Hurricane Harvey’s Aftermath Boon for Houston Investors

5Dec 2017

Hurricane Harvey ravished the Texas gulf coast by not just winds but from 3 days of steady rain fall accumulating 50+ inches of rain water. The region was further devastated by the storm surge that blocked contributories and would not allow Houston’s water spillways to release the bayous to the Gulf of Mexico. To add insult to injury, the two main flood water retaining reservoirs were ordered by the Army Corp of Engineers to be released for fear of failing. This release flooded a large number of higher end homes that had never previously flooded.

More than 42,000 homeowners (80,000+ households) sought storm shelters after being driven from their homes from flood waters. Many of which did not have flood insurance. During the last 3 months as Houston rebuilds after the damage, the housing market is once again seeking relief from both labor and housing shortages.

The housing shortages in Houston are the result of Houston’s population growth during the 2008 – 2010 financial crisis, while the number of new home built during this period fell to record lows. As the economy began its recovery, the displaced skilled housing labor from the recession did not return. Home builders have not been able to produce sufficient inventory surplus to date. To make this situation even more intense, many of the existing flood victims have either permanently or temporarily abandoned their homes while they determine what they will do for the future.

Most homeowner storm victims moved to rental homes or apartments. At the time apartment inventory was in a large surplus due to overbuilding the past 5 years. That inventory shrunk dramatically as did the rental home market. The new home market inventory has also shrank for the same reason, leaving a large inventory of surplus damage vacant homes throughout the area and a shortage of new homes.

We will present a discussion on the dynamics this storm has placed on the Houston housing market.

Houston Economy

The Houston housing market shortly after the financial crisis was white hot from 2011 – 2015. The city population grew by 10% from 2010-2016 according to the Census Bureau. Houston Texas remains one of the most diverse, fastest growing and affordable cities in the nation. The Houston economy lead the nation out of the great recession of 2008. In 2015 the price of crude oil fell from $100 to $40 barrel during this period. Oil prices have historically driven the Houston economy to either fuel and energize or slow to a crawl.

Although the oil industry still represents 15% of Houston’s commerce the oil industry has not had the historical impact of past years. This is due to the increases and diversity of other industry sectors like health care, professional business services, energy utilities and international commerce through the Port of Houston.

Oil prices still have not recovered in the last several years but the Houston economy has proven to be very resilient. The Houston unemployment rate is 4.5% compared to the national rate of 4.2% while lower than other major cities like LA, New York and Chicago which are all above 5.0%.

Houston remains the most affordable major city in the nation. This is principally due to the cost of living expenditures of which affordable housing represents 32% on the average. On the other side of that equation, Houston’s personal income of $43,000 remains slightly below the national average of $50,500. This creates a favorable quality of life attraction for larger companies employees.

Impact on Houston Home Values

The Houston housing market is in a state of dynamic volatility due to Harvey’s devastation. Many homes remain abandoned while the owners agonize over their financial and personal situations. There are homeowners that did not have flood insurance and for those that had flood insurance, they were financial impacted by the loss cap of $250,000 less depreciation.

Older homes valued at >$350,000+ that were damaged by flood waters, will receive flood claim benefits that are not likely to be sufficient enough to actually replace the damages. This is because of the replacement values are being adjusted for depreciation. A fifteen year old home that received the full value of $250,000 would likely receive $125,000 less deductable. This means that owners will be required to either use savings or/and borrow to rebuild their home.

Typical hurricanes raise home prices in the aftermath for years as much as 5% according to the Federal Reserve studies. This is due to higher demand and a lower supply of homes and the increase price pressures on materials. Because of all the existing shortages and premiums being paid on homes that were not flooded, there is no clear conclusion for projecting how much future home values will rise in Houston.

Homes that did not flood become more coveted then before this event. So they are receiving a spike in prices from the shortages and premium prices of not being economically victimized by the storm. In the short term even the homes that are completely remodeled will be subjectively perceived at a lesser value.

There is also likely to be a large increase in ready to build home lots. Many owners have already listed their property for sale “as is”. With the supply of premium lots entering the local market, investors can expect lot prices to fall over the next 12 -18 months. This may not directly affect lots that did not get flooded, but will impact the amount of price increase they would normally expect.

Houston Investor Single Family Investment Opportunities

The current Houston housing market conditions are presenting investors that have access to capital some unique opportunities that seldom are available. They are the ability to stock pile A+ lots to sell in a few years, renovate existing homes that are being sold as is and building new homes in these neighborhoods.

There are a large number of homeowners that have been emotionally damaged by experiencing the flood water events. In many cases these homeowners cannot get past the possibility of this happening again. In these situations rebuilding is not an option. They will keep their insurance proceeds and sell the property as is. There are such large numbers of these homes that some owners will sell immediately while others will hold them to sell at a later date expecting prices to rise. This suggest that this condition is likely to last for 2 – 3 years.

In many cases the these flooded homes can be renovated and resold in the market for quick reasonable returns that if annualized are good annual rate of return. These homes can as well be demolished and new homes built on these lots. Making the selection of which of the many options requires careful market analysis.

Investors have a number of viable options when it comes to buying these homes. Each home and each neighborhood will require to be carefully evaluated. After building several different profoma scenarios and evaluating the matrix of the immediate area, the investors will select the most optimum solution for their risk aversion.

The Houston housing market is poised for a dynamic market value move over the next 2 to 4 years. While flood victims evaluate the impact on their life and net worth, investors will provide justified and a needed role in the outcome of the speculation in the Houston housing market.