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Monday, June 3, 2013

The Houston Economy - Boom and Bust

By Rand Stephens (Houston)

The naysayers of Houston’s economic success like to point to the energy business as the main driver, and that the city’s economy is not diversified and subject to a collapse based on a drop in energy prices. This is an outdated view of Houston’s economy that dates back to the 80s.

There are now four economic power centers in the US. They are New York City for Finance, Washington DC for Government, Houston for Energy and San Francisco/Silicon Valley for Technology (the “Big Four”). Each of these centers are similar in that they have the infrastructure and intellectual capital that allow businesses in these industries to operate most efficiently by being in these locations.

While the common thought has been that cities with economic diversity are best from a real estate investment perspective, it appears that specialization is the way to go as it fuels growth and mitigates the downside when there’s an economic downturn. The Big Four are not only the fastest growing major markets in the US, they also have been the quickest to recover since the Great Recession.

The cause of the Great Recession was a debt problem...not enough of it, as the lending markets shut down; with everything so highly leveraged, it’s no surprise that we had a major economic meltdown..."live by the sword, die by the sword".

The Houston economy has recovered faster than the rest of the country because businesses, consumers and real estate weren't as highly levered as other places around the US. We've "been there, done that" in the 80s, and lenders have loaned cautiously in Houston since then.

The Boom and Bust reputation that Houston has endured since the 80s isn’t because our economy lacks economic diversity; it’s about debt, and the potential for getting over levered as investors look to ride the energy wave. So far, the lenders have remained disciplined and the city’s fundamentals look great.

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