Big Oil and Real Estate

An economic indicator that I consider occasionally is one from the Global Insight quarterly study on housing prices in America. Here’s an interesting tidbit from the most recent report: of the 330 markets surveyed, Houston is the most undervalued.

The study uses many factors in determining the theoretical price equilibrium level for each regional market, including taxes, income, population density, and a somewhat ambiguous “desirability factor”. So, as with most all economic studies there is an element of art mixed in with the science.  Nonetheless I think this study is an insightful data point when thinking about the relative valuation of varioius markets.

The fact that Houston is scored as the single most undervalued market is interesting when viewed in light of the underlying economic factors and the stark difference between the market’s reactions now with the past. When we think about real estate bubbles most of us immediately focus on California, Las Vegas, Florida, and other markets that have grabbed newspaper headlines with their flying prices over the past several years. But we forget that the poster child for real estate market corrections was Houston in the mid-to-late 80's.

Texans hip to irrational exuberance long before Greenspan poopularized the term. When the Gulf States kicked off the Arab oil embargo in reaction to the West's support for Israel in the Yom Kippur war, the resulting rise in oil prices fueled oil investments. This, in turn, pushed property values to unsustainable heights.  Everyone wanted their own Southfork Ranch. 

Fast forward to current day. Two rounds of war in the Gulf, rocketing demand and decreasing supply have again sent oil prices into the stratosphere; and this time around the increases have more fundamental sustainability than before. Cash is flowing into operational oil centers like Texas and Oklahoma. But, the property market hasn’t responded. Yet.

The graph below shows the Department of Energy refiner acquisition cost of imported oil. 

Will property values in Houston and other oil centers go up? In the short term, perhaps not. Economic storm clouds and a jittery credit market will help to continue to keep a lid on the prices ... READ MORE ...