Houston–the Teflon® Economy and Real Estate Markets
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A Few Scratches, But the Bad Stuff is Not Sticking and We Keep on Cooking….
Teflon (a non-stick coating from DuPont™) provides resistance to dirt, grim and friction across an array of applications from industrial, consumer and transportation. Ditto the Houston economy and real estate markets. Both perform better than the alternatives.
Teflon is not a perfect product as it is susceptible to scratches–just as the Houston real estate markets and economy.
There are numerous indicators of an improving national economy:
- Business and personal bankruptcy filings are down in 2011 compared to 2010
- Bank failures have declined 36 percent from 157 in 2010 to a projected 101 in 2011
- Household debt service as a percentage of disposable household income has dropped from 13.9 percent in 2007 to 11.2 percent in 2011—the lowest since 1994
- Light-weight vehicle sales, have recovered from a 2008 recession trough of 9.4 million units to a 12.4 million annualized pace today–although this still lags the typical 16 million cars and trucks sold each year from 1999 through 2007.
- Commercial real estate values have finally turned the corner and are showing increases
Houston (and Texas) economies continue to outperform the U.S. in whole. But how do you get a non-stick coating to stick to things as does Teflon (and Houston)? Both use multiple layers to achieve results. Teflon, one of the largest molecules, is much like Houston (the fourth largest MSA in the U.S.). Teflon sticks because it has a layer of sticky coating between the Teflon and where it sits (consumer goods, medical products, transportation, marine applications, and industrial products). Houston grows because it has multiple layers of adhesive ranging from the port, Medical Center, colleges and universities, oil and gas, industrial and manufacturing, trade (wholesale and retail), transportation and finance.
The Teflon qualities of the Houston economy have allowed it to slide ahead of most of the markets. Jobs are everything to an economy. In the latest 12 months, Houston added 68,200 jobs—a gain of 2.69 percent versus the U.S. average of 1.23 percent. This recovery spans most of the economic landscape. The latest 12 months has even seen job growth in construction. In the various primary employment categories, the latest 12-month change in jobs are detailed:
Mining (Oil & Gas) +12.38 percent
Construction + 5.61 percent
Manufacturing + 4.38 percent
Retail + 2.07 percent
Wholesale + 3.17 percent
Transportation & Utilities - 1.38 percent
Information - 6.03 percent
Financial + 0.15 percent
Services + 4.81 percent
Government - 1.17 percent
Declines in employment occurred in the Transportation & Utilities segment (read that as job losses from Continental Airlines departure), Government (shrinking tax revenues impacting budgets) and the continued and ongoing off shoring by main street and corporate America of IT services.
The largest growth continues in the oil and gas (amazing what flirting with $100 per barrel oil does to an industry), and construction. While construction posted a relatively large percentage increase (5.61 percent) and finally turned positive, construction makes up just 7 percent of the 2.6 million jobs across the Houston MSA.
Retail and wholesale are driven by an improving U.S. and Houston economy in which consumer spending is finally growing again—though nationwide it is still 4 percent below the peak reached in September 2007. A leading indicator of these segment’s recovery is 1.39 million loaded 20-foot-equivalent containers flowing in and out of the Port of Houston in the past 12 months. At an average 11.4 tons of goods per container and with 63 percent of the containers being exports versus imports—that’s a lot of U.S. grown or manufactured goods. One regional economic model estimates that the Ports in the area contribute more than 700,000 jobs in Texas.
The Houston Purchasing Managers is ranging in the highest levels seen since the slide began in 2008. An index greater than 50 connotes growth in local business in the coming three to four months and currently runs at 60.8.
So goes jobs, so goes housing, so goes commercial real estate. In housing, Houston is not at all comparable to the U.S. Sales of existing homes in the U.S. are running at a rate 11 percent less than the last normal period (2002—following the recession of 2001 and the subprime debacle of 2004), while Houston homes sales are up 4.3 percent in the same period. Median prices nationwide are down 25.7 percent from the peak, but the 12-month moving average in Houston–at $152,250–is within $500 of the all-time record.
Important has been the minimal new construction of housing in Houston, with less than 25,000 new dwelling units permitted in the past 12 months. While 1.25 to 1.5 new jobs per new dwelling unit is considered normal, Houston added 2.75 jobs. As a result, rents (cash and effective) and home values will continue to climb as vacancy rates and housing inventories decline. Houston’s real residential real estate market today can positively be described as normal.
The Texas State Data Center forecasts that the Houston MSA population will increase from 6 million in 2010 to almost 12 million in 2040 (based on an assumed similar net migration level seen in 2000 to 2007). Driving that is the overall affordability to live in Houston. While the median household income was approximately $50,000 in 2010, a comparison was made at $100,000 income to other cities (making a percentage comparison simple). The following table compares Houston to 25 cities and shows just how affordable Houston is to live. For other cities comparison click here. This site also shows what a person in a similar job will make—and in almost every circumstance, the job in the comparison cities do not a reach salary level needed to offset the increased cost of living.
From a commercial real estate perspective, now is a good time to over-weight into property. The following chart shows the relative price performance in the U.S. since 2002 of the S&P500, the Down Jones Industrial Average, Median U.S. Home Prices and the Commercial Real Estate (using NCREIF’s transaction index as a proxy click here to see Moodys/REAL Commercial Property Price Index (CPPI)).
Since 2002, the S&P500 Index is up 5 percent, housing up 10 percent, the DJIA gained 16 percent, while commercial real estate is up 36 percent—and climbing.
Given the job gains in Houston, rental rates will climb and vacancies fall in industrial, retail, office and multifamily properties in the coming 12 months.
While Houston may have a few scratches in the Teflon economy, it still is slick and keeps on cooking.