Houston Economy After Hurricane Harvey: Q&A with Dr. Jim Gaines
Dr. Jim Gaines
HOUSTON – (Realty News Report) – The statistics from Hurricane Harvey stunned everyone — not just the record rainfall and catastrophic flooding, but the human cost. Even ten months after the storm, the economic impact is still being assessed. Has the city recovered from Harvey? Are jobs returning? Will the economy fully rebound? Realty News Report consulted Dr. Jim Gaines, chief economist at the Real Estate Center at Texas A&M University, for insight. Dr. Gaines specializes in housing and land development issues and previously worked at the Rice Center before spending 16 years with KPMG and Arthur Andersen providing real estate consulting.
Realty News Report: What’s your economic outlook for Houston for the remainder of this year and for 2019?
Dr. Jim Gaines: Considering the shocks Houston has faced in recent years, the city is performing surprisingly well. Houston is resilient. The first major shock was the collapse in oil prices beginning in late 2014. The economy didn’t slide into a deep recession; job growth essentially flattened rather than falling sharply. Then, in late 2017, Hurricane Harvey struck — a second major disruption. The human and property losses were devastating, but the community rebounded both psychologically and economically within a few months. Since the fourth quarter after Harvey, monthly job growth has been solid.
Realty News Report: Houston’s job market appears to be regaining momentum, with a strong job-growth report last month.
Dr. Jim Gaines: About 30,000 jobs were added in the first quarter of 2018. Despite three major floods in the last 18 months, the outlook remains positive. Houston was already on an upswing when Harvey hit; the storm disrupted growth for three to four months, but recovery followed. The state and national economies are in good shape, oil and gas activity has returned, and manufacturing has improved. A large portion of Houston’s manufacturing — perhaps 60 to 70 percent — is tied to the energy sector, so the rebound in oil and gas helped manufacturing jobs. We’re forecasting roughly 1 to 2 percent job growth this year; current trends look closer to 2 percent. By comparison, job growth was about 1 percent in 2017 and essentially flat in 2016. Energy markets have strengthened, and some research suggests oil prices could approach the $80-per-barrel range. Drilling activity has picked up, although it will not return to the 2013–2014 levels driven by the initial fracking boom because technology now yields far higher production per well. As a result, fewer wells and different rig usage patterns are required.
Realty News Report: Which sectors of the Houston economy are strongest, and which are struggling?
Dr. Jim Gaines: Import-export activity is uncertain and depends on trade policies and agreements such as NAFTA. The petrochemical industry benefits when oil prices are lower and Houston is now an exporter of petroleum products. Business and professional services are strong, which is reflected in new office construction and companies relocating to the area. Overall, the economy has rebounded well, and we have not yet fully felt the large-scale effects of Harvey recovery spending, since FEMA and insurance payouts move slowly. The city has received about $4 billion in recovery assistance so far, which is helpful but small compared to the tens of billions needed. Relocations out of the city have been limited. One sector showing employment declines is information — newspapers and magazines — as print media continues to shrink and transition online, requiring fewer staff.
Realty News Report: Were there delayed consequences that emerged months after Harvey? Has Houston fully recovered?
Dr. Jim Gaines: We expect mortgage delinquencies and defaults to rise as some homeowners fall six or seven months behind and see little chance of catching up. Sorting through those cases will likely take another year to 18 months. Home prices had been rising modestly before Harvey, but the flooding was very patchy — one side of a street might flood while the other did not — so market corrections will play out unevenly. Insurance claims, settlement delays, and higher construction costs driven by new building-code requirements will all affect housing costs. Elevating an existing home two feet, for example, could add $70 to $80 per square foot to rebuild costs. Some neighborhoods were hit harder than others, and those pockets are working through recovery. We probably have not yet seen the full wave of foreclosures that may follow. Mortgage lenders have shown some reluctance to aggressively foreclose in flood-prone areas, and some properties will be bought out rather than rebuilt; in those cases, property values may approach zero if a home consistently floods. Early after Harvey, speculators entered the market, but many discovered that insurance reimbursements can take years, reducing the attractiveness of quick flips. Building-code changes are likely: Mayor Turner has suggested that anyone building in a 500-year floodplain should build two feet above the required elevation. Identifying where those floodplain lines lie will be contentious because Houston is not uniformly flat, and the final maps and requirements will have major implications for affordability and development, particularly near areas like the Addicks reservoir.
Realty News Report: How will flooding affect the real estate market and development going forward? Will buyers and developers be more cautious?
Dr. Jim Gaines: Flooding will generally increase housing costs across the city. Developers will exercise more caution and closely evaluate future requirements. FEMA will redraw flood maps at some point, but the timing and specifics remain uncertain. Realtors report that the first question buyers ask is, “Did it flood?” Buyers will become more savvy, asking whether a home sits in a floodplain. Mortgage lenders may start requiring private flood insurance more often. For homes outside designated floodplains, private flood insurance historically has been reasonably affordable — roughly $300–$400 a year. It’s surprising lenders didn’t more commonly require such coverage before. The interaction between FEMA’s decisions and private insurers will shape future outcomes for buyers and developers.
Realty News Report: What is the estimated total damage — economically and socially — from the storm?
Dr. Jim Gaines: Precise totals vary, and while I’ve heard figures around $80 billion, I’m not certain about the geography or methodology behind that estimate. Different analyses use different boundaries and measures.
Realty News Report: Will investors or potential homebuyers avoid Houston because of Harvey? Will people steer clear of flood-prone neighborhoods?
Dr. Jim Gaines: There may be some initial hesitation, but Houston has demonstrated over decades that it is a resilient and dynamic economy. It remains a global center for the energy industry, which attracts investment. Cities like Houston and Dallas are increasingly recognized as world-class investment destinations alongside older hubs such as New York, Chicago, and San Francisco. Houston is also a cosmopolitan city because of the international nature of the energy business, not the stereotype some outsiders imagine.
Realty News Report: Houston has recovered from many natural disasters in the past. Is there a particular resilience among Houstonians?
Dr. Jim Gaines: The spirit of Houston’s residents and the city’s role as a major economic hub contribute to its resilience. People repeatedly pull together in crisis, and many remarkable stories of community support emerge during and after disasters.
Realty News Report: How did Houstonians demonstrate that spirit during Harvey and other emergencies?
Dr. Jim Gaines: During Harvey, citizens from all walks of life came together to help one another. Initially, the response is overwhelmingly cooperative, with neighbors and strangers rescuing one another. Over time, as recovery shifts toward economic concerns, groups naturally begin to focus on their specific interests, and some fragmentation can occur. But the immediate human response is strong and inspiring.
Realty News Report: Should homeowners whose properties flood repeatedly rebuild, or should they relocate? Why do many choose to rebuild?
Dr. Jim Gaines: If a property has flooded multiple times and insurance claims have been exhausted, it’s time to consider an alternative. Rebuilding after repeated floods will become increasingly difficult. After two or three significant floods, private flood insurance may be unavailable or prohibitively expensive, and federal insurance costs could also rise. FEMA and municipal programs may offer relief for lower-valued properties, but higher-priced homes are unlikely to be fully restored to their previous values. For many owners, emotional attachments and the desire to remain in place drive decisions to rebuild, but practical and financial constraints may force different choices in the future.
Realty News Report: Anything further to add?
Dr. Jim Gaines: In northwest Houston, much of the flooding was caused not only by rainfall but by the controlled release of water from reservoirs. The Army Corps of Engineers released unprecedented volumes of water to prevent structural damage to dams, leaving residents with little time to react. Plans dating back to the 1940s included additional reservoirs that were never built; those proposals may be revisited. As with other coastal areas, people tend to rebuild because living near water remains desirable. After Hurricane Ike, Galveston and the Bolivar Peninsula were rebuilt with higher standards. Houston will also rebuild, but regulatory changes, longer-term planning, and careful consideration of where and how to develop will shape the city’s recovery and future resilience.
