Houston, We Have a Problem

Existing Home Sales at Nine-month Low

As demand ramps up for California real estate and prices soar while buyers engage in fierce bidding wars, other real estate markets in the country are suffering. What goes up must come down and that’s exactly what the Houston market is experiencing. Using Houston as evidence, can we expect the California market to experience a slump like this?

Home sellers are slashing prices and offering incentives to keep buyers from walking away from contracts as an 18-month oil slump clobbers Houston’s once-booming housing market. Home construction permits in the area dropped 26% from a year earlier in the third quarter, while December sales of existing single-family houses fell nearly 10% from the same month of 2014, according to the Commerce Department and Houston-area brokers.

Builders are scrambling to reverse declining sales and rising cancellation rates by beefing up incentives. KB Home in October advertised homes in several of its Houston developments with price cuts of up to $31,000 and commissions available to buyers’ agents of $2,000 to $10,000. Even the high end is hurting with the average sale price for luxury homes, defined as the top 5% of the market, fell 5% to $1.3 million in the fourth quarter from the same period a year earlier, according to real-estate brokerage Redfin.

Behind the slump is the plunge in oil prices from close to $100 a barrel in August 2014 to about $29 in January 2016. On the other hand, oil prices tripled between 2009 and 2014, helping Houston outpace every other U.S. metropolitan area in home construction in the period. Prices for existing Houston homes rose 37% since 2011.

“While Houston has figured out how to diversify [its industry makeup] a lot, we still are an oil-and-gas city,” said Scott Merovitch, Houston division president for closely held builder Chesmar Homes LP, which saw a higher cancellation rate in Houston in 2015 and notched 20% fewer sales. “We’re going to ebb and flow with oil and gas.”

The first sign of trouble came in mid-2014, when oil prices began their decline. Houston’s home sales managed to sustain their momentum until this past summer, when news of the Iran nuclear accord spurred concerns of increased Iranian oil production adding to a supply glut. At the same time, big Houston oil-and-gas employer ConocoPhillips warned workers of layoffs.

Michele Marano, a Houston real-estate agent who specializes in oil-and-gas clients and worked with Ms. Fagbemiro, said “my buyers have completely backed off.” She added, “I have an enormous number of buyers but they’re sitting.”

With the CA market as hot as it is now, will it come crashing down to the point where incentives will need to be implemented to lure buyers back?

Would you be willing to offer these kinds of incentives? Let us know what you think.

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