During his biannual real estate forecast, Barton Smith, University of Houston economics professor and director of the Institute for Regional Forecasting (IRF), examined both Houston's short-run and long-run future. His presentation, "Houston's Emergence from the National Economic Meltdown," held at the Hyatt Regency Houston Hotel in downtown Houston, presented the IRF's most recent macro regional forecasts. He discussed its implications to real estate today and the challenges the city will face in the near-term as the recession slowly ends and over the long-run as 2.7 million people and 1.5 million workers are added to the region's population and employment base.
Smith confirmed that Houston indeed is working its way out of recession quicker than he and most other observers thought would be the case. "The old wisdom that because Houston was so late in getting into the recession that it would be late in getting out of it simply proved to be wrong," Smith said. "It now appears that Houston started gaining net new jobs last September, but at a very slow pace." His forecast shows continued slow growth of no more than 1,500 net new jobs a month for the rest of the year, accelerating in 2011 and beyond. "Don't expect a return to the high growth levels of 2004 to 2008," he warned, indicating that regional growth should eventually level off at between 2 and 2.5 percent per year over the next five years.
During his presentation Smith answered a question he's been bombarded with by both local and national media of late, "Why has Houston held up so much better than most parts of the nation?" He believes that there are two primary reasons: (1) oil prices recovered faster than almost anyone anticipated; and (2) the lack of any perceptible decline in home prices meant that Houstonians did not experience as sharp a decline in personal wealth as the rest of the nation, which has left area consumers in a much better position to aid in the recovery. As a part of his real estate-oriented symposium he presented the latest numbers for the IRF's home price indices.
"While prices fell last year by a miniscule 0.2%, overall prices today are no different than their 2007 highs. And why is that? Because Houston never participated in the home price bubble, there was no need for prices here to correct."
Smith also pointed out that, despite losing almost 100,000 jobs last year, the local housing market is in much better shape today than in the mid 1980s because new construction slowed so quickly this time around. As a consequence, the extreme excesses in supply of the 80s don't exist today.
Turning to the long run, Smith stressed that there was both good news and sobering news in the IRF's new forecasts. By 2035, the Houston metropolitan area is expected to have a population of nine and a half million people with a work force of 4 million. That's ultimately good news for developers, though they will have to exercise extreme patience in the short run. This long-term growth will require an enormous amount of new real estate capital over the next 25 years: more than 850,000 new homes; more than 330,000 new apartment units; and approximately 110 million square feet of office space and 90 million square feet of commercial retail space.
"The question is where will this all go and will we be able to provide the social infrastructure needed to support it and keep it from diminishing the region's quality of life."
Using maps, Smith indicated the geographic path he believes urban growth would take. While the central city will see some growth, he expects most to occur in suburban Harris County and the counties that surround it. Growth will maintain its westerly bias, but the rebirth that began this decade on the city's more distant eastside will continue.
The IRF forecasts indicate the 2035 population in Fort Bend and Montgomery counties will exceed one million.
"That's going to present enormous challenges for these two suburban counties," Smith said. "During the past three decades these two counties were not fully prepared for the growth storm that was to hit them and are now having to play catch up in providing needed infrastructure such as roads and schools. Growth in the distant suburban areas at the headwaters of Houston's creeks and bayous will also create problems for Harris County.
"One such problem will be flooding that is only going to get worse unless all Houstonians take it more seriously. Many Houstonians don't understand that because their homes didn't flood and they weren't hurt. Partially because of flooding, Houston has one of the highest homeowner's insurance rates in the country."
In his presentation, Smith recalled Houston economic history as far back as its early start in the 19th century to point out that strong leadership and strong overall community commitments to the future produced the prosperity that Houston has become accustomed to. "That will be needed in the future as well. It was strong leadership and the community's courage in matching federal dollars to build the Houston Ship Channel (the first local/federal matching program of its kind) that made Houston one of the nation's most important ports. It is that type of leadership and courage that we will need in the 21st century."