Liquid Gold

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If you have heard me talk about the fundamentals of real estate investing you may have heard me talk about my analytics and they are based on job market, population, affordability and demographics. In the last 6 months or so I have been talking a lot about Texas. Some people have asked me why Texas?

Well as you have seen in my last “Texas Sized Post” there has been tremendous growth in Texas with many of the cities growing over 20% in the last decade. There are many schools of thoughts of why the population is migrating to Texas but my baseline assumption was the job market. As it was recently reported that in 2014, 1 in 3 jobs that were created, were created in Texas. Meaning 33% of all the new jobs in the United States was in Texas, with Austin as the top city of Texas. Which is pretty significant since Texas doesn’t have a third of the population of the US.

Now that the oil prices have literally come crashing down it is adding a new variable to the mix. As a portion of those new jobs in Texas have been based on the booming domestic oil industry. As far as I am aware of there isn’t any equation that directly links oil prices to real estate prices, but there is definitely some correlation. Especially in the Houston market as they are so dependent on the oil industry. There was recently an article in the Wall Street Journal talking about oil and Houston specifically. I’m paraphrasing here but it said back in the 80s when the oil market crashed it drastically depressed the entire real estate market in Houston. At that time oil made up 10% of the jobs in Houston. Now in 2015 oil only makes up 5% of the job market in Houston. Which mathematically would equate to them having a 50% less effect on the economy, however the catch is with the record profits prior to the most recent crashing oil prices the oil industry is still responsible for the same percentage of revenue as they were in the 80s. So the reality is that these oil prices could have an effect on the oil industry but subsequently the real estate market.

But, and here is my take on that it all depends on how long the oil prices stay in 50s or below, as the WTI was briefly at the 46/brl on Friday. If prices remain there into the summer of 2015 then I would start to anticipate some higher levels of distress in the domestic oil industry, mineral rights options, production facilities, pipelines etc. all of which could start to trickle into the real estate markets that have exposure to the oil industry. Those main cities are Houston, Denver, Fort Worth and Calgary especially if you combine the Fed raising the rate like I am projected in the middle of the year.

The silver lining is certain industries will see significant profit growth based on low oil prices especially manufacturing, transportation, and tourism. Also in cities like Austin and San Antonio where much of their growth has been in tech, biomedical, and manufacturing they all could see a continued steady growth of jobs, population and home prices despite the dropping oil industry. But for now it is a matter of sitting tight on those oil dependent markets and just watching the geopolitical maneuvering of the Saudi’s and OPEC in combination with the others in the World all playing Russian roulette to see who flinches first. If we see prices moving back up into the 70s by the middle of the year then I think much of those markets will just keep on chugging and we could expect to see positive growth in those areas of Houston, Denver, Fort Worth and Calgary. If not then it could start to get interesting and be a good time to start looking at acquiring some properties at a significant discount as the distress in the market causes some motivated sellers. As with anything in life and business the key is always timing, where I see some great opportunities in some areas I am of course very aware of risk in others.

As always God Bless and Prosperous Investing.

-          Jake