Inner Loop appreciation vs. national trends

[longcat]

I'd like to get people's opinion on when/if houston's housing market can expect to feel blowback from the various pessimistic indicators already affecting elsewhere (increased lending standards, higher interest rates, drop off in speculator activity...etc). Everyone says that Houston is unique because of continuing job growth, lack of run up in prices...etc, but I think the second of those 2 isn't true anymore when you look at the inner loop and the run up in prices over the last several years. At what point will job growth alone not be able to sustain inner loop price appreciation in the face of all the negative factors?

[KinkaidAlum]

I'd like to get people's opinion on when/if houston's housing market can expect to feel blowback from the various pessimistic indicators already affecting elsewhere (increased lending standards, higher interest rates, drop off in speculator activity...etc). Everyone says that Houston is unique because of continuing job growth, lack of run up in prices...etc, but I think the second of those 2 isn't true anymore when you look at the inner loop and the run up in prices over the last several years. At what point will job growth alone not be able to sustain inner loop price appreciation in the face of all the negative factors?

Don't believe the hype about the national real estate slow down either, especially with regards to high demand areas. Everyone and their dog has heard how bad the market has crashed in Boston but it simply isn't true in the city.

While prices have fallen in some of the far-flung suburbs, prices in Central Boston have remained steady. The house I purchased in 1999 is worth DOUBLE now. The fact of the matter is things aren't selling as quickly but prices have not dropped a bit. Construction hasn't slowed either. Right now, there are mega projects under construction like the Mandarin Oriental, The Clarendon, Columbus Square, and more.

As to how this pertains to Houston? I think Houston has reached a level of maturity and size (the metro is 5 million plus) that the Inner Loop pricing wont drop. Sure, there might be blips here and there for a year or two that might affect flippers, but if you are in it for the long haul, Inside the Loop is where it is at. Space is limited and demand is not.

Additionally, with the mega expansion taking place in the Med Center (new Baylor Hospital, 3 new facilites at Texas Children's, 3 new facilities at Methodist, a new addition to MD Anderson), the planned enrollment increases for U of H (10,000 more students planned for) and Rice (wants to become the size of Duke/Stanford which would mean close to a doubling of the undergrad population), and the increasing popularity of office space in downtown and uptown, the demand for close-in housing is just going to increase.

[jm1fd]

If the price of oil goes into the crapper, you'll see the inner loop market slow down and maybe even make a bit of a reversal. It probably won't be as bad as the bust in the 80s when oil prices plummeted, but it will definetly cool things off.

[Jeebus]

If the price of oil goes into the crapper, you'll see the inner loop market slow down and maybe even make a bit of a reversal. It probably won't be as bad as the bust in the 80s when oil prices plummeted, but it will definetly cool things off.

Can you expound on this? It would seem to me that at this point in time that the values would continue to rise as people will try to get as close to the center of the city as possible to save what little gas they have.

I think the 80's were a stretch-mark of sorts for America. For the first time we were feeling the effects of "white-flight", recession, and suburbanism all at the same time. It left our cities scared via the "donut" effect. I don't think that would happen again, at least not with our generation.

I don't foresee the values decreasing ever again in my lifetime.

[jm1fd]

Can you expound on this? It would seem to me that at this point in time that the values would continue to rise as people will try to get as close to the center of the city as possible to save what little gas they have.

It is not about saving gas. Its about the general health of the local economy. Right now the local economy is very robust; thanks mostly to the high prices of oil and the tremendous amount of exploration and expansion activity in the oil industry.

[kenc]

Yes....as the energy industry goes, so does the Houston real estate market. But I don't think we will see a slow down anytime soon. And if the bottom falls out of the market it will be the burbs that suffer the most.

[Jeebus]

Yes....as the energy industry goes, so does the Houston real estate market. But I don't think we will see a slow down anytime soon. And if the bottom falls out of the market it will be the burbs that suffer the most.

This is what I'm thinking. The donut effect seen in the 70's & 80's was somewhat of a fluke caused by the exploration of suburban living fueled by recession. By the revitalization of downtowns and inner-city corridors over the last 20 years I think we as a society have realized the error of our ways. I think it'll be us out here in the suburbs that will suffer most (real estate-wise) if there's another oil bust. Granted, the inner-loop might cool off, but there's no way the values will drop. If anything they'll hold stagnant as people attempt to get into the city before the bottom drops out, and they're left out here in decaying neighborhoods.

[TheNiche]

Bear in mind that employment growth within the local economy is more closely correlated with the rate of increase and acceleration of energy prices than with their actual level. Also, higher prices are leading indicators; it takes a bit of time for firms to ramp up employment as a response to higher prices.

If the prices do nothing other than level off, job growth slows. In the long run, if the prices remain about level, job growth within the energy sector and related sectors will stop and even decline slightly, although that downward effect would be partially offset by a non-energy sector that is correlated and usually slightly higher than U.S. employment growth. If prices plummet and it appears as though they aren't likely to come back up in the near term, a lot of projects get cancelled and the entire region gets hurt badly. In the long run, non-energy expansion into space vacated by energy allows us to recover and even expand, but the short term consequences would be disasterous.

Real estate demand within the inner loop is very closely correlated with demand for office space in the CBD, TMC, Greenway, and the Galleria area. Three of those four are disproportionately driven by energy and related sectors as compared to most suburban areas, and even a fair bit of large philanthropic donations to non-profits in the TMC come from folks who have made their fortunes in energy (not to mention that a larger and wealthier customer base is a more viable customer base), so even medicine is not completely immune.

...so a collapse in energy prices would be bad for the region, but I think even worse for much of the inner loop. It would hurt across all levels and types of housing demand, from the 5th Ward to River Oaks. Make no mistake about it. It'd be ugly for several years before the non-energy sector could move in and fill up the inexpensive office space and industrial facilities vacated by energy.

I think that Clear Lake/League City and probably far northwest Harris County would probably fare better than the inner loop or west Houston and Katy.

[TheNiche]

If anything they'll hold stagnant as people attempt to get into the city before the bottom drops out, and they're left out here in decaying neighborhoods.

I doubt it. If anything, extremely low land and fuel prices, coupled with a large cohort of aging baby boomers nearing retirement, as well as a non-energy sector that is less concentrated in the inner city, would provide incentive for people that were still employed to locate themselves in exurban or rural areas. Also bear in mind that childless young singles and couples are more mobile than those households that are anchored by children; they comprise the largest part of demand for yuppie inner loop households, and they will comprise the first wave of an exodus from our region.

[Jeebus]

Also bear in mind that childless young singles and couples are more mobile than those households that are anchored by children; they comprise the largest part of demand for yuppie inner loop households, and they will comprise the first wave of an exodus from our region.

I disagree that childless singles & couples comprise the largest demand for inner-loop housing. Most inner-loop neighborhoods, both poor & wealthy, are family units. Only certain execptions, like portions of the Heights, Montrose, & Midtown, will you find the childless yuppies.

I do agree however that they (childless couples) would be the first wave to move out of the loop. I foresee this happening right before bottom hits. I think this is when you'll see prospector families moving into the loop to capture those neighborhoods they could never afford. I think this because I would be one of those to move my family to West U or Rice Village if the prices were to ever go stagnant.

I'm thinking like a layman though, not like someone who has studied economics.

[KinkaidAlum]

Bear in mind that employment growth within the local economy is more closely correlated with the rate of increase and acceleration of energy prices than with their actual level. Also, higher prices are leading indicators; it takes a bit of time for firms to ramp up employment as a response to higher prices.

If the prices do nothing other than level off, job growth slows. In the long run, if the prices remain about level, job growth within the energy sector and related sectors will stop and even decline slightly, although that downward effect would be partially offset by a non-energy sector that is correlated and usually slightly higher than U.S. employment growth. If prices plummet and it appears as though they aren't likely to come back up in the near term, a lot of projects get cancelled and the entire region gets hurt badly. In the long run, non-energy expansion into space vacated by energy allows us to recover and even expand, but the short term consequences would be disasterous.

Real estate demand within the inner loop is very closely correlated with demand for office space in the CBD, TMC, Greenway, and the Galleria area. Three of those four are disproportionately driven by energy and related sectors as compared to most suburban areas, and even a fair bit of large philanthropic donations to non-profits in the TMC come from folks who have made their fortunes in energy (not to mention that a larger and wealthier customer base is a more viable customer base), so even medicine is not completely immune.

...so a collapse in energy prices would be bad for the region, but I think even worse for much of the inner loop. It would hurt across all levels and types of housing demand, from the 5th Ward to River Oaks. Make no mistake about it. It'd be ugly for several years before the non-energy sector could move in and fill up the inexpensive office space and industrial facilities vacated by energy.

I think that Clear Lake/League City and probably far northwest Harris County would probably fare better than the inner loop or west Houston and Katy.

A collapse of energy prices would be bad for ALL of Houston. To try and make it out that the Inner Loop/Uptown would be "ugly" and harder hit is assinine, especially when offering up far northwest Harris County as an area that might fare better. The Inner Loop is home to the MD Andeson Cancer Center, Methodist Hospital, St Lukes Hospital, Memorial Hermann Hospital, Ben Taub, V.A. Med Center, Park Plaza Hospital, Twelce Oaks Med Center, St. Joseph's Hospital, most city, county, state, and federal offices, the University of Houston, Rice University, Texas Southern University, UH Downtown, Houston Community College, the Art Institute, South Texas College of Law, Baylor College of Medicine, Texas Woman's University, UT Health Science Center, Prairie View ATM College of Nursing, University of St Thomas, the top 5 commercial property management firms, the top 5 commercial real estate brokerage firms, 3 of the 5 largest commercial building contractors, the top 5 architectural firms, the 2 largest mechanical/electrical engineering firms, the Houston Association of Realtors, the Houston Bar Association, the Harris County Medical Society, the top TWENTY FIVE law firms, the 12 largest accounting firms, 9 of the 10 largest banks according to deposits, TWENTY FOUR of the top 25 money management firms, 9 of the top 10 venture capital firms, 7 of the top 10 stock brokerage firms, Continental Airlines, Group 1 Auto, Quanex, Stewart Information Services, Landry's Restaurants, Consolidated Graphics, Crown Castle, Comsys, Maxxam, Cornell Companies, Service Corp International, HCC Insurance Holdings, Goodman Global, Stage Stores, Kirby Corp, Camden Trust Company, the largest internet access provider, 4 of the top 5 telecommunications providers, 3 of the top 5 web design firms, 3 of the top 5 software development companies, 2 of the top 5 bioscience firms, Reliant Stadium, Toyota Center, Minute Maid Park, George R Brown, Reliant Hall, the Museum District, 6 of the 10 largest hotels, 4 of the top 5 graphic design firms, 4 of the top 5 P.R. firms, 8 of the top 10 executive search firms, 4 of the top 5 catering companies, and 3 of the 5 largest private schools.

I can see how you came to that conlusion...

[RedScare]

Kinkaid, you gotta go easy on Niche. He was all of about 1 or 2 years old the last time Houston got hammered by a collapse in the oil field, and he has no idea what precipitated it, what it entailed, and what areas bore the brunt of the ensuing real estate collapse. If he got in his car and drove around, he could find them, though. Or, he could just ask people like mrfootball. He complains about these areas on a regular basis.

The fact is, though Niche wasn't around the last time oil collapsed, the bigshots in the energy industry were. Those of us who lived through both can attest to the fact that Houston, though reaping benefits from oil, is not as dependent on it as it was in the 70s and 80s. We can also attest to the fact that the energy companies are approaching this "boom" FAR more cautiously than the last one. Many of us remember doctors, dentists and lawyers all buying oil wells, because "that's where the money is!" People literally were acting like the Ewings on Dallas. It will be years before oil prices could drop to levels that would cause a collapse, but the energy industry will handle it better, because frankly, they haven't forgotten the last one...and the doctors are sticking to medicine now.

[TheNiche]

I disagree that childless singles & couples comprise the largest demand for inner-loop housing. Most inner-loop neighborhoods, both poor & wealthy, are family units. Only certain execptions, like portions of the Heights, Montrose, & Midtown, will you find the childless yuppies.

Ah, but inner loop appreciation has very little to do with poor folks even though there are still great numbers of poor households, family and non-family alike. In areas such as West U, Bellaire, and up into Afton Oaks, River Oaks, and to some extent Montrose, there are few enough poor households at this point that the schools are decent enough to support upper middle class households with children--and the extremely high land values are supported by public schools with a good reputation. In areas of the inner loop where regentrification is not yet complete, relatively high land values that don't match with the demographics that presently exist there are entirely supported by the expectations that childless yuppie households will come along and make the neighborhoods highly desireable again. Take a big chunk of childless yuppies out of Houston and put those that remain in the neighborhoods that have already regentrified but where prices had been too high for them before a bust, and you could expect to see a lot of areas rapidly regress as prices plummet.

This is a scenario I've played out in my head several times over, as I have exposure to that very risk in the East End.

I do agree however that they (childless couples) would be the first wave to move out of the loop. I foresee this happening right before bottom hits. I think this is when you'll see prospector families moving into the loop to capture those neighborhoods they could never afford. I think this because I would be one of those to move my family to West U or Rice Village if the prices were to ever go stagnant.

Oh, I don't doubt that a few lucky families would very quickly fill any void in pricey areas like West U and Bellaire that have trusted public schools, but I don't know how your financial status is, except to say that an energy collapse would be a regional problem and that if most of your savings is tied to the value of your house (which is true of very many households), then you could still be as much up the creek as the next guy when it comes to buying up. The result, in high-demand neighborhoods like that, is that the profile of such households may not change significantly even though average household incomes might decline somewhat and there could be a lot of shuffling around within the same demographic cohorts.

[TheNiche]

A collapse of energy prices would be bad for ALL of Houston. To try and make it out that the Inner Loop/Uptown would be "ugly" and harder hit is assinine, especially when offering up far northwest Harris County as an area that might fare better. The Inner Loop is home to the MD Andeson Cancer Center, Methodist Hospital, St Lukes Hospital, Memorial Hermann Hospital, Ben Taub, V.A. Med Center, Park Plaza Hospital, Twelce Oaks Med Center, St. Joseph's Hospital, most city, county, state, and federal offices, the University of Houston, Rice University, Texas Southern University, UH Downtown, Houston Community College, the Art Institute, South Texas College of Law, Baylor College of Medicine, Texas Woman's University, UT Health Science Center, Prairie View ATM College of Nursing, University of St Thomas, the top 5 commercial property management firms, the top 5 commercial real estate brokerage firms, 3 of the 5 largest commercial building contractors, the top 5 architectural firms, the 2 largest mechanical/electrical engineering firms, the Houston Association of Realtors, the Houston Bar Association, the Harris County Medical Society, the top TWENTY FIVE law firms, the 12 largest accounting firms, 9 of the 10 largest banks according to deposits, TWENTY FOUR of the top 25 money management firms, 9 of the top 10 venture capital firms, 7 of the top 10 stock brokerage firms, Continental Airlines, Group 1 Auto, Quanex, Stewart Information Services, Landry's Restaurants, Consolidated Graphics, Crown Castle, Comsys, Maxxam, Cornell Companies, Service Corp International, HCC Insurance Holdings, Goodman Global, Stage Stores, Kirby Corp, Camden Trust Company, the largest internet access provider, 4 of the top 5 telecommunications providers, 3 of the top 5 web design firms, 3 of the top 5 software development companies, 2 of the top 5 bioscience firms, Reliant Stadium, Toyota Center, Minute Maid Park, George R Brown, Reliant Hall, the Museum District, 6 of the 10 largest hotels, 4 of the top 5 graphic design firms, 4 of the top 5 P.R. firms, 8 of the top 10 executive search firms, 4 of the top 5 catering companies, and 3 of the 5 largest private schools.

I can see how you came to that conlusion...

I've stricken through anything that you mentioned in that list that is dependent upon expansion of the local economy to make money and that you could expect to see shrink its staff size or at least stop expanding in the event of a bust. I gave most educational services a break because they tend to be fairly stable in a recession on account of that some people use being laid off as an excuse to get more education, while other people find themselves in a position that they can't afford it. Where the hospitals are concerned, they need people to treat, and if they have few people to treat, then they'll scale back operations; places like Ben Taub on the other hand, may see an increase in customers that could not afford better treatment.

By the way, according to Claritas, which bases estimates upon economic Censuses, only about 19.8% of business establishments with more than 20 employees in the Houston MSA are located within the Inner Loop or Galleria area (77056). Please don't rely on anectodal data to try and prove a point. ...at least use hard employment numbers--but oops! No, that won't work either. Still, only 24.3% of employment are in these areas. ...yes, a disproportionate concentration, but still not really all that compelling to someone who is would now be faced with very low gas prices and much less congestion on the roads as a result of so many people not driving to work.

[TheNiche]

Kinkaid, you gotta go easy on Niche. He was all of about 1 or 2 years old the last time Houston got hammered by a collapse in the oil field...

Actually, I was in the womb. My parents contemplated buying a unit in the Warwick Towers overlooking Hermann Park but decided against it. ...instead, I grew up in the rural countryside of Hays County, just southwest of Austin. So not only did my parents, a childless but employable yuppie couple, decide to locate outside of Houston, but in a exurban/rural area. ...I hadn't actually factored that into my theory, but thank you for validating it and reminding me of how well my own childhood was related to just the same basic patterns.

Kinkaid, you gotta go easy on Niche. He was all of about 1 or 2 years old the last time Houston got hammered by a collapse in the oil field, and he has no idea what precipitated it, what it entailed, and what areas bore the brunt of the ensuing real estate collapse. If he got in his car and drove around, he could find them, though. Or, he could just ask people like mrfootball. He complains about these areas on a regular basis.

The fact is, though Niche wasn't around the last time oil collapsed, the bigshots in the energy industry were. Those of us who lived through both can attest to the fact that Houston, though reaping benefits from oil, is not as dependent on it as it was in the 70s and 80s. We can also attest to the fact that the energy companies are approaching this "boom" FAR more cautiously than the last one. Many of us remember doctors, dentists and lawyers all buying oil wells, because "that's where the money is!" People literally were acting like the Ewings on Dallas. It will be years before oil prices could drop to levels that would cause a collapse, but the energy industry will handle it better, because frankly, they haven't forgotten the last one...and the doctors are sticking to medicine now.

Actually, I know quite a bit about the one-two punch that was oil and S&L. ...and you're right that the hardest-hit places were small-lot suburbs that were in the middle of being developed at the extreme urban periphery as well as apartment complexes that were of mediocre quality and insufficiently differentiated from their competition. Places like Williamsburg Settlement, for instance, are still being filled in even today, and we can all see what became of SW Houston and to other areas to a lesser extent. There were even some subdivisions like that which already had the infrastructure in place but had to be replatted and reconfigured as larger lots to be able to sell. Such is the nature of a region in which there is a vast oversupply of homes throughout all price points in the midst of an economic meltdown. Only so much demand, and that which is there tends to physically occupy the best housing, while the really crappy stuff ends up with a really low occupancy, much of it valued only as dirt. Regardless, values of all types of housing are hurt for many years and development slows to a painstaking crawl. This is not only the pattern that has been communicated to me professionally, but it is borne out in the data.

...and you're right, by the way, that this is a more cautious expansion than in the last bust. I want to clarify that I'm giving a scenario analysis moreso than a forecast. If I were forecasting something like this as being on the horizon, I absolutely wouldn't be playing around with money in the East End. ...that's not to say that it can't happen, but I wouldn't be doing what I were doing if I didn't think the market was going to hold.

[TAK]

You forgot to strike Continental Airlines and Landry's.

[TheNiche]

You forgot to strike Continental Airlines and Landry's.

I gave them the benefit of the doubt. They're large enough that their inner loop corporate staff will probably pull through, even if there were layoffs around town.

[longcat]

I recently talked to a realtor who mentioned that prime lots in West U are approaching $90-100 / sq ft, and I'm sure River Oaks is even worse/better (depending on perspective.) Can that really go any higher or even be sustained at that level? There appears to be plenty of demand, but these prices make those areas seem more akin to San Diego and San Fran than the often touted median price for Houston.....so wouldn't these areas also be subject to any impending 'correction' like Socal?

[TheNiche]

I recently talked to a realtor who mentioned that prime lots in West U are approaching $90-100 / sq ft, and I'm sure River Oaks is even worse/better (depending on perspective.) Can that really go any higher or even be sustained at that level? There appears to be plenty of demand, but these prices make those areas seem more akin to San Diego and San Fran than the often touted median price for Houston.....so wouldn't these areas also be subject to any impending 'correction' like Socal?

I don't understand, myself, what makes West U so desirable that people are willing to pay upwards of $80psf for dirt. A fair bit of downtown has less expensive land than that.

...but so it goes, when some neighborhood or another becomes so prestigious. For some reason, a lot of people really like being insulated amongst people just like themselves.

[KinkaidAlum]

I don't understand, myself, what makes West U so desirable that people are willing to pay upwards of $80psf for dirt. A fair bit of downtown has less expensive land than that.

...but so it goes, when some neighborhood or another becomes so prestigious. For some reason, a lot of people really like being insulated amongst people just like themselves.

It isn't just about prestige.

West U offers an incredible location. Downtown, Uptown, the Galleria, The Med Center, the major universities, Greenway Plaza, the museum district, Hermann Park, the art scene, the pro sports scene, etc... can all be reach in 5 to 15 minutes without getting on a freeway. For a lot of folks, that lack of a commuting hassle is well worth the money.

Additionally, the public schools are SOLID.

Throw in area amenities like access to Rice Village, Upper Kirby, and a small cluster of local businesses that give the area a small town feel (independent grocery store, Edloe Deli, etc...), and you have yourself a winner.

[Jeebus]

As Kinkaid said, West U is one of the most geographically desirable hoods in all of H-Town. It's literally in the in between everything.

[TheNiche]

It isn't just about prestige.

West U offers an incredible location. Downtown, Uptown, the Galleria, The Med Center, the major universities, Greenway Plaza, the museum district, Hermann Park, the art scene, the pro sports scene, etc... can all be reach in 5 to 15 minutes without getting on a freeway. For a lot of folks, that lack of a commuting hassle is well worth the money.

Additionally, the public schools are SOLID.

Throw in area amenities like access to Rice Village, Upper Kirby, and a small cluster of local businesses that give the area a small town feel (independent grocery store, Edloe Deli, etc...), and you have yourself a winner.

I would concur, except that its location is not unique, and while elementary schools are undoubtedly excellent, that is not necessarily as accurate by the time that a kid gets to high school, which serves a larger area...and regardless of the quality of public schools, I'd imagine that a lot of West U kids get put in private schools.

The differentiating factor seems to be that as an enclave city, West U has the capability to keep out the riff raff and ensure a particular homogenity of residents--and a lot of people really go for that.

[N Judah]

I would guess it has the same appeal as pretty much any other well-defined neighborhood. Houston has neighborhoods but none of them seem to have that main-street kind of feel that brings it all together. Even West U doesn't really have that, but it has enough of it to make it more desirable for a lot of people.