Economist Addresses Houston’s Teflon Economy and Real Estate Markets

Ted C. Jones Discusses Significant Improvement at Biannual Institute for Regional Forecasting Event

An increase in renters. A turn from investing.  A continued lack of consumer confidence.  But the news isn't all bad.  These themes were examined at the University of Houston Institute for Regional Forecasting's biannual economic and real estate forecast.

In his presentation, "Houston: the Teflon® Economy and Real Estate Markets—A Few Scratches, But the Bad Stuff is Not Sticking and We Keep on Cooking," Ted C. Jones, chief economist for Stewart Title, sees three mega-themes in the analysis:

A growing portion of the population will become renters rather than homeowners—the next generation may become renters for decades. Short-term interest rates are so low that consumers and corporate America are comfortablej ust sitting on the cash with no investing (some inflation would help theeconomy).The uncertainty of politicians in Washington, D.C. is amplifying and sustaining thelack of consumer confidence, which is holding back economic growth.

"The good news is that Houston and Texas have resumed robust job growth, unlike much of the U.S.," Jones said.  "Houston added 68,200 jobs, a growth rate of 2.6 percent compared to an average annual growth rate in the past 10 years of 1.4 percent."

Jones added that the Houston economy is being driven by the economic engines of oil and gas, the Port of Houston and the Texas Medical Center.  As of the end of September, Houston was just 10,000 jobs short of having an all-time record number of people employed.

Indicative of the strength of the Houston economy, median home prices rose approximately one half of 1 percent compared to a decline nationwide of 4.1 percent.  The number of existing homes sold in Houston was up 2.4 percent versus 1.2 percent nationwide.

Retail sales in Houston in the first half of 2011 compared to the same period in 2010 saw a 7.4 percent increase.  Vacancy rates declined across the board in Houston commercial properties.  Retail, office and multifamily properties will likely have the fewest square feet and units of new space coming online in 2012 than in decades.

U.S. retailsales are rose more than 7 percent.  Lightweightvehicle sales in August were up 8.9 percent from the same month in 2010.  Both business and consumer bankruptcy filingnumbers are down more than 10 percent compared to 2010 and bank failures areoff 36 percent.   Household debt serviceas a percentage of household disposable income is down to 11.2 percent from ahigh of almost 14 percent in 2007.

Jonesindicated the national economy is moving on job growth, but the current ratewill require six more years to reach the number of jobs last seen in January2008. Not all news is good, however.  DespiteCongress' commitment to reduce Federal borrowing in the coming 10 years, even atthe planned level of cuts, deficit spending is not sustainable.  The U.S. national debt was $10.7 trillion of(excluding Social Security, Medicare and Medicaid commitments) at the end of 2008,which has grown to $14.8 trillion at the end of fiscal year 2011.  Jones stated that it's not the amount of debtthat is of concern but the interest on the debt and the ability to cover theinterest and refinance when necessary. Preliminary annual interest on the federal debt for 2011 was $438 billion and is estimated to reach $1.1 trillion in 2020.

"Houston is not an economic island unto itself and benefitting from global issues," Jones said.  The widening of the Panama Canal to handle larger vessels is directly impacting similar activity at the Port of Houston.  Ditto the growing demand for affordable energy.  As a result, we are seeing forthe first time since 2007 an increase in construction employment.  Houston, the world's technology center for oil and gas expertise, saw a significant job growth rate of 12.4 percent in "oilpatch" and related employment in 2011.

Jones believes the biggest roadblock is the lack of consumer and business confidence,which is holding back spending and the resulting record holdings of cash by corporations. As he stated last year following the November elections, stalemate has indeed set the stage for little activity in Congress with an appearance of many elected officials merely positioning themselves for reelection rather than solving the issues at hand.

Population growth is expected to continue to be positive in the long run with the Houston Metropolitan statistical Area (MSA), almost doubling by 2035.  The significant decline in U.S. national home prices has already reduced corporate relocations across the country.  In many circumstances, when a company does relocate employees, they are discouraging their employees from buying a home.  Ironically, given depressed home prices and record low interest rates, there may have never been a better time to buy property.

The IRF forecasts include several predictions:

  • A robust U.S. recovery in jobs will not begin until 2013 if then.  Jones anticipates a recovery from recent declines given anemic job growth levels.  It will take a recovery in consumer and corporate confidence for job growth and the economy to reach their true potential. Stalemate will continue between the White House and the Republication-controlled House of Representatives, so expect an ongoing lack of confidence muting the economy.
  • Houston will continue to perform well, adding 66,000 jobs in the coming 12 months growing at 2.4 percent year-over-year pace.  Once again the largest growth will be in the mining (read that as oil and gas) segment, retail and wholesale, and for the first time in years in the construction arena.  Likewise, the service sector will gain jobs as will manufacturing.  Continuing cuts are seen in transportation sector and in government jobs as stimulus funds run out and pinched state and local budgets.
  • As the global and national economic recovery progresses, so will the upward trend resume in oil prices.  The recent innovative technology of fracturing shale for natural gas production has set the stage for moderated natural gas prices and demand for related technology and services.
  • Interest rates will escalate in 2012, driven by a declining value of the U.S. dollar, increasing cost of oil, a growing global economy and the hangover effects of a copious and cheap money policy.    Since instigating Operation Twist a month ago (designed to reduce long-term rates), 30-year Treasury rates have risen almost one-half percent.  While the Fed can readily control short-term rates, their ability to reduce longer has little track record.
  • In terms of the real estate markets,new home sales will be helped by continued job and population growth.  Good news is that Houston homeowners need not be overly worried because Houston prices will remain positive with an average overall increase in values in 2012.  Homebuilders will see an increase in housing starts, with the largest percentage gain coming from the multifamily side given increased down payments and enhanced credit requirements.  Apartment vacancy rates will continue to decline and rents rise, as will multifamily values, making this sector the darling of the real estate industry in Houston.