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A Mild Dip Ahead for Houston in 2016: Q&A with Dr. Ted C. Jones of Stewart Title

Dr. Ted C. Jones

Dr. Ted C. Jones

With oil prices continuing on a downward spiral, how will Houston residential real estate fare?  Will home prices plunge? Stay steady? Increase a little? What about home sales?  Coming off two record years, will Houston see a dramatic drop in single-family transactions?  To find out what may be in store on the Space City home front, Realty News Report talked with Dr. Ted C. Jones, Chief Economist and Senior Vice President at Houston-based Stewart Title Guaranty Co. A major player on the Lone Star State real estate scene for more years than he cares to remember, Jones served as the first director of investor relations for Stewart Information Services Corporation. Prior to joining Stewart, Jones was chief economist at Texas A&M University’s Real Estate Center — the nation’s largest publicly funded real estate research group. A past member of the board of directors of the National, Texas and Houston Association of Realtors, he served as chairman of the board of the Houston Association in 2004. Jones earned a doctorate in finance with a minor in statistics and a master’s degree in land economics and real estate from Texas A&M University.

Realty News Report: Oil prices are around $30 a barrel and energy firms are cutting their work forces and expenditures. What impact will this have on Houston home sales this year?

Ted C. Jones: You need to put this all in perspective. Jobs are absolutely everything to an economy. Last year more than 23,600 new jobs were created in the Houston MSA. For the first time in our history, Houston had more than 3 million jobs. Yes, we are losing jobs in the energy sector but growth in other industries are offsetting that loss. All along the Gulf Coast, there is a massive expansion in the petrochemical sector — some  $330 billion worth of new construction or expansion is going on. Formosa Plastics of Taiwan, for example, is expanding or building 15 plants! So that’s taking up some of the slack. Petrochemicals are taking up some of the slack. Analysts estimate the U.S. will go from being the largest importer of plastics to the largest plastics exporter in five years. The production side of the oil industry is hurting and the rig count has dropped by two thirds.  But the decline in the rig count didn’t affect Houston.  Most of the rig count losses were in western North Dakota, in the Eagle Ford formations in Southwest Texas or places like Fort Worth. Houston is doing better than people think. This is the ‘best’ Houston downturn the city has ever seen! Had Houston not diversified, we would have lost tens of thousands of jobs.

RealtyNews Report: What about Houston’s commercial real estate?

Ted C. Jones:  Not all Houston commercial real estate is experiencing problems. Industrial and retail is doing phenomenally well.  Multifamily is overbuilt and we’ll probably see rent concessions in Class A properties and rent increases in Class B and Class C units. Office is challenging because many of the buildings were started when the price of oil was high and they are now being completed. The hospitality industry is doing very well. In Texas, hospitality employment is up more than 4.5 percent. Houston has the second largest port in America. The Port of Houston is unique because for every container that is unloaded at the Port, two containers get shipped out. We export twice as much as we import! In addition, we have the largest Medical Center in world and it keeps expanding! Also, Texas is business-friendly. Each year the Tax Foundation ranks all 50 states in taxes and Texas ranks 10th for having lower taxes than many states. We’re in a great spot. That said, we had a 2.5 percent decline in home sales from 2014 to 2015.  Keep in mind that 2015 was second best sales year in history – 2014 was the best.

Realty News Report: Can you speak to home prices? Do we expect to see homes lose value?

Ted C. Jones: In the $200,000 to $500,000 price range, Houston doesn’t have a lot of inventory and the market is strong. In the luxury market — a million dollars and up – we’re seeing some softness. A home in that price range is worth 7% less today, some analysts say. I think people are concerned about the future and they’re deciding not to spend $1 million to purchase a home. So they’ll opt for a $750,000 home. I speak to a large number of Realtor groups and brokerage firms in Houston and they all say the $200,000-$750,000 market is doing OK. The market above that is getting soft.

Realty News Report: What about upper end homes, over $1 million? Will upper end homes be hit harder by falling oil prices?

Ted C. Jones: Million dollar plus homes have been hit hard, but remember we sold more $1 million dollar homes last year than anytime in history. Homebuyers are just waiting. I have some attorney friends who are looking to purchase another luxury home. Their children are grown up and they are looking to downsize. So they put their million-dollar home on the market and they haven’t gotten a buyer after a year. There isn’t a lot of activity in that sector because people are waiting to see what happens with the economy.

Realty News Report: What about home building in Houston? Will builders pull back in 2016?

Ted C. Jones: Home building in Houston is difficult now, particularly on the higher end so builders on the higher end are being very cautious. Texas buyers are fortunate because we allow easy development of real estate and construction.  A couple of months ago, I visited the old Howard Hughes airplane plant site in Los Angeles. It’s taken them 23 years to get planning and zoning approval for homes. We don’t have those types of restrictions here.  Not only that, but in Houston, new homebuyers get a bigger bang for their buck than anywhere else in America. Our new homebuilders build quality homes for very low prices. We’re very lucky.

Realty News Report: Mortgage rates are still low. Will that change in 2016?

Ted C. Jones: The latest rates came out Thursday morning (February 4). Freddie Mac is the keeper of mortgage interest rates and the current 30-year mortgage is at 3.72 percent.  That’s phenomenal! I remember being at Texas A&M in 1989 and building a new home. We were thrilled to qualify for 9.75 percent loan. It was the first time rates had been under 10 percent in a decade. Looking ahead, we expect rates will rise this year, because we have a good economy and the Fed is not worried about the impact of a rate rise on housing.  Also, consumers are saving so much from lower energy costs; we already have the savings in our pocket to pay for rising interest rates. It’s not going to hurt us as long as we have good job growth.

Realty News Report: You say some 5.2 million homeowners could profit from refinancing. Why? Do you think there will be an increase in refinancing as rates rise?

Ted C. Jones: There are tremendous benefits to refinancing but people need credit worthiness to refinance. A homeowner may have a 5 percent rate, but is not creditworthy and is not able to refinance. Also, it’s difficult to refinance if you’re house is under water. Still, in the U. S., there are more than 5 million people who have equity in their homes and great credit scores and should refinance. A lot won’t. Some consumers are simply unsophisticated about refinancing or say they only have 22 years to go on their loan, so what difference does it make?  Or they are planning to sell their home in three years and think, ‘why bother?’ Refinancing would put money in their pockets. They could refinance their 30-year loan for a 15-year loan. The payments are almost identical and would save years on payments.  But they have to be motivated. Many aren’t that motivated.

Realty News Report: Speaking of rates, do you expect the Federal Reserve to raise rates in 2016?

Ted C. Jones: Our forecasting model predicts rates will rise to between 5.2 and 5.6% by the end of this year. Other economists predict that rates will be in the 4.5% range, but we think rates will go higher because the economy is stronger.

Realty News Report: Could there be a recession in the nation?

Ted C. Jones: I don’t believe so. We’re still rolling along and the strength of the U.S. economy is surprising many analysts. Economists predicted the U.S. would add 200,000 jobs last December. They were wrong. America ended up adding 292,000 jobs.  Most forecasters missed the mark by almost 50 percent! Jobs are everything. And we’re creating, on aggregate, better paying jobs.

Realty News Report: Houston’s economy added about 23,600 jobs last year? What’s your forecast for this year?

Ted C. Jones: Realistically, we could lose 20,000 or 30,000 jobs but when a city has 3 million jobs that isn’t a big number – just percent of the jobs.  Still, it all depends on what the oil companies do. Petrochemicals will still continue to expand. Oilman George Mitchell enabled us to first discover and then produce so much natural gas that the industrial side should be fine. As oil prices rise, then the oil production side will come back into play.

Realty News Report: Any other thoughts?

Ted C. Jones: Home sales over the past two years have been great. 2016 will see a dip in sales because of the comparison to those two record years (2014 and 2015).  But consumers still have a good, positive view of their future. And, in Houston and throughout the U.S. there is a large segment of the population who will be buying homes in the near future – Millennials. Millennials are signing home purchase contracts before a marriage contract. Just 3 percent of all Millennials have a home mortgage loan, so the residential real estate industry has a huge potential there. Among the 92 million Millennials, 31% live with their parents. In the early 2000s the number was 2 percent, so we’re going to see a lot of new household formations and that’s going to drive other sectors like retail. What’s the first thing new homebuyers purchase?  Everything! That bodes well for entire U.S. real estate industry.

Feb. 7, 2016

Realty News Report is a Texas-based publication edited by Ralph Bivins.

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