Comment of the Day Runner-Up: What Difference Does the Price of Oil Make to Houston Real Estate?

COMMENT OF THE DAY RUNNER-UP: WHAT DIFFERENCE DOES THE PRICE OF OIL MAKE TO HOUSTON REAL ESTATE? Drop of Oil“Let’s assume 100,000 people live and work in Houston and are employed, somehow, someway, by the energy industry. That’s a very high guesstimate, but let’s go with that. Now let’s assume one of four, or 25,000, are in danger of having their hours reduced or jobs eliminated. Again, a very high estimate. 25K folks in financial distress is less than one percent of the giant Houston SMA (5M or so). Even if you tripled the number to 75K folks living in Houston that are instantaneously released from their employment ’cause oil dropped to $25/barrel, that’s still less than 2% of the city’s population, and a blip on the ‘financial health of Houston’ radar. Home prices may dip a bit in Houston, but that may be more due to a massive number of shit houses being constructed and sold cheap than $1.95/gallon gas.” [c.l., commenting on Houston Housing Market Reaches All-Time Highs — Before It Crashes, Dips a Little, Remains Steady, or Climbs Further] Illustration: Lulu

23 Comment

  • It looks like it’s closer to 300,000 directly employed by the oil industry.

  • Yeah your estimate is wildly too low, as outlined in the original post. While that might be a potentially plausible number for employees of medium to large oil companies in Houston, it likely isn’t capturing oil service companies (everything from steel and pipes to catering and geophysical services), lawyers, bankers, and landmen whose roles are directly tied to oil, or major construction/project management companies (Technip, Bechtel, etc). I would estimate that at between 250-300,000 total directly linked to the oil industry. And a solid majority of them in the $100-200k+ salary range. I think more than anything else, even if most of these people don’t lose their jobs, they are likely to be more cautious in their spending and less likely to be looking to buy bigger houses/more expensive cars/do major renovations. I think that’ll be more than a blip and more like a flat spot on the price growth ramp, where things slow down and house prices flatline for a bit.

  • 100,00 people working in the energy sector is a “high guesstimate”? No, it’s low. Its more like 200,000 Over 10,000 people in Houston work for Exxon alone.

    The Energy Sector accounts for almost 20% of Houston’s GDP

  • The number employed in exploration and production is closer to 125,000 and those jobs have about a 3:1 multiplier in the economy. So if you lose 9,000 jobs in that sector — you can count on another 25,000 – 30,000 being lost across the economy. Now, you are looking at almost 40,000 jobs – still just over 1% of the 3 million jobs in the Houston MSA.

    It can start to affect the real estate market when companies fear the future and curtail expansion plans into new office space when we have 16 million SF of office space under construction. Or when the petroleum engineer making $80K a year doesn’t get hired and so doesn’t move into one of the 22,000 apartment units or decides not to buy of the 13,000 $350-$500K houses we are building.

    I don’t think it will get to that, but it’s a legitimate concern for the short term, anyway.

  • wow, what an uneducated comment – and based (it appears) on mere assumptions.

    in 2012, the energy sector accounted 3.4% of Houston’s employment. i don’t have the figures for 2014, but i am 100% certain they went up from 2012 to 2014. most likely by a significant amount.

    but even more so, it isn’t just about people *directly* employed by oil & gas companies… those that are indirectly affected (ie steel companies, housing & food for rig workers, etc) have already seen layoffs.
    and these layoffs most certainly trickle into other industries. economists said that in Louisiana, for every Schlumberger layoff, that accounts for 2.6 layoffs in retail, tech, etc. and the point is, that’s in another state.
    people are scared, because this isn’t just a Houston or Texas problem – it’s a global problem. last week, 10,000 rig workers with Petroleos Mexicanos were laid off.

    will it devastate the country’s economy? doubtful. but up to 8 states will see massive layoffs if the trend continues on this path.

  • 100k is actually a very low estimate. 500k-750k is a much closer, fairly conservative, estimate for those employed by O&G in the Houston Metro area.

    But more important than the number employed is the amout of GDP supported by oil. In 2010 Houston’s GDP was $385 B. Energy makes up more than 50% of Houston yearly GDP, and this does not include the many companies that are indirectly related, albeit related to the energy sector (transportation, ship channel, manufacturing, etc.)

    This “worst-case” look at the affect of dropping oil prices is, unfortunately, a way too simple estimation. Houston’s economy is deeply intertwined in the oil and gas industry, and if the price of oil keeps dropping and and doesn’t recover in 2015, the Houston market will be in for some hard times.

  • I thought this post was debunked in the original thread

  • You failed to address an even broader concept related to oil prices affecting real estate. When oil drops and thus prices at the pump fall, inner loop housing devalues a bit relative to the burbs. $40 to fill up the SUV vs. $80. It makes a difference in our super sprawl town. Although like not a deal breaker, many people use this a decision point when determining where to live.

  • NEWB!

  • The estimate of 500K+ in the “energy” industry in Houston is probably correct from a total standpoint, but at least half (and probably 2/3) are in midstream and downstream sectors that benefit from lower oil prices. NAICS for mining & logging (which in Houston is oil extraction) is about 125K.

  • I’m very proud of Houston. In spite of the Houston haters (in Texas, around the country, and in the jealous/hostile oil producing countries), the city has boomed and thrived continually for over 8 years. Its status in America and on the world stage has clearly been elevated, the tired unfair stereo-types of the past employed by the haters have met the truth and died, and the city now receives a plethora of accolades (#1 this, #1 that) and good press. On a scale of 1 – 10, it’s been an extraordinary 11, operating at near maximum potential with dizzying explosive growth that has transformed the city, for the better. The oil hiccup has brought it to about a 7, and will actually allow the city to catch its breath, absorb/adjust to the new reality, and regroup to get ready to turn things back up and do what it does best: boom (much to the Houston hater’s chagrin). The oil matter is of concern, but sorry Houston haters, this is not a repeat of the 80’s, rather a regroup. As well, there’s obvious overreaction and exaggeration regarding the matter, coming from those wish Houston ill-will or stand to gain from stopping/slowing Houston down (poor haters). The economic boom may cool a bit due to this man-made dust-up in the market, some companies may shed a minor amount of jobs or decide to hold off on new hires temporarily…but make no mistake, Houston will continue to rise significantly, albeit at a more moderate rate. Houston learned an ugly lesson in the bust of the 80’s. It vowed to never let that ever happen again, and has worked overtime the last 30 years to fortify its flagship industry, oil/gas, to withstand these very types of hiccups…moreover, it’s economy at-large has been greatly diversified to further protect itself from these blunt fluctuations/swings…this time, Houston covered its ass, and because of its efforts it will continue to boom during its “so-called” bust. At the end of the day, the price will eventually rise and hoover at about $75 by Q4, and the haters, pansies and chicken-little will have to accept that the sky didn’t fall, after all. In the interim, it’s onward and business as usual in Houston…as the city sharpens its oil/gas chops for the next round, leans on its other powerhouse sectors like Medicine and all the recently announced multi-billion dollar expansions breaking ground in its vast and behemoth Texas Medical Center, the world’s largest. As well, the city and its filthy rich (which is ridiculously rich in Houston) can now take some time to spend some of the zillions they’ve made during this current boom, as they begin to transform Houston’s world renowned Cultural Arts institutions with all the recently announced multi-billion dollar museum, park and theatre district expansions. And, of course, the city can take a moment to officially welcome the legions of new citizens that have swelled an already gigantic city, as the population quickly approaches 2.5 million. The powers-that-be in politics/business/oil gave it their best shot with this man-made manufactured oil curve ball to throw Houston back to 1980, but this is Houston 2015: a new Houston. The saying says, “those ignorant of history, are doomed to repeat it.” So Houston forsook ignorance, learned from history, diversified and prepared…and will reap the benefits and continue to rise with continued success.

  • Sorry, the real estate market and all of Houston’s economy is going to take a hit.
    I know someone who is in the process of buying a home in the West U area where they were able to get it for 5-10% over asking. In my opinion, the only thing that may hinder a serious real estate drop are solid buyers (not investors) planning to stay in Houston who have stepped out of the market because of its frothiness.
    Having lived through the 1980’s in Houston, I can say the impact of low oil prices goes well beyond the oil & gas industry. My family was in medicine, and it impacted that industry as well .
    I’m personally surprised as how fast industry is reacting and starting layoffs. Its going to get much worse before it gets better. Personally, I think Corpus, San Antonio, and Midland will get it much worse, though. Industry forecasts expected a dip, but not one this severe (more like $50-60/bbl). The fact oil is down to $40/bbl worries me a bit, no shale is profitable at that price. Only people drilling now in the US do so to hold leases or service debt. I see low oil prices to stay for a while particularly giving the current geopolitical situation and domestic economy. Low gas prices help to boost the rest of the US economy and reduce Putin, ISIS, and Saudi income.
    For those claiming the $1MM spec homes should be slowing down, they have obviously not spent time around such builders. They go bust all the time and always assume they and their home is unique and thus immune to any downturn. I’m personally readying myself to pick up distressed properties in a few years.

  • @Txcon:

    I’ve been in the downstream sector in Houston for about 20 years. Every time the price of oil drops our industry is decimated. I know it seems they would benefit from lower oil prices but it just doesn’t ever work out that way. I’ve just seen large midstream projects from one of Houston’s fortune 500 companys that I’m working on canceled. They not only canceled the current projects, they cancelled all future projects also. I was on a polypropylene extruder project in the late 90s that was canceled when the price of oil dropped. The old timers on the job started warning us that if the price dropped much more we’d see all our projects canceled. Sure enough they were right. Massive layoffs followed. In our business it happens over night. You can have 30 years with a company and you’ll get a call from HR and be out the door that day. I’ve seen 60 year old guys who have been with a company for 30+ years pushing a cart out the door with tears in their eyes.

  • Honest Truth: people will not be moving to Houston just because we have received accolades about the quality of life (green space, restaurants, museums, etc.)–they will move here for a economic reasons because when it booms, people come no matter how crappy the air quality or options for public transportation are. And if one came for their fresh out of school $100k job and it goes away, he or she is likely to go away, too.

    Your glass half full attitude is very nice, but perhaps a bit too optimistic.

  • Overseas companies are laying off too. This affects their employees here too, even if they aren’t necessarily the ones being laid off.

  • Your employment number is low. Also, in addition to direct employment by the energy industry, there is an equal or greater number of people that are indirectly employed by the energy industry in Houston and those are the folks that usually get hit first. Energy companies have learned to hang on to “talent” and outsource “commodity”. Fire one worker, you may cause him/her to have to pack up and leave Houston – taking with them a wife/husband and possibly some children. Along with that loss goes the sale of gas to fill their tank, the grocery store sales to put food on their table, the rent they paid to their landlord, and anything else the family may have spent on. It’s a pretty damaging thread to pull on. Lots of folks like to try to fool themselves by saying Houston won’t notice another oil bust, but they’re doing just that – fooling themselves.

    If prices continue to stay low or go lower, it won’t be long before sellers will be beating each other up to try to sell their home before the value drops below their mortgage balance.

  • Count me as an optimist – at least, for a construction standpoint. Why? Because we have accidentally created a Keynesian Economics situation. Yes, oil is down. Yes, oil companies are laying people off, and yes, that has a secondary effect on construction because it means fewer oil related facilities will be built, (and if there are enough layoffs, less housing as well)
    But there has been upwards of $4 billion in k-12 and community college construction bonds passed, and we have major TXDOT projects underway that are only about halfway through. Construction workers who might have been putting up oil refineries will be able to go over and work on roads or schools. Architects and engineers, too – though the MEP engineers who do oil refineries might find simple buildings to be a bore….

  • The quality of sprawl will be different. Sprawl follows the subsidies – in this case the freeways (as you might have guessed). The style will be very different depending on how prolonged this is. The Houston area may end up with an additional ring of sprawl (in the style of the middle ring, aka the working-class ring) outside the outer ring!
    Hwy 99 north of I-10, for example, I would have guessed 6 months ago was on a path destined for mile after mile of taller clusters. Now I would guess it to be ultimately made up of short warehouses and 3-story office parks.

  • Let’s look at this way – poll your peeps. How many of them that work directly in the O&G industry have been laid off since oil dropped below $100/barrel ?

  • No layoffs I am aware of but there is a hiring freeze or so I heard. In a certain sense that is just as bad.

  • What happened to Armageddon ?

  • Individual firms have been able to adjust their strategy to adapt to low oil prices, but there remains a question as to how long they can profitably sustain the level of output that they are able to generate in the short term in an environment where global demand remains weak. Where commodity prices and demand are concerned, it remains much easier to make a pessimistic case than one that is optimistic.

    The global financial situation, meanwhile, reflects a continuation of excessive monetary easing and consequent malinvestment, even as banks in Asia and Europe remain only tenuously solvent. In particular, there seems to be a lot of fairly dramatic news in China that is being VERY carefully mitigated and played down in media intended for public consumption. Commodities (not just oil and gas) are down, but credit remains available. When that situation changes (and it will, as it has over and over and over for hundreds of years) and if I am correct that commodity prices have not substantially improved by then, then that’s the one-two punch that’s going to really hurt Texas. If a financial crisis originates elsewhere and is contagious, then the United States will participate broadly in a recession and any local economic diversity (which I think is oversold in Houston) will not be a cushion, problems with liquidity and credit will constrain spending by local households and businesses, and commodity prices may dip momentarily but may be buoyed by a weaker dollar. If the U.S. banking system proves generally resilient in the context of an overseas recession then the value of the Dollar will continue to strengthen, commodity prices will be crushed, and export-driven manufacturing (incl. refining) will also feel the hurt. Neither of these scenarios would bode very well at all for Texas.

    I hope that I’m wrong, really I do. This prognostication may not happen immediately, maybe not even for another couple of years; however now seems like a good time to be selling strategically rather than buying, and I’d say that about pretty much any asset that has exposure to the global capital markets (that’s most of them) but especially about commodities.