Hot Houston Housing Market Chills As Energy Prices Dip

Alexei Barrionuevo

When energy prices dipped to 12-year lows in December, Sullivan Brothers Builders decided to try to spur sales of its single-family homes in the Houston area by offering a $5,000 bonus—and payment of buyers' electric bills for one year.

"The price of oil has stalled some buyers," said Karen Travelstead, director of sales and marketing for Sullivan Brothers. "There were buyers ready to make decisions that kind of decided, 'Let's wait three to six more months before we decide.'"

Two months later Sullivan Brothers is still offering the incentives, and likely will continue them through the spring, to see if the global energy downturn deepens for the nation's most important oil and gas corridor, Travelstead said.

Houston, the nation's number one market for housing starts last year, is starting to show signs of a slowdown. Still, home prices in the metro area, whose job market is about 50 percent energy-related, may prove surprisingly resilient, in large part because supply has been struggling to keep pace with demand for the past few years – making for a hot market that more resembled San Jose, California, than any city in Texas, said Bill Gilmer, director of the Institute For Regional Forecasting at the University of Houston.

But due to the energy fall-off, Houston is expected to lose its crown as the king of new home construction this year to its in-state rival, Dallas. "In 2016 you will see Dallas be the leading market in terms of single-family growth, followed very closely by Houston," said Scott Davis, the Houston regional director for Metrostudy.

Both Houston and Dallas have been on a housing-expansion tear since 2012, with home prices rising at double-digit rates across most of the state. Last year Houston had 27,899 housing starts, down 709 from 2014, compared to 26,905 for Dallas-Fort Worth, up 917 from the year before. The third place metro area–Atlanta--was nearly 8,000 starts behind the Texas leaders in 2015, according to Metrostudy, a real estate marketing and intelligence company.

Sizzling job growth spurred developers to build and expand further north in both Dallas and Houston. The Dallas area added 123,000 jobs in 2014, and another 98,900 jobs last year.

Houston has added 514,000 jobs in the last six years, or about 6 percent of all jobs added in the country. But now, with the oil downturn, Houston is expected to have lost some 40,000 energy-related jobs last year, for net job growth of about 20,000.

Houston has added 514,000 jobs in the last six years, or about 6 percent of all jobs added in the country.

Sales are at near-record levels, and supply of vacant finished homes in Houston stood at just 2.3 months in December, up from 1.5 months at the end of 2014. "On the surface it looks not just like a healthy market, but a hot market," Gilmer said. "Unfortunately, I think that is a negative symptom. The Texas growth model has always been built on the low cost of living and the low cost of home construction."

In Gilmer's view, what Houston and Dallas have is a "lots problem." With tighter lending practices imposed by the Dodd-Frank Act, builders have struggled to find the financing to create more single-family lots and keep up with demand. The legislation has hurt smaller regional banks more than larger banks, studies have shown. "The requirements to hold capital against land development are just prohibitive," Gilmer said.

"Unless you can reach into national markets, like one of the big builders, or can get a hedge fund, or put half of your own money into the project, it has been very difficult to get lots on the ground," he said.

The shortage of lots has pushed up the price of land, making it more difficult to build a house. That has contributed to an uptick in housing prices. In Dallas, new home prices rose by 51 percent from 2010 to 2015, to $299,300. In Houston, the median sale price of a new home rose 49 percent over the same period, to $282,700, Metrostudy said.

Still, builders tried to keep pace with the stunning job growth in Texas generally. Places like Frisco, the top sub-market for housing starts in the Dallas area in 2015, have morphed from the smattering of farms I remember from when I worked for a local newspaper in Dallas in the early 1990s, into a luxury home destination, with prices ranging from $400,000 to $749,000.

And the jobs keep coming. Toyota North America is relocating its headquarters to Plano (north of Dallas), which will bring 4,000 jobs, and State Farm and Liberty Mutual are building call centers in the area that will add another 13,000 jobs.

Exxon Mobil

As diversified as Dallas's economy is, energy still rules Texas. "Overall we are seeing a little more caution about spending money in Dallas because it is part of Texas," said Paige Shipp, Metrostudy's regional director for Dallas-Fort Worth. "That is a 2016 revelation. It was kind of no-holds barred in 2015 – buy as much land as you can, get as many deals as you can."

In Houston, with the complications around creating new development lots, builders contracted a case of "Exxon fever," as Gilmer put it. When the energy giant began construction in 2011 on a new global headquarters in Spring, a city north of Houston, developers seized on the opportunity to create luxury housing that would feed a new white-collar energy corridor. A third outer loop called the Grand Parkway—Houston already has two highways that loop around the city—also promised to ease traffic.

The resulting development activity further fueled the transformation of The Woodlands, a master-planned community developed by oil investor George P. Mitchell, into a suburban megalopolis, with a population that has nearly doubled since 2000 to 108,000. But developers overreached, building homes averaging from $400,000 to $800,000—about double what most buyers expect to pay in Houston—and now some of that new housing is lingering on the market for longer.

"That north Woodlands area has been one of our prime growth corridors, and right now it is really slowing," Davis said. "We haven't seen a big movement of Exxon relocations to buy housing in that area. What has happened is we are offering product at a price point in communities that don't have the amenities that attracts the consumer segment that buys at that price point."

I took a drive through Spring and The Woodlands recently. Signs advertising new homes and new lots were everywhere. Communities like Harmony, which is selling homes from the $250,000s to the $600,000s, had signs pitching the benefits of hike and bike trails, high-speed internet and alarm monitoring.

In Springwoods Village, a 2,000-acre master-planned community just south of The Woodlands, I passed by the 385-acre ExxonMobil campus, which currently employs 8,000 and is designed to grow to 10,000.

Alexei Barrionuevo

I saw a lot of unsold homes and home sites. At Audubon Grove builder Taylor Morrison was pitching 51 single family homesites starting in the $500,000s. At Harper Woods, green and silver balloons still adorned the entrance to the community. There was a row of three "available" signs on one street. Homes there range from the low $400,000s for a townhouse to $650,000 for a home just under 3,000 square feet, Travelstead said.

Since 2013, Sullivan Brothers has sold and closed 23 homes out of 34 available. There are nine currently for sale. The plan is to expand to 88 homes, but the oil downturn may force the developer to redivide the land to "bring down the density," Travelstead said. In recent weeks, the company reduced some prices by up to 6 percent, including on a three-bedroom, 2,805-square-foot house with antique brick exterior and a butler’s pantry, which is now selling for $549,000.

The free electricity and $5,000 bonus are attracting attention, she said, though so far they have resulted in just two closings.

• Property Lines archives [Curbed]