minute, fine brush,” she said. “Houston has an entirely different economy now than it did during the last downturn.”
Borden should know — she’s been in the business for 14 years, and handles buyers in Katy, Texas, which she says is where many oil and gas industry employees look to live.
She underscores what the Partnership mentioned in its report — falling in one employment sector could mean a gain in another. For example, she said, there has been a rise in the petrochemical employment sector.
If you build it, will they come?
KB Home is a big player in the Houston market. In a recent front-page story in USA Today, the builder was mentioned as an example of one who has scaled back in the Houston market. The paper reported that CEO Jeffrey Metzger told analysts last week that KB “decided let’s take some chips off the table until things stabilize,” referring to construction in that market.
Metzger wasn’t able to speak with us about the company’s views on the Houston market, but company reps did email some additional information from the analyst call.
“Specific to Houston … Our first-time [homebuyer] in what I would call our affordable first move-up communities are continuing to sell well at high margin and solid sales pace below $250,000,” Metzger told the analysts. “So the communities that we have that are above $250,000 and we do have some, were quickly rotating to smaller footages, lower spec levels and we’re going to drive our price down and hopefully holding our margin percentages. So we’re being pretty proactive there.”
Metzger continued, “and we still view Houston as a real opportunity. It’s a large market, it’s a diversified economy. You just have to stay strategic right now until there’s clarity and we’re going to keep working to move our price points down until oil settles and we know where it’s headed.”
Houston skyline image via Shutterstock.
Houston housing market historically remains stable
Rina Camhi, who’s been in the industry for 14 years in a variety of capacities, has a slightly different take. She says that she’s been through an entire cycle of rising and falling markets in Houston, and points out that the market has historically been strong, and didn’t see the rapid gains that other metros have.
She said that price drops come in housing as a direct loss of jobs. And, since part of her bandwith includes understanding of the rental market, she said that rental listing are on pause, too.
“The luxury market slows a bit,” Camhi said. “ Agents are capturing the middle market.” But, she adds, even though new home construction did dip, the custom builders have business year-round.
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She feels that the Houston market can absorb job losses. She gives the example of a displaced worker sliding easily into a job with Uber. And, expansion continues to happen, with other building and infrastructure projects still in the works.
She expressed the same sentiment on price as did Metzger: she said that seller drop their prices more than once and home still sit, looking for that sweet spot that will lead buyers from the sidelines.
For her, several factors are in play in addition to oil.
“I think in an election year, there is uncertainty, which leads buyers to hold off on major purchases. Millennials are still living at home, and are slower to make that first home purchase.”
She opines that that West Texas crude needs to settle around $45 per barrel for the Houston market to right itself, calling that price one that is “great for everyone involved.”
But if recent commodity market trading activity is any guide, that’s quite a way off.
