The one-two punch of COVID-19 & low oil prices for Houston

In what would be the headline story in any other economy, oil prices are low and implications for select housing markets are many and varied. Houston, the fifth largest metro in the US, is facing the same COVID-19 uncertainty as the rest of the nation, but is also grappling with the changing energy sector. 

Oil Basics

The supply of oil sets pricing, but there’s a lot under the surface ranging from cartels to special interests, politics, and demand. Suppliers are constantly juggling matching demand with holding onto market share, and that balance got tipped as COVID-19 lessened the need for oil from travelers, airlines, etc. 

Enter: the power struggle between Saudi Arabia and Russia, two countries that are keeping production levels high despite less need internationally. The glut of inventory caused the price of oil to plummet to around $20 per barrel, a near 20-year low*. For reference, oil started the year at $60 per barrel. 

America became the largest oil producer in the world as of 2018 and has a vested interest in normalizing the supply of oil. For example, Halliburton, one of the world’s largest providers of oilfield services, furloughed 3,500 employees last week in Houston in response to the low oil prices. The administration is considering intervening, which could revitalize the sector, but in the meantime, it’s important to study the impact of low oil prices on Houston’s housing market. 

Energy Dependence Is Shifting

Houston’s economy has diversified considerably over the past 30 years but remains synonymous with oil. Data from a report by the Greater Houston Partnership shows that energy jobs in Houston represent the smallest share of total employment going back 30 years at 9%. For comparison, the energy sector represented 13% of jobs in 1991. If those numbers seem low, it’s because they don’t account for all the industries that are related in the periphery that will also slow when oil prices are down. 

To get a good sense of the energy sector’s impact on Houston’s economy, we pulled stats on how housing fared when oil prices dropped in the most recent rut starting in 2014.

2014 Peak to Trough

Today Peak to Trough

Lawrence doesn’t believe the market will be uniformly hit though. There are two parts of the market he’s particularly watching:

1. Move-up housing along Interstate 10. As seen in the late-2014 oil decline, move-up product that satisfied the upstream demand from white-collar energy workers was impacted by job losses and experienced lower sales volume. Lawrence believes the same will hold true this time around. For example, communities in Katy, which represent roughly 10% of the actively selling communities we track in the Houston metro in Zonda, could be faced with a pullback in demand if oil prices stay low for a prolonged period (we are just a week into oil sub-$30 per barrel).
2. Some first-time buyer communities. Since oil prices started to rebound in 2016, builders in Houston have re-emphasized on affordable product with less of a cluster in the energy corridor than in the past. While normally considered great news, the apartment industry also made a bet on the space over the past 18+ months by focusing on suburban development. Incentives were already in use for some rental communities due to hypercompetition in certain locations. Low oil prices will just amplify this.

Our multifamily expert, Kimberly Byrum, agrees. She sees that over 40% of the units in Houston are offering some type of rental concession already. She notes, however, that the percent is substantially lower than the 79% during the Great Recession. 

As with COVID-19, the duration of the low oil prices is critical to follow. The market still offers opportunities in today’s climate, though.