The Lone Star State isn’t the same place as it was during the big 1980s oil bust, and is better weathering falling oil prices, but further price plunges and worker layoffs could negatively impact home sales and construction.
This is according to new research by Texas A&M Real Estate Center research economist James Gaines, who published Texas 2015 Housing Market and the Price of Oil last week. The six-page report explains that Texas’ economy has diversified significantly since the 80s bust, relying much more on healthcare, technology, and other sectors.
Here’s the takeaway:
The price of Texas oil and the upstream energy sector is a prime cause of concern for Texas’ 2015 economy and housing market. History shows that Texas’ housing does not depend on high oil prices. In fact, the state’s housing market has thrived at prices within a wide range of oil prices lower than those experienced in 2013 and the first half of 2014.
The saving grace for Texas right now is that the state didn’t go overboard in its response to rising oil prices in 2013 and 2014, a stark contrast to the 1980s, when there was huge overspending and overbuilding, Gaines writes.
More from the research:
Oil price expectations, this time, were not based on maintaining $100/bbl or more levels, thus reducing the potential negative impact on the economy, especially in housing and commercial real estate. As many people have noted, “we’ve seen this cycle before, so we’re not as carried away with the good times.”
The negative economic impacts of low oil prices should be at least partially offset by positive impacts from non-energy economic activity, although continually falling oil prices, which are at six-year lows, make the real estate market challenging to predict.
“The uncertainty about how low prices will go and how long they will stay low makes 2015 estimates extremely difficult. No doubt there will be some job losses and a reduction in the job growth rate as a consequence that will impact the housing sector,” he writes. “Equally significant, though, may be any negative psychological impact on buyer and seller expectations and behavior if the non-energy positive impacts are not sufficiently offsetting.”
Gaines has predictions in his report, the biggest of which is that if 2015 West Texas Intermediate (WTI) crude oil prices settle between $40 and $50 per barrel, home sales in Texas will match or be above last year’s levels. He also predicts a rise in home prices at that level, but at a more moderate pace of 5 to 7 percent.
But from there, the news is rather gloomy: Gaines writes that if oil prices go much lower and layoffs continue, the Texas real estate market could be in for hard times.
“Sales and construction activity could decline by 10 to 20 percent more,” he writes. “The level of increase in the median price could be severely restricted or possibly fall. The more intense negative psychological effects of a more significant economic decline on the market would further depress the housing sector.”
This free-fall in oil prices comes on the heels of a banner year, Gaines writes, noting that in 2014, home sales reached 285,000 transactions, the second-highest level ever recorded at slightly less than the 2006 peak of 292,805. The statewide median home price set another record high for the fourth year in a row, reaching $183,700, and inventory of homes listed for sale fell to new lows relative to the pace of monthly home sales, reflecting the tight residential markets across the state.