Houston We Have a Problem: Why You Shouldn't Invest in Houston!

Monday, December 29 2014

I received a somewhat surprising email from my Texas investor partner this past weekend that sort of surprised me, especially since he's from Houston.

He said this, "Tell your students that I'm not taking deals for partnership in Houston right now. There has been some new information having to do with the oil industry that has been disturbing which will cause major shrinkage in that industry. This will greatly affect the Houston apartment building and housing market."

Hmmmmmm...

He should know. He knows the market better than anyone I know. And if he's saying that Houston is not a good idea right now then maybe Houston isn't a good idea right now.

Something about the Houston market has always bothered me since the beginning of our recession/depression (back in 2005...remember that year?): Houston was the only real estate market that never fell apart. As far as I can tell, it didn't feel any recessive pinch like the rest of the markets have. It's like a ball bouncing up and never coming down. It defied all economic laws like no other area of the country I've ever seen.

Of course, I'm only 40 so there's probably a lot of economic things I haven't seen or known in my lifetime. So, I just chalked it off as a circus freak show like a two-headed serpent or the bearded lady and never gave it a second thought.

Then when I received this email I started thinking...Is it really possible that while every city in America -- including those that have seen the most economic devastation like Detroit, Cleveland, and Memphis -- is starting to boom, that a place as financially solid as Houston has always been could now come crumbling down?

Yes, this could very well be the case. In fact, if economic laws never fail, Houston inevitably will have to undergo it's own economic recession even if every other city in the United States is booming at the same time.

Coincidentally, I was just reading in Bloomberg Business Week last week about how Houston is going to start feeling the pinch due to oil prices falling and oil companies (who have headquarters in Houston) cutting back. Insofar, they have actually been cutting back for quite awhile now including laying people off.

And that's never good for the housing market whether you have apartment rentals or you're trying to sell a single-family home.

Between the fall in gas/oil prices and, ultimately, our mass consciousness going into the more "green" direction of utilizing solar and battery power for cars, it is becoming more and more clear that these oil giants won't stay financially relevant forever. It's only a matter of time that every dinosaur eventually dies to make way for new cutting-edge and more efficient ways of doing things.

Unless Houston becomes the center of another type of industry, I'm afraid we're looking at a Detroit replay over time. It may not become so devastatingly bad but if you work the equation the way it is, I don't see how else Houston could fare in the battle of trying to stuff an obsolete resource down people's throats; this would be just as effective as, say, trying to sell people buggy whips in today's day and age. It would only work if you're selling the whip to city of dominatrix's and I'm not sure there's enough of them around to support an entire market, especially that of the size of Houston. (Hey, maybe the oil could double as "lube" for the dominatrix's activities.)

So, it seems that Houston didn't avert the depression after all. Unfortunately for the Houston market, while the rest of us in America are enjoying an economy that's better than what the Roaring 20s kicked out almost a century ago, Houston will be eating beans out of a can under a bridge and crying over its own financial calamity. But as far as I see it, when we all have to pay the piper, we ALL have to pay the piper. Nobody gets a fr*ee ride.

Are you surprised at this Houston economic verdict for 2015? I am. Sort of. Then, on the other hand, I'm not due to it always seeming "unfair" that they never felt the squeeze when every last one of us did. Now it's their turn.

The unfortunate thing for this dose of bad news for Houston is that it won't be an easy case of the financial squeezes and it won't be a short-term recession either. This one if for the long haul so...if you own property in Houston, be prepared. If you're thinking about buying property in Houston, think again.

How do you know if I'm right or not?

Well, first of all, I'll be the first to admit that I'm not always right but I'm right about 99.999% of the time, and those are pretty good odds. Second, although I suspected that the Houston market would eventually have to come to terms with the recession the rest of us have been schlepping through for the past 9 years, I actually stopped thinking (and ultimately caring) about Houston back in 2010 when I myself stopped investing there.

Let me remind you that the bulk of this "warning" about the upcoming Houston economic pinch isn't coming from me but rather someone who is highly familiar with the market. This man is much older than I am and much wiser in the world of real estate investing. When he tells me to stay away from his home town (which, I may add, he's completely in love with) because of an impending financial crunch then trust me when I say I'll be fullyheeding to his warning.

There are too many other cities you can still make money in and completely circumvent Houston while staying in Texas (if that's where you want to invest). There's Dallas/Fort Worth which is an extremely profitable set of cities. There is Waco which is also a solid cash flowing city for multifamily real estate. There's also San Antonio, Lubbock, Amarillo and Corpus Christi to name a few. (Stay away from border cities like El Paso and Laredo because of issues with drug trafficking. Also, Austin has low CAP rates and tends to be overpriced for what it is.)