Houston Feels the Drag from Lower Oil Prices

The Houston economy is showing more evidence that lower oil prices will be a significant drag in 2015. There is still a gap between official data and anecdotal reports of cooling conditions. Over the next few months we expect to see an increasing body of data consistent with a downshift in the regional economy. A key early indicator has already turned south. The Houston Purchasing Managers Index fell to 48.9 in January, its first drop below the break-even 50 mark since August 2009. The below-50 reading is consistent with a contracting regional economy over the next three to four months.

Property markets will feel the chill. According to the Houston Association of Realtors, January sales of mid-level single-family homes were still strong, but sales of homes priced above $500,000 had slowed noticeably. Anecdotal reports tell of an increasing number of low-ball offers for million-dollar houses. Sales of townhomes and condominiums have declined as well. Commercial property markets are also vulnerable. One-sixth of all office space under construction in the U.S. is within the Houston metro area. According to Costar, Houston had about 80 office buildings, totaling 18 million square feet, under construction at the end of 2014. Some of the new office buildings are entirely speculative and may have difficulty attracting tenants. Energy-related layoffs are picking up momentum, translating into less need for office space.

World-wide, large-scale layoffs in the energy sector number more than 100,000. Houston area layoffs could reach into the tens of thousands this year. We expect to see deteriorating labor market conditions through the second half of 2015. Oil prices have recently stabilized in the low $50/barrel range. But it is premature to call for a bottom for oil prices. Even stability near $50/barrel could result in a chain reaction of job cuts through the Houston economy this year.


 Click here for the complete Houston Regional Economic Update: Houston2014_Q4.

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