Analysis finds Houston real estate market in bad shape, but there is good news

by James McClister

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Living through an economic downturn gives the public a new perspective. The “it could happen, but not to me” mindset phases into “when will it happen again?” Because it probably will happen again. A new analysis of the real estate market’s five-phase cycle from John Burns Real Estate Consulting showed us that.

According to the research group, after a downturn, markets are re-born; growth follows and the markets thrives; and once they hit their peak, they slip back into another slowing period that most often leads to downturn and recession.

For the most part, the country’s major real estate markets, or at least the ones John Burns analyzed, are in either phase two or three (i.e. expansion and exuberance, respectively). Not Houston.

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The Bayou City is, by a wide margin, the real estate market most in danger of a near-future downturn, according to John Burns. And the reason is oil prices.

Economists and City officials alike say oil price depreciation hit Houston harder than expected.

Late last year, Houston Controller Roger Widmeyer told Houston Agent that the effect of falling crude values was worse than previously anticipated, and it forced the City to revise projected sales tax revenues from $679 million to $629 million. A difference Widmeyer described as “significant.”

“We’re facing some real challenges here,” he said.

The price of low oil price

The drop in oil price similarly forced the Greater Houston Partnership to revise its job projections in the city from over 60,000 to near 20,000. The Partnership explained the revision as an adjustment for unforeseen shortcomings: the national rig count was expected to drop by 500 but dropped by more than 1,000; energy companies’ exploration expenditures were expected to be cut by only 20 percent, not 40 percent; and despite the Partnership hoping for increased exports to help offset loses, Houston’s exports actually fell 13 percent year-over-year in 2015.

John Burns Director of Research Rick Palacious Jr. said in his analysis that because of the effect oil price has had on Houston, the city’s real estate market is currently contracting, or is in phase four of the five-phase cycle. However, there is good news.

The report reads: “We believe Houston will remain in Phase 4 through 2017 and will most likely avoid the full-fledged downturn/recession associated with Phase 5.”

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  • Mark McNitt says:

    All of this is true, but individual homes are still selling. Much depends on the price range the home is in, location, condition, etc. With rent prices still on the high side and the prospect of interest rates rising (plus slightly easier credit terms), many renters are finally moving into the 1st time buyer market…generally $250,000 or less. Those 1st time Sellers might be looking to move up with cooling off prices and thus easing the overall downturn snatching up those $300,000+ homes that are seeing longer days on the market and in some places falling prices.
    When someone looses, someone wins. I’m still bullish on the Houston real estate market, but you have to be aware of the overall situation. Great article.

  • Volley Goodman says:

    Why do they believe Houston will avoid a full-fledged downturn/recession associated with Phase 5? Real estate is cyclical. You never do away with the business cycle. I’d say we are already in phase 5.

  • Aaron Layman Properties says:

    “We believe Houston will remain in Phase 4 through 2017 and will most likely avoid the full-fledged downturn/recession associated with Phase 5.”

    LOL! I guess Mr. Palacious is banking on QE4. No way Houston is going to avoid phase 5 of the cycle unless the Fed can keep the bubble in equity markets intact (and they can’t!) The correction is coming, and there’s not a thing the pundits can do to stop it. The bubble has already been blown. All the Fed can do now is delay the bountiful consequences, and by delaying the correction they just make the mean reversion even worse.

  • Kay Robbins says:

    A prospectus of “”What to expect in the near future for Houston real estate”.. from John Burns Real Estate Consulting

  • Chip Byas-Ortega says:

    Houston is and will always be a survivor. So the vastly over paid oil company executives do not get a second home in Whistler… Regardless of oil the city/ metroplex is still growing and evolving. Alas Houston Texas is still by far one of the most affordable places to live with incredible year around activities that the price points alone will always be a buyer draw…Houston ROCKS!