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What Will Lower Oil Prices Do to Our Real Estate Market?

Experts forecast what to expect in 2015

No one knows for certain what the next year holds for housing in the greater Houston area; everyone wishes they did though.

Will declining oil prices negatively impact our market? If so, how much?

We have gathered forecasts from various experts in the field; some in person and some from other media reports.

One thing all of the experts say Houston has going for it is that it is not as oil-focused as it was in the oil bust of the 1980s. Oil is definitely a driver of the economy, but Houston doesn’t live or die based on the closing price of a barrel of West Texas Intermediate crude.

Dr. Jim Gaines, research economist from the Real Estate Center at Texas A&M University, works in concert with Dr. Mark Dotzour, chief economist, and together they believe that Houston is not as countercyclical as people might think.

“When the national economy is doing well, Houston still benefits,” said Gaines. “Also, lower oil prices might be bad for the upstream (exploration and production) market, but they are great for the downstream (refining) companies.”

According to the U.S. Energy Information Administration, nearly 30 percent of the entire country’s petroleum refining capacity resides in Texas.

Some experts say that the extra money staying in consumers’ pockets when paying at the pump may make moderate-income people consider buying a home. I’m not sure how much a $2.29 gallon of gas is going to impact someone considering the purchase of a $229,000 home, but I will definitely defer to the experts in that regard.

All this being said, all of our experts believe lower oil prices will be a negative for home sales. They do not believe that prices will fall though.

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Dr. Ted C. Jones, chief economist for Stewart Title, expects that home sales will decline by 10-12 percent, while prices will continue to rise by between three to six percent.

Even with the potential slowdown in our local economy, Jones still expects the greater Houston area to add 65,000 to 72,000 new jobs in 2015, down from 126,700 new jobs last year, but still strong.

“In many ways, houses are where jobs go at night – and with lower job growth we will have reduced demand,” said Scott Davis, regional director of Metrostudy. “

Jones also expects months’ inventory to rise to about 5.6 months in 2015, up from 2.5 months at the end of 2014.

While the low active inventory has been present in our market for a couple of years now and has been cited as the biggest challenge by many, it seems that it is now helping to keep prices from falling.

“Inventory levels for new and resale single family homes remain remarkably low and so I think those put a floor under any price declines,” said Davis.

The low inventory situation has also caused new home builders to ramp up activity to try to meet the demand that was perceived to have been there about six to 12 months ago.

Housing permits issued for January through November 2014 (the most recently available data) were up 9.9 percent compared to the same period in 2013.

Zillow Chief Economist Stan Humphries published a report recently that projected Houston home prices would rise 2.1 percent in 2015, slowing from 2014 levels primarily due to a growing supply of new construction homes.

At least we still have historically low mortgage interest rates to help stabilize the market somewhat…for now. On that topic, Jones predicts that mortgage interest rates will rise to 5.6 to 6.0 percent in the next 12 months. Realize, though, that factor has already been built into his sale and price forecasts.

Another opinion expressed by many who commented on the issue is that if oil stays below $50 per barrel for an extended period of time, then “all bets are off.” If you look at historical oil prices though, the average barrel has sold for $42. Some of the reactions people are having are just from the dramatic fall from above $100 per barrel levels and not necessarily a rational response to the absolute price of a barrel of oil.

The housing market in the greater Houston area may see a parallel to the oil market in one regard.

“Instead of a dramatic collapse, what we are likely seeing is a reversion to the mean –we are moving out of an exceptional market with unsustainable performance to a market that is healthier and normally functioning,” said Davis.

The word that we should all be using to describe our real estate market in 2015 is “NORMAL.” And normal is not a bad thing.

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HAR Communications Dept.

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