Office of External Communications

Houston, TX 77204-5017 Fax: 713.743.8199

FOR IMMEDIATE RELEASE
May 2, 2006

Contact: Angie Joe
713.743.8153 (office)
713.617.7138 (pager)
ajoe@uh.edu

HOUSTON, May 2, 2006 – Despite some optimistic predictions of a “soft landing” for the nation’s housing market, University of Houston economist Barton Smith says those prospects remain rather shaky.

There are a sufficient number of markets throughout the nation that are so vulnerable to a major market correction that it is unlikely that the U.S. economy as a whole will be able to escape some negative consequences. However, the most positive aspect of the current situation is that many urban markets, especially in the nation’s mid-section, will escape most of the direct blow and only feel the secondary impacts associated with the subsequent national economic slowdown. Fortunately, Houston is among this latter group.

During his annual real estate symposium, Smith pointed to excessively high prices and extremely low affordability in about a quarter of the nation’s home markets as well as a dangerous rise in sub-prime lending that is already producing high levels of foreclosures. In that regard, Houston is not exempt. Local foreclosures are three times higher than they were just three years ago.

Smith said that current national lending practices are squeezing households into home ownership they really can’t afford when you take into account the full costs of that responsibility and the risks associated with it. These practices also encourage households with incomes sufficient to qualify for ownership to consume more housing than is prudent, given their economic circumstances. This is leaving hundreds of thousands of Americans with excessively tight budgets – budgets that have no room for savings and little room for the unexpected, such as the recent surge in energy prices.

Smith, UH director of the Institute for Regional Forecasting, addressed more than 1,000 people at his real estate-focused program, “The Housing Bust: How Soon? How Bad?” May 2. Smith does not say that such a bust can’t be averted, but he said that a scenario for a soft-landing for this market is problematic.

“Two major unanswered questions are when will the Federal Reserve Bank stop raising interest rates and when will long-term fixed mortgage rates finally catch up with the FED’s past tightening,” he said. “I hope we have only one more quarter point rise before the FED pauses for the rest of this year. We have now finally reached the point where further interest rate hikes could really get the housing market correction going. Already, home sales are weakening. Bringing the housing market back down to earth slowly is going to require real finesse, perhaps a level of monetary fine-tuning that is beyond the FED’s abilities, especially at a time when they are preoccupied with the inflationary implications of high energy prices.”

As a part of his presentation, Smith contrasted the current environment with the last housing market correction of the early ’90s. The post correction spike in home prices looks very much the same. The environment of rising interest rates is also similar. But, he reminded his audience that the real estate bust of the early ’90s was spread across all types of real estate from residential to commercial to land. Today, he said, the only market in real jeopardy is the residential market. That ought to help minimize the spillover effects to the national economy as a whole. Nonetheless, the consumer, who accounts for three-quarters of aggregate demand in this country, is extremely vulnerable right now. A significant blow to the value of their most important asset would not be good for the national economic expansion that is already beginning to slow.

Houston, on the other hand, will be cushioned by a housing market that is still very affordable and a regional economy that is reaping the benefits of high energy prices. This won’t produce a ’70s boom within Houston’s new diversified economy, but it will greatly cushion the region should the national slowdown get out of hand. Still, when it comes to energy prices, Houston can have too much of a good thing.

High energy prices stimulate the local energy economy, but they pinch the pocketbooks of consumers here just like in any other part of the country. Excessively high energy prices sufficient to bring the U.S. economy to its knees will also impact Houston’s large energy-independent base and virtually all of the local secondary sectors in the economy. Houston has an interest in a national soft landing for the housing market, even if our market is less vulnerable to the inevitable correction that is just around the corner.

“I expect local job growth in 2006 to be close to the pace we saw in 2005 – strong, but not quite a boom. After that, as energy growth slows, it will all depend on the health of the national economy and that, in turn, will largely depend upon the fate of the housing market.”

Smith has conducted numerous studies in urban issues, housing, transportation and the environment. During the past 15 years, he has gained national recognition for his analyses of the Houston economy and real estate markets. Smith wrote “Handbook on the Houston Economy” and continues to publish two symposium reports a year on Houston’s economy and real estate markets.

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