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Three signs of possible trouble ahead

#1 – Watch out for falling oil prices.

Warning-Danger-Zone

The bedrock supporting Houston’s economy will shift in 2015, and while these tremors will not bring disaster, they will bring changes that some will find painful.

The collapse of oil prices in 2014 has made it very difficult for economists, both public and private, who until recently assumed oil would only drop to around $85 a barrel based on greater supply and less demand. Almost none expected prices to touch $54 a barrel, as they did this month, and not all assumptions are in question.

The volume of the oil oversupply and the tepid growth in the global economy forced oil companies and international agencies to re-evaluate year-end economic forecasts, and most revisions predict the price of oil is unlikely to reach $85 a barrel for at least 18 months to two years.

Predictably, oil companies have started cutting their capital expenditure plans for 2015. Marathon Oil Corp. says it will spend $1 billion, or about 20 percent, less next year. ConocoPhillips, another Houston-based oil company, also said it would cut its budget by 20 percent. Rosetta Resources, a much smaller Houston company, reduced its spending plans at least 16 percent.

[…]

The effect on the Texas and Houston economies is now a matter of intense debate, but under no scenario will it be positive. The oil and gas industry is responsible for between 11.7 percent and 13.5 percent of the economic activity in Texas last year, depending on the analyst.

A Federal Reserve Bank of Dallas model calculated that if prices remain in the $55-a-barrel range, Texas could lose 128,000 jobs in the first half of 2015. In all, 2.7 percent of all jobs in Texas are tied to the oil and gas industry, the bank said.

Analysts at JPMorgan Chase warned clients that Texas could face a recession next year. Barclay’s Bank warned that the Texas housing market correlates with oil prices, and therefore could take a major hit if oil prices stabilize at current levels.

As some other folks have observed, Rick Perry sure has been lucky these past few years, and is getting out of town at one heck of an opportune time. The rest of the column above is devoted to the effect on the Houston-are job market, which it says will slow down but not go backwards over the next two years or so. Two other effects of this, which the column does not have the space to explore, are 1) the Rainy Day Fund, which gets much of its revenue from energy taxes and fees, and which is now being used quite a bit as a source of funding for things like water and roads, since our Legislature and statewide Republican leadership won’t do anything about them, and 2) the city of Houston’s booming revenues will take a hit as well, and this will come at a time when certain short-term expenses have come due. As such, the absolute worst thing we could be doing is passing meaningless tax cuts or handing out special deals to appease the stupid revenue cap that we passed in 2004. We will regret these actions going forward.

#2 – Due in large part to item #1, we could be sitting on a housing bubble.

Houston has one of the most overvalued housing markets in the country, according to a national financial rating agency.

Home prices in the Bayou City are 19 percent overvalued — the second-highest in the nation after Austin — according to Fitch Ratings’ fourth quarter Sustainable Home Price report. Fitch measured how far current home prices have deviated from the historical norm, looking at data such as household income, unemployment rates, population growth, mortgage rates and rental prices.

Fitch’s report comes two months after Trulia Inc. (NYSE: TRLA) placed Houston on its quarterly “Bubble Watch” report for having one of the most overvalued housing markets nationally. While the initial report from the San Francisco-based online real estate company sparked fears of a possible housing bubble, Fitch predicts a housing slowdown across Texas — including Houston — next year.

Texas housing markets have remained relatively stable despite a volatile national market. While average home prices nationally grew 38 percent between 2000 to 2006 — before the housing market crash of 2007 — Texas averaged a “comfortable” 18 percent growth. The Lone Star State “remained largely on the sidelines” during the most recent housing bubble, the Fitch report said.

Since the Great Recession however, the Texas economy has been booming, buoyed by the state’s strong energy sector. The job growth has attracted thousands of new residents to Texas, fueling the homebuying rush and homebuilding frenzy. Today, the Texas housing market is about 11 percent overvalued, according to Fitch.

However, Texas’ current housing boom is “out of character with its price history,” and is unsustainable in the long run, said Fitch director and analyst Stefan Hilts.

It should be noted that not everyone agrees with Fitch and its gloomy outlook. That said, the meteoric rise in property values in and around Houston is way out of sync with our (now not so accurate) reputation as a cheap place to live, and the proliferation of luxury properties, especially inside the Loop, sure feels unsustainable to me.

#3 – Beware of stuff like this.

The Texas Building Owners and Managers Association say “unpredictable and uncontrolled” increases in property values put significant burdens on the state’s businesses and could lead to many leaving Houston to avoid the appraisals.

The group has launched a statewide initiative “Taxed out of Town” to push for appraisal reform, according to a recent statement from the advocacy organization, which represents commercial properties in Texas.

“This issue affects everyone, not just commercial real estate. Commercial property taxes are paid by the businesses that lease space in Texas,” said Tammy Betancourt, executive vice president of the group’s Houston chapter. “Higher commercial property taxes lead to increased operating costs for Texas business owners, rents for tenants, and costs for goods and services.”

The group says that in some parts of Houston, property valuations have increased by more than 100 percent in the last two years. In 2013, commercial properties’ valuations across the city increased 53 percent on average and another 18 percent in 2014. Similar double-digit increases have occurred around the state. The group says these rates have risen not just sharply but erratically and small businesses have difficulty planning for the future.

“Texas takes pride in being pro-business, but the current property appraisal process is anything but. If runaway increases in commercial property valuations are allowed to continue to burden Texas’ businesses, the end result will be stalled local growth, decreased job creation, and local businesses and investors looking elsewhere to do business,” Betancourt said.

The group hopes appraisal reform and tax relief will be a key issue of the upcoming Legislature session.

Their press release is here and their website is here. It’s little more than generic complaints about high appraisals and exhortations to contact your legislator and tell them to Do Something about it. As you can see, they may get their wish for a slowdown in appraisal increases, though perhaps not by the means they have in mind. It’s hard for me to interpret this as anything other than a plan to pursue some goodies for themselves, couched as always in the weasel-speak of “fairness” and “job creation”. Anyone who is truly concerned about making the appraisal process better and fairer for all Texans has plenty of other things to concern themselves with. I point this out mostly as a reminder to keep an eye out for stuff like this. Unless you have your own high-powered lobbyists in Austin, the policies that are being pushed generally aren’t written with the primary goal of benefiting you.

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