Big Real Estate Correction Coming - Perfect Storm (Houston, Sugar Land: middle-class, sales)

[jradMIT]

My opinion of course, but I am(was) in the market to buy a house. I might sound a little like chicken little here, but it seems to me that there is a perfect storm brewing for a major real estate correction in the city. I think if your thinking of buying you might want to become much more selective or wait 6 -12 months if possible. Let me summarize my overall why I think prices will fall back to prices seen in the mid 2000's and there will probably be many homes going for lower than market value prices. Here are the reasons I see

1. Dramatic rise is prices is the recent past- Over the last two years prices have run up very nicely.
2. The rise in prices in turn caused tons of construction and real estate investment, it seems everywhere you look, you see apartments/condos/houses being built. Basically there is a large of supply of new real estate that is coming on the market.
3. Drop in Oil prices dramatically and quickly- The price of oil essentially took a nose dive with no warning. Very quickly we are at sub $40 dollar a barrel oil, it happened so quickly that people really couldn't adjust. Also there was alot of false optimism and disbelief, most people thought after the initial drop that prices would at least be in the 60-70 range and that it was temporary. Not looking that way now, Saudi is flooding the market trying to break producers, until they are broken this goes on. Could be years (gulp).
4. Layoffs - many energy and oil service companies have already had round(s) of layoffs, more probably in the future if prices remain under 40-50. Your talking about over 100,000 high paying jobs eventually. I work for Chevron, they started a project aimed at making recommendations of cutting costs in the beginning of the year, the results were finally released recently and its about 1500 jobs, most likely there will be another project next year to do the same, and so on. The city's economy is supposed to be differentiated since the bust in the 80's and we will soon find out, but what drove the previous boom? Energy and Oil jobs were the primary cause. The economic effect is lagged too, last year's layoffs are felt today. Next year the effects will start to be seen.
5. Irrational Exuberance- I think many homes right now are being priced way too high, they haven't adjusted to the new reality. Owners want the pay day, agents and realtors don't want to be told the party is ending. This is going to aid the issue because homes that could be selling aren't, simply because they are overpriced. When the correction starts there will many homes that are on the market that would have sold 6 months ago at their current price. Also there are alot of small time real estate investors/flippers that have overextended themselves when prices drop they are going to hurt.


All in all, I think its a perfect storm so to speak, fast run up, increase in supply, loss of jobs very quickly. If it were more of a gradual change the market could have adjusted in a smoother fashion. But this will be an abrupt, and the abruptness will create some real good buying opportunities.

[mikeyyc]

While you're grounded in logic, the base of your premise has to be that Houston is overvalued.

I'll counter by saying it was massively undervalued, and the collapse in oil prices has only halted excessive growth, and that pricing now is around the new normal.

You're not going to go back to pricing in Sugar Land and the like for $80-$100 a square foot again.

[astrohip]

We all have opinions. I think most people who keep up with this sort of thing would disagree. Houston may soften a tad, but it won't drop like a rock. It will either remain flat, or squishy plus/minus a few points. And high-end is still climbing. There is a lot of money still out there, looking for a home.

So if you want to wait, great. And if it's for investment purposes, it's always been buyer beware. But if you need a home, you need a home. Why would you wait? It's like timing the stock market. If you sold yesterday, you missed out on the 600 point bump up today. And if you need a home, then find one.

I always find market timers end up losing in the long run.

[gwarnecke]

I see slowing rate of appreciation, maybe some price drops in a few areas, but not a large-scale crash, for this simple reason.

The US-wide real estate crash in 2007-2008 was preceded by a sharp run-up in prices that forced middle-class buyers to drop serious money for homes. As we know now, many of these buyers were granted loans that they never should have qualified for.

Homes bought in Houston during the last five years were mostly bought with conventional fixed-rate loans. Prices certainly increased a lot during that time, but not to the extent that middle- and middle-upper-class O&G professionals were having to stretch to get a decent house. I know anecdotes are of limited value, but most of my colleagues own homes for which they spent maybe twice their gross annual salary, or less. Our house cost less than our gross annual salary, and it's located in a nice neighborhood near work, we're happy with it. Job loss is of course a hardship for anyone it affects, but it need not force us to dump our homes.

If prices start to waver, those who keep their jobs will see an upgrade opportunity, keeping prices from plunging too low.

As to where price drops would hit first - I'm wondering if it would hit the ITL townhomes first. They've built a ton in the last few years and keep building more. Most folks in O&G I know who own them plan to upgrade to suburban homes as soon as they have kids, to avoid having to lug all of the baby stuff up and down stairs. This is fine as long as young professionals keep flocking to Houston, to soak up the inventory, but if hiring stagnates, so could buying.

[jradMIT]

I agree with on some level, but I think the housing values here especially in the burbs will always have a lower ceiling because there is little land limitation. Construction here is cheap and essentially land is also, so there will always be a ceiling for prices in the outlying areas. The city is different because of the smaller availability of land, but still there are many empty lots all around the city. Basically what I am saying is that the city wasn't massively undervalued because the break even price of new construction here is low, I would guess it is in the neighborhood of $100. Just my guess I'm pretty sure its closer to $100 than $150. Also I guess the question is what caused the massive undervaluation? And is this factor now gone? I've heard it was the collapse of the 80's but 25+ years is a long time to abruptly move to a new equilibrium. My guess is the latest energy boom was the largest contributing factor to the run, and in their absence are move back to earlier levels is possible, now is the new equilibrium higher than before, absolutely, the new equilibrium is higher than the $80-$100. But I think what I am saying is that there will be a short time where you will see those homes selling for $80-100, not all of them but a decent amount. Essentially a new undervaluation in the short will occur particularly with the amount of new construction and the abruptness of the change in the labor market.

[jradMIT]

I guess my question for all would be, what was the factor that drove prices up over the past 5 years? What was the gain 30-40%? in some places? Would a 20-25% drop really be that dramatic? And I agree, the mid town area is definately vulnerable - places going for 200+ and sq/ft condos, Also I think the smaller 2000-2500 sqft houses to get some weakness, the high end will probably remain.

[ipuck]

I am noticing a big drop off in pending sales this month and unsold houses dropping their prices 5-10%.

Perhaps this is the 6 month lag since bulk of layoff start happening beginning of year.

[mikeyyc]

Originally Posted by ipuck

I am noticing a big drop off in pending sales this month and unsold houses dropping their prices 5-10%.

Perhaps this is the 6 month lag since bulk of layoff start happening beginning of year.

A big chunk of that is seasonal as well.

TX - Houston Area Market Report

[predatorprey]

You will see some drop off but I think 10% would be on the extreme side.

Much of the increase was due to demand (huge increase in population), and not speculation.

Demand will soften and we will likely see inventories rise to more normal levels.
Prices will stagnate and perhaps decrease some.

[jradMIT]

I am looking at Q3 2016, when you will see the correction take hold, and I say correction not crash, correction is a drop of 10% or more. 30-40% run up, followed by a 15-20% return, is not really that outlandish. Its still very early in this. If the price of crude stays in this range, which is very likely. for 2015-end of 2016, which is what the futures markets indicate(not really worth much), Its a rigged market when Saudi wants things to change they will, until then hold on. Only other factor would be weakness in the overall national and global economy, not sure about that one, but its another possibility, just to throw another variable out there, any kind of stagnant growth or a recession would make things worse, like I said though I have no strong opinion or one way or the other.