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Houston’s Economy After Hurricane Harvey: Q&A with Dr. Jim Gaines of Texas A&M Real Estate Center

Dr. Jim Gaines

HOUSTON – (Realty News Report) – The numbers from Hurricane Harvey were staggering not only in the amount of precipitation and flooding but also in human suffering.  Even now, some ten months after Harvey’s devastation, the economic toll is still being tallied.  Has the city recovered form Harvey? Are jobs coming back?  Will the economy recover?  Realty News Report turned to Dr. Jim Gaines, chief economist at the Real Estate Center at Texas A&M University for answers. Dr. Gaines, who focuses on housing and land development issues, was formerly with Rice Center and then spent 16 years with KPMG and Arthur Andersen providing real estate consulting services.

Realty News Report: What’s your economic outlook for Houston the rest of this year?  2019?

Dr. Jim Gaines: Houston is doing remarkably well considering it has experienced two economic shocks over the last several years. The city is pretty resilient in getting over both of them. The first shock was the collapse of oil prices that started in late 2014. The city economy didn’t go negative and we didn’t go into recession. There was not much gain, but not much loss. Job creation more or less went flat and stayed flat until the third quarter of last year.  At that time, something called Harvey came through — that was the second disruption. The bad news was Harvey was devastating. People lost their lives and so many homes were seriously damaged or destroyed. The ‘good’ news was that the city and community rebounded very quickly — within a couple of months — psychologically and economically. Since the fourth quarter of last, monthly job growth has been pretty good,

Realty News Report: Houston’s job creation machine seems to gaining traction and there was an excellent job-growth report last month.

Dr. Jim Gaines: Some 30,000 jobs were created in the 2018 first quarter. We’ve had three major floods in the last year and a half, yet the outlook is positive. Houston was in the process of an upswing when Harvey hit, and Harvey affected us for 3-4 months. The state and nation are doing well, oil and gas has come back and manufacturing has improved.  Some 60-70 percent of manufacturing in Houston is tied in with oil and gas — so much of the stuff we manufacture in Houston is energy related and that has brought manufacturing jobs here.  We’re looking for 1-2 percent job growth for this year. Right now, it looks closer to the 2 percent mark.  In 2017, it was about 1 percent and 2016 was effectively flat. The energy market has come back. The outlook is stable and some of the research indicates it would not be a surprise if the price of a barrel of oil approached the $80s. Drilling activity has rebounded but it will never go back to 2013 and 2014 levels — when fracking took off — mainly because of the technology. The industry has improved to the point that production per new well drilled is magnitudes greater than it initially was. So, companies don’t need to drill as many wells. And in some cases, they put the rigs on a fast track and move them on a rail, so they don’t have to take a rig down and rebuild it for the next well.

Realty News Report: What are some of the stronger sectors of the Houston economy?  Areas that are struggling?

Dr. Jim Gaines: Houston’s import-export trade is a little bit up in the air depending on what happens with the tariff situation and especially NAFTA. The petrochemical industry does well when price of oil goes down and now we’re exporting oil. All of the city’s business and professional services industries are way up hence the new office buildings we’re seeing.  We also have other businesses moving into the area. In general, the economy has come back pretty strong and we’ve yet to see the real impacts of recovery from Harvey this year – the money being spent to rebuilt.  FEMA and private insurance companies don’t move that fast. We’re hearing the first wave from FEMA is coming through. Houston also has received some $4 billion in recovery assistance, but that is a drop-in bucket when you are looking to tens of billions needed for the recovery. The number of people who decided to pack up and leave is very small, although there are some people who are probably leaving, I’m not aware of any industry other than information that is struggling based on employment changes.  The information sector – newspapers and magazines – is losing jobs. Newspapers are online now, and it doesn’t take as many people to do that job now.

Realty News Report: Were there any hidden side effects that we didn’t find out about until months after Harvey had passed? Has Houston fully recovered now?

Dr. Jim Gaines: We expect to see mortgage delinquencies and defaults increase in Houston. People are finding themselves six or seven months in arrears without any prospect of catching up. It’s going to take another year or maybe another 18 months to weed through all of that. Homes were increasing 3-6 percent, depending on the neighborhood but the flooding was sporadic and spotty in places – it flooded on one side of the street but not the other. I think the Houston market will take another year or so to feel all of the corrections – to get all of insurance claims settled and such.  Plus, labor has gotten more expensive, so the cost of a home has to be recalculated, particularly with changes in the building codes. Elevating an existing home two feet off the ground could cost $70-$80 SF. Everywhere there are pockets that were more affected, but those pockets are moving forward with recovery efforts.  Probably we haven’t seen the wave of foreclosure that are coming down the pike. Right now, there is a hesitancy on part of mortgage companies to do heavy foreclosure in some in flood plains. Those houses aren’t going away. Some will be bought out. There are programs to buy the houses, so they don’t rebuild. But the value of those properties has gone to nil.  Who wants to buy a house that floods every year?  Right after Harvey, there was a spurt of speculators who came into the market. But by first of the year, that had slowed because speculators discovered they could buy properties for maybe 50 cents of dollar but putting in a claim with the insurance companies and getting reimbursed would take years.  It will be interesting to see what changes are in store for the building codes. Houston Mayor Turner has already said anybody building in the 500 year plain needs to build two feet above elevation. The problem with that is nobody agrees with where the 500-year flood is. It’s not going to be uniformly the same, Houston is not table top flat. So, it will be interesting whatever comes out of that – where the lines are drawn for the 500-flood plain.  Building two feet or more above ground is going to increase cost of housing, creating affordability issues, development issues and raising questions about building in areas such as near the Addicks reservoir. With the growth Houston’s had, we have to build in a lot of places.

Realty News Report: What will the flooding mean for the real estate market/and development in the years to come?  Will people be more aware of questions to ask about flooding?  Will developers be more cautious in the future?

Dr. Jim Gaines: Generally, it’s going to increase the cost of housing across the board anywhere in the city. Developers will be more cautious, looking at what the requirements will be. Obviously, FEMA going to redraw the maps, but nobody knows how or when that will happen.  All the Realtors I’ve talked to say the first question asked about a home is, “Did it flood?  Buyers are going to be savvier and ask, “Am I in a flood plain?” and mortgage lenders might start requiring private flood insurance. For a house not in a designated flood plain, the cost of private flood insurance has not historically been prohibitive, usually $300-400 a year or about $30 a month. I’m surprised mortgage lenders didn’t require private flood insurance before.  And we’ll have to wait to see the outcome of FEMA and insurance, companies.

Realty News Report: What’s been the estimated total damage, both economically and socially, from the storm?

Dr. Jim Gaines: I don’t know if anybody has come up with the number. I heard about $80 billion but not sure if its accurate or what geography that covers.

Realty News Report: With the scenes from Harvey fresh in their minds, will investors shy away from Houston?  Will potential home buyers steer clear of flood-prone areas?

Dr. Jim Gaines: Yes, a little bit. That’s the initial reaction, I think some might steer clear for a while, but Houston has proven over 50 years to be a resilient, dynamic economic market. It is still the energy capital of the world and it can’t be ignored.  Dallas and Houston are recognized as world class cities in terms of investment capital. Before, there were really only 2-3 cities in US considered world class such as New York, Chicago and San Francisco.  Some people think Houston is still a bunch of redneck Texans but that’s not true.  It’s a very cosmopolitan city because of the concentration of oil and gas industry and global nature of that industry.

Realty News Report: Houston has been affected by a number of natural disasters in the past but always returned stronger than ever.  Why is the city so resilient Houstonians have a special ‘resiliency gene?’

Dr. Jim Gaines: It’s the spirit of Houstonians and the emergence as a major, strategic economic hub in the state and in the nation. You hear more and more remarkable stories. It’s definitely there.

Realty News Report: What about the spirit of Houstonians during Harvey and other times of trauma?

Dr. Jim Gaines: Houstonians from all walks of life pulled together during Harvey. People tend to be resilient and group together. The problem is how long can you keep people together until it breaks up into groups of special interests. During the storm and immediately after, people were in boats doing all sorts of things like saving lives. That’s human nature. After a while it’s about economic life and death and people start splintering.

Realty News Report: Should someone whose home has been flooded several times rebuild their home?  Why do you think they rebuilt rather than move on?

Dr. Jim Gaines: My feeling is that if your house has flooded several times and you’ve filed your insurance, it’s time for you to do something different. Permitting a rebuild after the third or fourth flood is going to become problematic.  After two or three floods, I’m not sure people could even get private flood insurance and federal flood insurance is going to become even more expensive. FEMA and city are will probably have to give them some financial relief. That’s OK for some of the lower price properties. But higher priced properties, aren’t going to be made whole.

Realty News Report: Anything else to add?

Dr. Jim Gaines: On regulatory front, flooding in Northwest Houston occurred not from rainfall but from the release of water from the reservoir. They didn’t give much warning but even if they did, what were people going to do? They couldn’t pick up their house and move it. The Army Corps of Engineers had never released that much water before and we hadn’t seen that degree of flooding that occurred. But as I understand it, the Corps had no choice but to release water because there was going to be structural damaged to the dam. There were supposed to be two more reservoirs built in the 1940s that for whatever reason didn’t get built.  Those plans may get resurrected. Just like on the East and West Coasts, people will rebuild. Hurricane Ike did a number on Galveston. It destroyed East Beach and the Bolivar Peninsula, and it’s all been rebuilt now — there are new houses, all up and down the beach because people want to live on the water. Regulatory changes made them build up, but they still rebuilt.  Houston will be rebuilt too, in time.

Aug. 27, 2018 Realty News Report Copyright 2018

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