February 16, 2016
Few are complaining about cheaper prices at the gas pump. However, the sharp decrease in oil prices is hurting oil-production states, such as Texas. To discuss the issue, the Dallas Federal Reserve and the Real Estate Center at Texas A&M University recently presented the all-day seminar “Finding Shelter: Assessing Texas Residential Real Estate amid the Oil Slump” at the Dallas Fed building in downtown Dallas.
One takeaway: the oil-price slump isn’t a repeat of the 1980s, when the Texas real estate industry’s collapse led to a regional recession. For one thing, banking collapses aren’t taking place this time around. Additionally, the current oil issues are supply-driven, the opposite of the 1980s.
The Dallas Fed’s Senior Vice President and Director of Research Mine K. Yucel explained that a lot of supply is coming from the U.S. shale plays, as well as OPEC output and the sudden influx of oil from Iran. “Since 2014, output has been greater than consumption, something we’ll see continue into 2016,” Yucel said.
Another takeaway was Texas’ resiliency despite oil-price declines; Dallas and Austin have been job-creation machines. “People expected Texas to do worse last year than it did,” said Keith Phillips, assistant vice president and senior economist with the Dallas Fed’s San Antonio branch. One reason for the resiliency was diversification; specifically, real estate. “Residential and commercial real estate helped cushion the oil-price shock,” Phillips observed.
Presenters unanimously agreed that Houston, primarily an energy-based economy, is bearing the brunt of the falling oil prices. On the multifamily side, G. Ronald Witten, president of Witten Advisors, noted that Houston apartment rents will continue to decline. But there is plenty of money available to buy and build multifamily properties. Though the cost of lending might be higher, “debt is still cheap,” said Jeanette Rice, head of investment research, Americas, CBRE.
Speakers also addressed residential affordability. James P. Gaines, chief economist, Real Estate Center at Texas A&M University, pointed out that since 2000, median home prices have been growing faster than income. “Forty-three percent of Texas households can’t afford to buy homes priced higher than $150,000,” he said.
Witten and Rice remarked that vacancies among Class B apartments are tightening, as renters try to find less-expensive alternatives to the newer, Class A properties. Though it isn’t feasible for developers to create Class B properties, “today’s brand new Class Triple-A building will be tomorrow’s Class B,” Witten said.