CITING NATIONAL UPTURN, BARTON SMITH PREDICTS
HOUSTON RECOVERY
UH Economist’s Forecast Says Energy Sector Key to Local Success
HOUSTON, May 6, 2004 – Following a strengthening national
recovery, Houston’s economy is gaining momentum and is now
adding jobs, said Barton Smith, University of Houston economics
professor, during his annual real estate symposium.
The UH director of the Institute for Regional Forecasting addressed
more than 1000 people at the Hyatt Regency Downtown at his real
estate-focused program, “Playing the Waiting Game: The Different
Perspectives of Residential and Commercial Property Interests.”
“The annualized rate of seasonally adjusted job growth is
running around 1.6 percent right now, a trend that will likely continue
throughout the rest of this year. If energy prices remain firm (though
not necessarily as high as they currently are), that along with
the improved tone of the U.S. economy will stimulate the Houston
region to the point of generating new jobs at a rate somewhat better
than the national economy this year,” Smith predicted.
In the absence of external surprises, the U.S. economy clearly
has upward momentum that should result in a steadily improving economy
this year, one that finally generates solid job gains each month.
But with a little help from our region’s upstream energy sector,
Houston should do even better.
“However, the national economy will not be as strong as occurred
in the mid-1990s nor will regional growth be as great as occurred
during the ‘boom years’ in Houston in 1997 and 1998.
The recovery will be subdued by continued worries over terrorism
and international unrest and by a consumer who is somewhat overextended
and not capable of the type of explosive spending spree seen in
other recoveries,” Smith warned. “Furthermore, the anomaly
of a strong housing market during a recession is likely to give
way to the anomaly of a softening housing market during the recovery
as interest rates begin to rise.”
Smith predicted that by no later than 2006, many regions in the
country will be experiencing a serious housing market correction
where home prices not only stop rising, but also actually fall.
However, at this year’s symposium Smith provided several reasons
why Houston is likely to escape most of the pain of this national
housing market slump. Furthermore, he said, that even the national
correction precipitated by higher interest rates will not likely
occur until next year. In the meantime, the home market will actually
get an added boost as many households rush to buy housing before
interest rates get much higher than they are right now.
Other types of real estate will be less vulnerable to rising rates,
but will struggle for several years with the burdens of excess supply.
Rising interest rates will actually help the beleaguered apartment
market as they eventually stem the flow of households from the rental
to the owner market. Nonetheless, Smith warns that the worst is
yet to come for this market as new supply will continue to pour
into the market the rest of this year. “This market failed
to heed our warning last year of the dangers of excessive new construction,
and will now pay the price for most of the rest of this decade.
Only if new supply were to totally end, might this market have a
change to return to normal within 3 or 4 years, but I don’t
expect that to happen,” Smith said.
“The office market has probably received the most negative
press over the past couple of years because of what the Enron debacle
did to the downtown market. However, this market has seen a significant
decrease in new supply, which will help it get back to normal more
rapidly than the apartment market,” Smith predicted. “If
Houston generates between 30,000 to 50,000 new jobs per year during
the rest of this decade, constrained levels of construction should
allow office, retail, and industrial vacancy rates to return back
to more typical levels within two to four years,” he said.
“Now, there is a possibility that the region’s economy
will do even better than that, but such a scenario is contingent
on an improved international environment for business and economic
growth that, given current world events, takes a large ‘leap
of faith’ to predict and at this point should not be counted
on. This requirement is necessary for strong growth not only in
non-energy sectors, but in energy as well.”
Smith indicated that the missing ingredient to an energy boom is
growth in demand. “Yes,” he said, “prices are
high, but international demand for oil is still subdued by worldwide
economic stagnation. Renewed worldwide economic growth would virtually
guarantee that oil prices remain at their current favorable levels
and that would produce an economic environment similar to what the
region experienced during the high growth years in 1997-98.”
During his presentation, Smith also addressed some of the high
profile issues getting substantial attention in the press and in
recent political rhetoric, such as the phenomenon of “job
outsourcing.” As a part of the discussion he presented data
indicating that the degree of “in-sourcing of jobs”
was likely as great as the so-called outsourcing phenomenon, and
provided a map illustrating the states in the country that have
been the greatest beneficiary of job in-sourcing by U.S. subsidiaries
of foreign companies. Texas is ranked second in the nation, just
behind California. But Smith also reminded his audience that the
inflow of workers into the country was significantly greater than
either the outflow or inflow of jobs and that a large portion of
this inflow of workers is not related to illegal migration but the
legal immigration of high-skilled workers to this country utilizing
temporary work visas that often end up being more permanent than
temporary. Smith pointed out that India, which has received so much
attention as the destination of outsourced jobs, is the primary
origination of this million worker a year flow of skilled labor.
In conclusion, Smith ended the program with his long-run forecasts
for the region and their implications to the public sector and the
area’s real estate markets. “The long-run forecasts
for the region are changed little since they were revised two years
ago,” he said. “Population is still expected to exceed
6 million by 2020, and employment will average close to 3 million
that year. Of that growth, most will occur in the distant suburbs,
though urban renewal within the central city will continue, following
the pattern established during the last half of the ’90s.”
Reminding those in attendance that Houston is aging and will continue
to face the challenges associated with that aging, Smith pointed
out that by the 2025, more than a third of the region’s housing
stock will be over 50 years old – a far cry from the days
of Houston’s youth.
About the University of Houston
The University of Houston, Texas’ premier metropolitan research
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For more information about UH visit the university’s ‘Newsroom’
at www.uh.edu/admin/media/newsroom
For more information about UH visit the universitys Newsroom at www.uh.edu/admin/media/newsroom.
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