NATIONAL HOUSING WOES THREATEN CONTINUED
ECONOMIC GROWTH
UH’s Barton Smith Predicts a Local Slowdown as Houston Adjusts
to New Energy and Construction Trends
HOUSTON, May 8, 2007 – Everyone is talking about the national
real estate bust and the soaring level of foreclosures. The new
fad for many who have escaped the pain of foreclosure is to invest
in foreclosed properties at a significant discount. But is the bottom
really near? Some optimists say yes, but University of Houston economist
Barton Smith says the national housing market correction is far
from over, echoing sentiments from even such self- promoting organizations
as the National Association of Realtors.
Furthermore, the worsening housing market is likely to have negative
implications for a national economy that is already limping along.
“There are a sufficient number of regional markets throughout
the nation in which the severity of the housing market correction
has already risen to heights that it is likely to produce a further
slowdown in the U.S. economy,” Smith predicted.
Smith, director of the Institute for Regional Forecasting at UH,
addressed more than a thousand people May 8 at his symposium Houston’s
Twin Booms: Energy & Housing – Will They Continue For
Another Year?
During the real estate-focused program he presents each year, Smith
pointed out that the nation’s housing markets are suffering
from three different maladies: excessive prices, overbuilding and
foreclosure rates. While some markets, like California, are being
affected by all three, Houston is struggling only with an unusually
high foreclosure rate. Local housing prices remain affordable, and
the degree of overbuilding within the metropolitan area is still
rather modest. Smith refers to today’s foreclosures as ‘subprime
foreclosures’ since prime mortgage foreclosure rates are still
relatively low and remain below 1 percent. The subprime foreclosure
rate, on the other hand, is eight times greater.
“Builders should not be too complacent and believe Houston
will be immune to the housing market correction just because housing
remains affordable here and fixed rate mortgages are still quite
low,” Smith said. “Subprime loans will be much more
restricted in the future, either from regulation within the mortgage
lending industry itself or from state and federal regulators. That
is going to significantly shrink the number of eligible households
in Houston who qualify for home ownership.” Coupled with slightly
higher interest rates today than two years ago, Smith estimated
that a large reduction in subprime lending will eliminate nearly
100,000 Houston households from the owner-occupied market.
Smith’s economic forecast for Houston indicates a slowing
growth rate, but one that still is substantially above the national
average. This too will help to cushion Houston from the severe pain
being suffered in some of the nation’s major metropolitan
areas. But Smith warned that even Houston’s upstream energy
sectors are not likely to repeat their stellar performance of 2006.
He emphasized that all real estate markets in Houston will greatly
depend upon the health of the energy economy, since the non-energy
sectors will limp along with the national economy. “Keep an
eye on exploration activity as indicated by such statistics as the
national and international rig count. Watch for a sudden slump in
energy prices. Look for a leveling off in energy-related employment.
These statistics will provide an early warning to developers to
lower their sails,” he advised.
“While we can worry endlessly about the risks of new terrorist
attacks, the more obvious and certain concerns involve Federal Reserve
Bank policy, the financial health of the consumer, and the extent
to which the housing market correction gets dramatically worse,”
Smith said. He sees plenty of clouds over the national and regional
economies, but no thunderheads. “The likelihood of a national
recession is not zero, but I would place it less than the 30 percent
forecast by Alan Greenspan.”
Smith is worried new FED chairman Ben Bernanke has implicitly reduced
the central bank’s inflation targets to unrealistic lows and
the FED will be slow to provide relief to a national economy under
excessive stress. “Bringing the housing market back down to
earth slowly will require real finesse, perhaps a level of monetary
fine-tuning beyond the FED’s abilities, especially when they
are preoccupied with the inflationary implications of high energy
prices.”
Even with slower growth in energy, Houston will outperform the
national economy, but it won’t be immune from a significantly
worsening national economic environment as evidenced by current
data. Smith cited a variety of statistics suggesting Houston’s
economy is already beginning to feel spillover effects from the
national slowdown. The region’s non-energy sectors have been
slowing down for about six months, and even energy is showing signs
of leveling off to a lower growth rate. Houston’s construction
sector is seeing a degree of moderation which, while lowering job
growth temporarily, is a good thing to prevent an excessive buildup
of unoccupied real property inventories.
In the long run, Smith sees nothing but good things for energy,
at least in terms of jobs and profits. However, for the consumer,
those long-run prospects may be less exciting with gas prices hitting
$4 per gallon before this decade is over. In tandem, oil prices
will eventually settle around a new equilibrium of about $80 per
barrel. This is the level at which the nation can begin to seriously
fill the energy gap and reduce our foreign dependence on oil through
the development of alternative fuels. In the short run, however,
there still remains the possibility of an energy market correction
that could send oil prices down below $50 per barrel before it stabilizes.
Such a correction will be short-lived unless the nation’s
economic woes turn into a recession that spills over to the world
economy.
The next one or two years will be confusing to some builders and
developers, Smith noted, especially those who just watch employment
growth statistics. One anomaly is that population growth is proceeding
at a much slower pace than employment growth. He attributed this
to an exodus of Katrina/Rita evacuees. “We estimate that approximately
15,000 households (40,000 people) who were a part of the Katrina/Rita
evacuee community one year ago have now left,” he said. To
a large extent, this explains the significant increase in apartment
vacancies during the past 12 months. This, along with the impact
of a reduction, if not elimination, of new subprime lending will
greatly reduce the size of the local Houston area population qualified
for owner-occupied housing.
Smith stressed that local home builders will have to be more cautious
with their future building plans than in the past few years. This
will be particularly critical in the region’s “starter
market” of homes in the $100,000 to $150,000 range, he said.
Smith has conducted numerous studies in urban, housing, transportation
and environmental economics. For nearly two decades, he has gained
increasing national and local recognition for his analyses of the
Houston economy and real estate markets. Smith wrote “Handbook
on the Houston Economy” and continues to publish two symposium
reports a year about Houston’s economy and real estate markets.
For more information about the Institute for Regional Forecasting,
see http://www.uh.edu/irf/.
About the University of Houston
The University of Houston, Texas’ premier metropolitan research
and teaching institution, is home to more than 40 research centers
and institutes and sponsors more than 300 partnerships with corporate,
civic and governmental entities. UH, the most diverse research university
in the country, stands at the forefront of education, research and
service with more than 35,000 students.
For more information about UH visit the universitys Newsroom at www.uh.edu/admin/media/newsroom.
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