Monday, October 17, 2005

Houston reasonably safe from housing slump

Business Week has an article and a graphic on which cities are most at risk economically if a housing construction slump begins due to rising mortgage rates and flattening or declining house prices. They do this by looking at what percentage of recent job growth in a city is construction-related. High percentage = lots of risk. Fortunately, Houston and Texas are in pretty good shape:
Other regions would also come through a housing downturn relatively unscathed. Most Texas cities, for instance, are doubly insulated from a downturn. Housing price hikes been moderate, and construction is a small part of payroll growth: 2% in Dallas, 9% in Houston, and -2% in San Antonio, where construction employment has fallen.
I find the Houston vs. Dallas difference to be odd considering that both metros seem to be growing at about the same rate. I suspect that these are city numbers, not metro area. Houston is larger and still has substantial construction inside the city limits. Dallas is smaller, built-out, and most construction seems to be in the suburban cities around it. Houston's lack of zoning may also contribute to more redevelopment and construction: just look at all the inner-loop townhomes going up. Just another indicator that we have a more vital core than Dallas does right now.

But beyond that, I even question their core thesis. Would new housing construction really drop that much if home prices flattened or declined on the coasts? I'm not so sure. A lot of those high-construction cities they list are where people are fleeing from expensive cities. Even if the average Orange County or Bay Area house drops from $600K to $500K, is that really going to slow the exodus to Riverside-SB, Phoenix, and Vegas all that much? I do think they would slow down a little bit, if only because people will have trouble cashing out of their CA house at an "acceptable" price to move to those cities. But no matter how you look at it, demand is far outrunning supply out there (and in some other parts of the country), and while a slump might close the gap somewhat, I have trouble seeing it bringing supply and demand back to equilibrium. But maybe I'm thinking about this wrong? Would love to hear other thoughts in the comments.

Thanks to Erik for the link.


At 2:06 PM, October 18, 2005, Anonymous Anonymous said...

I'll point out the obvious regarding "what percentage of recent job growth in a city is construction-related" and "high percentage = lots of risk"... an exception is reconstruction due to natural disasters, such as Hurricane Katrina. Disaster-related replacement and repair follows different economics. It is also possible that the sheer volume of construction occuring between New Orleans, Biloxi, Gulfport, etc. will "starve" other markets of materials and labor, including ours.


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