Comment of the Day: Inner Loop Home Prices Can’t Keep Rising Like They Have

COMMENT OF THE DAY: INNER LOOP HOME PRICES CAN’T KEEP RISING LIKE THEY HAVE Housing Bubble“. . . Our current population boom was due to an unexpected resurgence in the gulf of mexico oil market and hit our housing supply by complete surprise. However, the housing market will be going full steam for the next few years to catch up on supply and entire new subdivisions are going to be created that are well outside of the property value inflation we’re seeing in town. The vast majority of new residents are already buying well outside of the 610 Loop. Even the snottiest of inner loopers such as myself would eventually consider buying a mansion in the ‘burbs for the same price as a cluttered townhome in the Loop. . . . Not to say we’re in a bubble right now, but beyond doubt there will be a lot of downward pressure on home prices in the Houston area moving forward unless we see employment start accelerating again. That definitely is not going to be likely no matter how well the gulf market holds up. So I think people claiming there is or isn’t a bubble are being a bit premature, we all have to wait and see. I believe the general expectation is that although values have shot up, there should be enough demand to hold the prices up moving forward. So yes, odds are probably against a bubble, but I would expect that this burst of demand has pulled property valuations forward quite a bit and that folks shouldn’t expect to see gains on home prices for the next 5 years or so as a glut of new apartments and homes come onto the market. There’s still plenty of land to be redeveloped and no shortage of opportunities for increased density in the inner Loop and that’s even before we start really gentrifying the 3rd and 5th wards. For me, i’ll hold off on Inner Loop property until the boomers start dwindling down.” [joel, commenting on Mirroring the Features of a Simple $310K Studewood St. Duplex] Illustration: Lulu

29 Comment

  • I sort of agree. It’s been insane. We haven’t bought any new properties in Montrose for a while as there are tons of ‘newcomers’ that are willing to trade being in Montrose for near 0 return on their $.
    .
    I’ve been happy to sell into the craziness and move slightly east. As Montrose changes and prices become more and more insane, you’ll have people moving just slightly outside the area (but still in the loop, still close) where you get WAY more bang for the buck.
    .
    We rent 2bd units with central air in 3rd ward for less than our studios that are a mile away. Doesn’t make sense…

  • I’m not sure what you mean by “gulf of mexico oil market”………I’d argue that most of the job growth in energy is a result of companies investing in new unconventional areas that are very much onshore and often in international locations. Essentially, the success of the oil & gas market in Houston extends far, far beyond the Gulf of Mexico.

    But I do see your overall point. There is a risk of a bubble, although I’d argue that many of the young professionals entering the inner loop are more than happy to trade a 1,200 sq ft space close to the action than a 3,500 sq ft mansion in the burbs. And with HISD improving overall, I’d be willing to bet that many are also willing to have some kids in the smaller space.

  • There is more money out there than people realize, especially in a city like Houston. The city is going to grow for many years and there will be plenty of people with more money to spend on housing. The inequality in this city has barely begun to show. The prices here are only expensive to the locals. Compared to other major cities it is still cheap to live in the loop. The only real thing that will stunt the growth and prices in this city is the lack of infrastructure to handle all the traffic. Without any other options this city will hit a “gridlock” for development.

  • My theory is that there’s been a massive transfer of homeowner equity into Houston via the corporate-relocation folks coming in from the east and west coasts, particularly in the loop. That coupled with extremely tight supply have generated the market we see today. There are $1M homes listed for sale in Shady Acres… pretty incredible if you think back to the same area 5 years ago.

  • This boom is very much centered on the energy bubble and there is a very real danger of the bubble popping. It’s sky-high oil and gas prices that spurred investment in unconventional oil and gas in the mid-late 2000s as Asia’s booming growth collided with already tight conventional energy supplies. These high prices made it profitable to go after shale oil, shale gas, ultra-deep water, and arctic oil – it spurred another boom in Houston as companies hired workers to do this. These high prices were a contributing factor to the housing/financial crisis and put a damper on growth during the years following the crash. We’re in a strange world now where we need high prices to find and produce the last bits of oil that are left, but if prices get too high, growth stalls and demand for oil drops. A drop in demand means reduced overall production, which sends prices back up. What we’re seeing now, though, is that economies can’t seem to cope well with oil over roughly $110/bbl, but the oil majors are canceling major exploration and production projects this winter because those prices are too low. We could get into a situation where overall production rates and demand decrease while prices stay high, but not high enough to fund investment in exploration and production. This would be bad news for job creation in Houston.

  • Houston has a few natural governors on its housing market that will both prevent bubbles and a pull back in housing prices.

    1. Houston developers are incrementalists. There are no huge pie in the sky projects coming. The multi-family market inside the loop is taking a breather to see how demand responds to new supply. Housing inventory is still way behind with new construction doing little to change that. It almost seems like Houston developers take an annual trip to downtown Dallas and all hold hands, close their eyes and whisper “never again” over and over.

    2. Lending is still tight both for developers and consumers. And even if you have great credit and can easily get a loan, appraisers are way behind the market, especially inside the loop, and are forcing people to be prepared to come to the table with extra cash to make up any shortfall between the appraisal and mortgage amount.

    3. Cheap land is gone. Over the past 15 years, the suburbs have been built out. Cinco Ranch, Sugar land, Woodlands, Clear Lake, and Friendswood have all pretty much built out the majority of the land that was envisioned for residential development. Developers are now fighting over the scraps that are left in these communities and are having to go way out to find room for land that costs the same as land in the burbs back 10 years ago.

    4. Houston sucks at density. The inner loop is finally seeing some real density, but it is too late. The multifamily construction undershot development inside the loop in a big way. Too many prime parcels that should have been built mid to high rise ended up as town homes, strip malls or 3-4 story pencil boxes. That means that there are very few opportunities to build up inside the loop.

    5. Gentrification is too slow. Houston will see significant gentrification, but the process is too slow to provide relief to a hot real estate market.

  • Old School–excellent comment–right on right on

  • You lost me somewhere between saying you lived inside the loop, then that you wouldn’t buy inside the loop. Real deal is that while it’s fun to joke about buying a mansion in the burbs, nobody is giving up their $700k town home to do so. We may complain about the buying opportunities, but the only options are sit tight or buy land and build.

    There is nothing available intown. Zero. Nada. Zilch. I think the added luxury apartments stabilize the supply in the near term, but the idea that “downward pressure” will drive costs lower is absurd. The only thing that takes prices downward is another national recession.

  • @OldSchool – Great comments but the east end still has some parcels for low cost and large area (MDI, KBR, Bayou) properties open for development. Overall this is close to 250 acres situated a mile from downtown. Unfortunately your last point is correct that Gentrification is slow. You can blame that on organizations like TOP (Used to be Acorn) that sue developers unless they build affordable housing on every development.

  • Another excellent post, Old School.

  • If housing starts flagging here we can always just find out what the Chinese have as criteria for places to keep their cash and then build whatever type of real estate it takes to accommodate that.

  • I like that housing prices and rents are skyrocketing Inside the Loop. As affordable apartments disappear Inside the Loop, people are looking for alternatives. A lot of renters simply hop around from apartment to apartment. But a decent number of them take it as a sign that it’s time to buy a house, and even in EADO and other more affordable locations Inside the Loop, you’re hard-pressed to find a livable home for less than $200k. Neighborhoods (like mine) Outside 610 but inside the Beltway are an affordable alternative for those who want to buy. So we’re starting to ride the coat tails of the Inner Loop.
    .
    Some people scoff at the notion, but I want Houston to be more like New York City. I want the kind of City-wide renaissance that they have experienced. Bedford Stuyvesant Brooklyn, once a horrifically dangerous place, is increasingly known for it’s well-preserved Brownstones. There’s even a movement to rebrand the South Bronx into SoBro and market it as a place for artists! Oh if only we could get that kind of turnaround in Houston, with young professionals living in new apartments in Gulfton, and families moving to Sharpstown the way they’re moving to long-forgotten parts of Brooklyn and Queens.

  • Demand destruction concerns me, but it’s not just that people will immediately begin conserving on their energy use or that they will slowly replace their capital stock with more efficient equipment; it’s also a concern over the advance of technology. Fracking is a good example of that and was a gift to Houston and one that nobody anticipated; but how do we know that a breakthrough in battery technology or the materials sciences won’t reverse those fortunes? Don’t get me wrong, there will always be demand for hydrocarbons. There are a lot of materials that just can’t be engineered without them and there’s frankly a lot of legacy infrastructure that will plague our civilization for decades beyond the invention of replacement technology.

    However, this burst of hiring is a function of capacity growth in absolute terms — upstream, midstream, and downstream. Right now, Houston is firing on all cylinders. However, there will come a point where we’ve created enough supply capacity to meet demand at a given price level. When that happens, we will stop building new capacity and all of those boomtime jobs will go away. The opportunities that remain will be mostly related to the maintenance of what has already been built; and that doesn’t require much. There may still be opportunities in the developing world, where political barriers to entry are still being worked out and where there’s still a lot of low-hanging fruit. But Houston can’t count on that.

    Houston is going to face a bust. It’ll be much worse in smaller refinery towns once they’re finished re-jiggering the feedstocks and building new capacity that otherwise would’ve been built overseas; and it’ll be a little bit worse in the shale fields themselves.

    Understanding that, now is the time to capitalize on our good fortunes in order to remain relevant after the bust. The most important thing is to build up our universities. We need a technical university. Yes, both Rice and UH have good programs and UH should be built up as well; but what we really need in order to round out our portfolio is an MIT. If you listen to the business community, the thing that is most lacking is the availability of labor that is qualified to perform scientific, technological, engineering, and medical jobs. If those people are in Houston, jobs will come to Houston. Those jobs will pay well and the facilities and equipment that go with them are a windfall for the property tax base.

    Transportation is important. There are still numerous opportunities to build new and existing freeway capacity and Houstonians should be aggressive about it. Form new special districts that have the power to levy a property tax in order to issue bonds to raise money to finance the infrastructure and that are enabled to recoup costs by selling the finished infrastructure to private investors. A project might be as large as a new freeway corridor or as small as an overpass at a railroad crossing. Make it happen now while the tax base is strong! If local government doesn’t want to allow private businesses to develop unregulated rideshare and transit apps, then local government should set regulations and sell licenses to businesses to develop those apps. Ridesharing and driverless cars have the potential to totally usurp the need for mass transit in America. Houston needs to get at the forefront of the trend. Hell, Yellow Taxi can even keep its effective monopoly if they do it right. And what’s left over on the transit front, mostly for high-volume corridors, can be finished off with grade-separated BRT trunklines. (Light rail is only appealing for autistic children and financially-illiterate citizenry. What exists exists, and I’m not saying to pull up the rails or anything; but the idea of it as being part of the portfolio of new construction should be abandoned.) Ridesharing, BRT trunklines, and enhanced local bus service — all accessible from smartphone apps — will make it possible to curtail the parking requirements in all urban real estate. Older buildings will find themselves overparked will be able to allocate spare capacity to new buildings that can get built without any new parking almost at all. And that’s how downtown will make its big comeback! We ain’t seen nothin’ yet.

    Okay, so that’s education and transportation. Next is flood control. Build the Ike Dike. Do that and a tremendous quantity of investment will come to Galveston Bay and to the barrier islands; at the very least, there won’t be an exodus of capital as the Biggert-Waters legislation kicks in and as insurance rates get reset to reflect the true risks. With an Ike Dike, the Houston would have an advantage unmatched by any other coastal community along the Gulf of Mexico. The entire bay being safe harbor would be a boon to recreational boating and to port industry. There are numerous other places throughout the region that need additional stormwater detention capacity. Make it happen. The price of flood and windstorm insurance suppresses the price of real estate, so taking neighborhoods out of the floodplain will immediately pay back in terms of property tax revenue.

    And we’ve been really good at using flood control projects as an excuse to build parks. That’s an area that we just need to continue doing what we’ve been doing, and go faster. In general, Houston needs more trees, better sidewalks, and better upkeep of vacant lots. Perhaps we could set up some tax exemptions for urban gardening in order to encourage that sort of behavior; or lobby the state legislature to exculpate private property owners for third-party liability risk if they’ve temporarily used some of their extra land for a community garden or pocket park (in accordance with a set of design guidelines, of course). The same goes for Centerpoint and their rights-of-way.

    Think of it in this sense. Houston needs to benchmark its quality of life to Austin and its business environment to Dallas. If it does these things then it will be much better insulated from the inescapable future of an energy bust. And that very fact right there would lure more capital from outside the region immediately.

  • How do you live inside the loop, supposedly as a snob, and think offshore oil drilling is causing the boom? Remember almost 4 years ago to the date (4/20/10)..hint hint BP…

  • Woops…. I used @ Old School. I just got out of a 5th ward public meeting. Youll have to forgive me. My mind went to mush.

  • There is plenty of land left “inside the loop” and much of it is very cheap. Again, the inner loop is NOT expensive. You can buy a nice big cheap house. You can get a big apartment for very little. You can buy land for under $20/ft.
    .
    When we talk about a bubble in the loop, we’re talking about a pretty small subset. Montrose, heights, west U, etc. Yes, granted, THAT is expensive. However, East of downtown (and up north — 5th ward, Kashmir Gardens), east of 288, that land is cheap cheap cheap for builders, renters, and home buyers and it still puts you a mile or two from the hot spots.
    .
    I personally think there is going to be plenty of growth inside the loop… Its just the small bubble pockets will slow down. Why buy $100+SF dirt that you have to fight to get anything of size, when you can go literally 2 miles away and get $20/SF (or less) dirt all day long and build a sizable project.

  • I think everyone has missed two critical bits of information:

    One, right now there is an unprecedented inversion in mortgage interest rates in which jumbos are cheaper than conforming loans.

    Two, the outer-loop suburbs are seen as part of the TP race-to-the-bottom (witness the light-governor “I’m a bigger Neanderthal than my opponent” campaigns) whereas the Inner Loop is an oasis of progress (at least, relative to the rest of TX). For the demographic of people who can afford a $700k townhouse, these are both very important, and if anything the political self-segregation phenomenon is accelerating.

    My expectation is that the market will cool off as soon as that mortgage inversion disappears, which is convenient because it is easy to monitor trends in mortgage rates.

  • I agree the acceleration in housing values for desirable neighborhoods in Houston has been dizzying, but as others here have pointed out, some of it is just Houston catching up with the rest of the nation’s housing values. For many years, due to cheap land and no geographic barriers to development, Houston housing prices were some of the cheapest in the country for a very large city. Due to a glut of supply left over from the early ’80′s boom, Houston missed out on price inflation in the ’90′s that hit areas on the coasts. Now with lots of people moving here from the coasts, there’s much more money sloshing around in our housing market. Remember, the definition of inflation is too many dollars chasing too few goods. As people compete for a housing supply that is limited, prices will still rise a bit further, especially until new construction leaps over the 59/288 mental barrier and that land becomes desirable.

  • I disagree. I think you’ll see continue price increases over the next 2 years or so. It’s tied to the prosperity in the gulf, plain and simple. This guy doesn’t really make any clear points.

  • Others have hinted about it, but I would argue that there has been a fundamental shift in the way younger generations (Gen X/Y and the Millennials) view housing today. They want to be close to where the action is. They want to be close to their friends, their work, and bars and restaurants. The vast majority WILL NOT sit in their cars for 1.5 hours to and from downtown every day of the week like their parents did and do, just to have a McMansion in Katy or Sugarland…because they won’t be there for most of the time anyway. They’ll be at the bars, restaurants, and maybe work if they can or want to find a job. That’s why we are seeing micro apartments and tiny houses become more and more popular.

  • House prices in Houston have hit a pretty ridiculous mark. I look at all these 400+ houses and can only think “How many lawyers are there?”. Most people, excuse me, the VAST majority of people, can’t come anywhere near matching those prices. Maybe 1 in 20 can do 400+. So who keeps buying these places?

    There is also the ever obvious problem of traffic in the west loop, which is hitting a critical mass. Given 2-3 more years it may get close to unlivable for your average long distance commuter.

    I’m not saying the housing market is a bubble, there is terrific growth here. The new Exxon facility in the woodlands alone is bringing in thousands of upper-middle class folks. But the haphazard and over-exuberant nature of the growth inside the loop is going to hit a wall at some point. Well, maybe not a hard wall, but a wall made of molasses.

  • Also, fwiw, the baby boomer sell-off is right around the corner. And it’s anyone’s guess what that is going to bring.

  • In summary
    - West End of inner loop
    – Good – Raising home value, schools improving, close to west end entertainment
    – Bad – Homes to high priced, no land available, Too many townhomes, traffic
    - East end of Downtown
    – Good – Open land close to downtown, cheaper homes, Counter-flow every way in houston traffic, close to downtown attractions
    – Bad – Schools, Pollution???, lack of stores, dependant on market staying up
    - Outside the loop
    – Good – Tea Party Connections?
    – Bad – Everything else?

  • Well both a fracking bust and a housing bust would effectively be busts on the finance side. (People will always need energy irrespective of the price, and will always need housing irrespective of the price, which in a sense is how these booms get such enormous traction in the first place.)

    So the objective, then, would be to create more holding-places for money to replace the ones that could be disappearing. Whether that happens “around here” or elsewhere remains to be seen but if you’re like me, you’re biased towards this place. I have a few ideas:
    (1) do a better job marketing Houston’s startup community
    (2) make it easy for people from other countries to use our real estate to stash their cash and
    (3) start a high stakes capital-works project like a marvel-of-engineering subway system, turning an interstate into a tunnel, or doubling/tripling the size of the GRB — in other words, something that can induce demand from the ground-up in a way that the aggregate of the finances shores up what housing will have lost.

  • I followed the gays to the East End a decade ago and now I’m following them to Lake Livingston where you can still buy a 1/2 acre for a few thousand dollars. Cape Royale is only an hour and fifteen minutes away from downtown Houston…

    http://www.trulia.com/for_sale/LOT%7CLAND_type/30.638225599690283,30.667133128588794,-95.16746595499421,-95.0979430973282_xy/15_zm/map_v/

  • just to note, I understand that the energy boom is not necessarily tied to just offshore but also onshore with the infrastructure and processing facilities to export LNG to other markets with our current shale boom. however, take away the deepwater developments where the higher margins are and you will definitely see a lot of international companies focusing their investments elsewhere. regarding the port now being the largest exporter in the country, a lot of that is still dependent on growth in the deepwater developments.

    i really wish their were more Cody’s on here as I know he has to deal with stuff day in and day out for living and has to be familiar with the market sensitivities. play around with the rent/buy calculators and the montrose/central loop areas are not looking good for what has historically always been a no-brainer of a buy city. now as others have hinted, not many folks capable of buying in the inner loop would even have to consider the full return on value of their home purchases but that’s still by no means a rapidly growing demographic and it’s has to hold steady enough to keep up demand. haven’t seen the average salaries of all these new Houstonians but i’m sure they’re much much closer to the poverty line than they are to the six-figure mark.

    looking around right now though, it definitely seems you could be a landlord in Katy and rent in the Montrose for a lot less than what it’d take to be a homeowner in the Montrose.

  • @ Anon22: Eyepopping public works are okay, but they need to be financed in a manner that is consistent with state law and other political realities. A subway ain’t gonna cut it.

  • Federal funds…

  • I think there have been many good points made, but I think people are conflating different trends. Some neighborhoods like the Heights and Washington area are seeing old bungalows torn down and the lots subdivided into many townhouses. Other neighborhoods, like Upper Kirby, Greenway, and south of West U near the Braes Bayou are seeing the remaining 1950′s tract houses on quarter/fifth of an acre torn down and mostly single family 4000 sq ft+ minimansions put in their place. I think you might start to see two different paths in terms of bubbles for those sorts of choices. Neighborhoods that get new, fancy housing stock without densifying would presumably increase in value relative to neighborhoods that are dense but consist of fairly shoddily built houses with pretty serious issues for families with children (townhouse layouts are a huge hassle with babies, especially the ones with two ground floor bedrooms and a third floor master). I think there are probably far more folks who are overextending themselves to buy a 400-500k townhouse than those buying a 700k-1+ million minimansion/ a lot more chance of dominoing foreclosures in a downturn…….