HOUSTON/AUSTIN (Reuters) - It might seem like Houston’s historic flood would make America’s fourth-largest city a less desirable place to live, but it’s going to get more expensive, real estate experts say.
The supply of houses and apartments is expected to drop sharply with tens of thousands of homes destroyed and uncertain prospects for future flood insurance costs.
Following a pattern seen in New Orleans after Hurricane Katrina, that’s likely to drive up home prices and rents in high-and-dry neighbourhoods. Displaced buyers and renters will compete for a limited number of properties, said Nela Richardson, chief economist for the real estate brokerage and data firm Redfin.
Before the flooding from Hurricane Harvey, Houston had been a rare, fast-growing U.S. metropolitan area that had retained an affordable housing market, although prices had risen in recent years and held steady through an oil-price crash starting in 2014 in this centre of the U.S. energy industry.
“Houston stood out nationwide as a market where housing was remarkably affordable across the income spectrum” compared to other dynamic job markets such as New York or San Francisco, said Aaron Terrazas, a senior economist at Zillow, which recently did a comprehensive study of the Houston housing market.
Houston’s median home price in July was $230,000 (£177,580), unchanged from a year earlier, and the median value of all off-market homes was $190,000, according to Redfin estimates. That compares with a national median sale price of $293,400.
The experience of New Orleans gives some insight into what may lie ahead for Houston. In the 10 years after Hurricane Katrina, average home prices rose to $339,743 in 2015 from $228,620 in the first half of 2005 – an increase of 48 percent, according to an analysis of New Orleans Metropolitan Association of Realtors data by Real Property Associates.
Home prices and rents shot up immediately and dramatically as catastrophic flooding left few homes for the tens of thousands of displaced New Orleanians trying to come home.
Prices stayed higher over time, as some neighbourhoods never fully recovered and the city saw new demand from outsiders who decided to stay after helping to rebuild New Orleans.
It remains to be seen whether Houston – a region six times the size of the New Orleans metropolitan area – can better absorb the shock of losing so much supply all at once.
There are an estimated 242,000 homes in or very near the known flooded areas of Houston, collectively worth about $61 billion based on pre-storm values, according to Ralph McLaughlin, chief economist for the real estate listings and data firm Trulia.
Some sellers whose properties remained dry are already looking to cash in. Houston agent Jena Turner said she saw a three-bedroom ranch in the Willowbend neighbourhood jump in price by $82,000 just a few days after Harvey hit, a nearly 20% increase.
“All of a sudden they think their houses are worth a lot more,” Turner said.
However, in the upscale neighbourhood of Meyerland, which has flooded three times in the past two and a half years, homeowners are concerned about plunging values.
On Braesvalley Drive, retiree Melinda Loshak on Friday was clearing her 3,000-square-foot (280-square-meter) home of sodden sheet rock with the help of volunteers. She’d like to sell, but isn’t sure who would take it off her hands.
“A house like this you’re taking a chance it will flood again,” Loshak said.
Thousands of flooded homeowners did not have flood insurance, putting them and their mortgage lenders in peril of default, said Redfin’s Richardson. So far, she said, most banks are not extending much grace to borrowers: three months of forbearance, after which the missed payments are due.
Real estate investors are already sensing an opportunity in that desperation, Richardson said. The firm’s agents in Houston are fielding calls from investors who want to buy flooded homes on the cheap, she said.
“They believe Houston will be rebuilt,” she said.
Affordable housing has long been a key to Houston’s economic and population growth. Relaxed zoning and a pro-development spirit have produced a sprawling metropolis with homes for every budget, said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business.
“You get in your car and keep driving until you qualify” for a mortgage, he said, describing a market with prices that generally fall the further you get from downtown.
Permissive development rules also appear to have set the stage for potentially catastrophic losses, said Zillow’s Terrazas.
“The ease of building had a lot to do with where they were building, in vulnerable areas of the city,” he said.
Still, a relatively limited supply of entry- and mid-level homes prior to the disaster could make for an extremely tight market post-Harvey, Gilmer said.
Houston developers had in recent years focused on luxury housing for petroleum executives and other wealthy professionals, Gilmer said. When falling oil prices tanked the oil industry in 2014, builders scrambled to retool their offerings for smaller pocketbooks.
But supply is still constrained, especially for homes costing less than $200,000 in distant suburbs, Gilmer said.
The situation is much the same for rental apartments. Prior to the storm, there were plenty of luxury units available at rents of $1,500 and up. But the market for affordable rentals for working people was tighter, with occupancy rates hovering in the low 90-percent range before the storm, Gilmer said.
“This is the biggest problem that Houston will face: how to house these workers who are displaced,” Gilmer said.
It’s not yet clear how much of the region’s rental housing has been destroyed. But if previous storms are any guide, losing a substantial portion would push up prices fast amid a surge in rental demand, said Bruce McClenny, president of ApartmentData.com in Houston.
He said Houston-area rents rose 6.1 percent in 2001 after Tropical Storm Allison hit Houston; Hurricane Ike in 2008 raised rents by 5.7 percent.
McClenny said a few landlords he has talked to said most of their empty units were snapped up within days after Harvey struck.
Online apartment sites are already filling with pleas from displaced residents.
“We have just lost everything from the flooding,” read one posted Thursday on Craigslist. “By the grace of God please help us! If you have a private rental or if you work at an apartment complex, please contact me!”
Locals will also be competing with outside insurance and construction workers who will likely move to Houston and stay for an extended rebuilding period, McClenny said.
“Both of these groups will need places to stay,” he said.
Reporting by Daniel Trotta in Houston and Brian Thevenot in Austin; Additional reporting by Marla Dickerson; Writing by Brian Thevenot; Editing by Marla Dickerson