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Tuesday, November 4, 2014

Oil Prices and the effect on Houston Real Estate

By Rand Stephens (Houston)

The recent drop in oil prices followed by Goldman Sachs’ recent bearish report that prices will continue to fall, raises the hair on the back of the neck for those of us in the Houston real estate business who lived through the 1980s oil crash.

For those who are too young to know what I’m referring to with regards to the oil crash in the 80’s, further research is warranted on this topic, if nothing else, but to gain an appreciation for an epic economic collapse that epitomized the phrase “what goes up, most come down”.

The 80’s economic collapse in Houston was an economic tsunami of sorts, with a similar economic affect to what happened to the national economy in the Great Recession beginning in 2008, but without a government bailout.  However, since 1994, after paying for its economic sins in the 80’s with a massive purging of everything in excess, including jobs, the Houston economy has done nothing but go up.

Even during the Great Recession, the Houston economy barely skipped a beat.  Of course, it is important to point out that oil prices were very stable during the Great Recession, which is the major reason the Houston economy didn’t falter.  Prior to the Great Recession, oil prices peaked at $145/barrel, fell to $35/barrel in April of 2009 and then quickly recovered to the $90-$100/barrel range, where they’ve been until now.

I think it is safe to say, that if the price of oil had stayed at $35/barrel in 2009 instead of quickly recovering to the $90-$100 range, the Houston economy would not have enjoyed the same robust growth that it has seen over the last 5 years.

However, since the bust in the 80’s, Houston has weaned itself from excess debt.  So, while negative job growth is a killer for any economy, Houston has proved to be very resilient because, in general, everything is much better capitalized.   

At the beginning of this year, I blogged my predictions for 2014.   One of my predictions was that Houston job growth would slow to around 60,000 jobs.  Well, the trailing 12-month job growth in Houston is 107,000.  Unless something happens drastically in the next two months, I’m going to be very wrong about this prediction.  But the top economists who follow Houston are also going to be very wrong, since they predicted a slowdown in Houston job growth as well.  So, I guess that puts me in good company!

The bottom-line is, no one knows what is going to happen with Houston job growth, or oil prices, including Goldman Sachs.  However, I do sleep better at night knowing these important things about Houston:
  • Houston is the energy capital of the world, and the industry’s intellectual and financial resources continue to move to Houston.
  • The City’s real estate fundamentals are strong and new projects are being well conceived and well capitalized (view the latest 3Q office report here).
  • Houston still has a low cost of living compared to other major markets, it is culturally diverse and is filled with hard working nice people.

What does all this mean for Houston real estate?  I think it bodes well.  No doubt if oil prices continue to drop it will have an effect on job growth, however, Houston is fundamentally sound and is well positioned to handle whatever comes its way.

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