The Impact of Recent Oil and Natural Gas Price Declines on Local Housing Markets
Domestic oil and natural gas markets benefited from strong demand and higher oil and natural gas prices in the early part of this decade. The high prices encouraged exploration and production. Between 2009 and 2014, the mining and logging subsector in the United States increased by 39,400 jobs (5.7%) annually, peaking at an average 891,000 jobs in 2014. Oil and gas rig counts increased from 960 in July 2009 to 2,060 in July 2014, when oil prices peaked.
Figure 1. North American Rotary Rig Counts
Source 1: Baker Hughes
Recent declines in global demand and increased supply have lowered prices and put pressure on energy-producing areas. The average price of oil (West Texas Intermediate) fell by 66 percent between the first quarter of 2014 and the first quarter of 2016. During the same period, the Henry Hub price for natural gas fell by 62 percent. These price declines caused many energy producers to shore up their balance sheets by cutting costs, which involved reducing their workforces and putting further exploration and drilling on hold. The decreased capital spending and workforce has put pressure on housing markets in parts of the United States. Western North Dakota has already experienced a significant softening of rental market conditions and decreased home sales and home prices. Similar trends are emerging in Houston and Midland-Odessa in Texas and in Youngstown, Ohio. In Baton Rouge, Louisiana, however, economic and housing market conditions are improving in part because of declining energy prices. The following article will describe recent economic and housing market conditions in Williston, North Dakota; Houston and Midland-Odessa; Youngstown; and Baton Rouge and offer a look ahead at housing trends in these energy-impacted areas.
Western North Dakota, particularly the area around Williston, has become a hub for energy exploration. According to RigData, rig counts in North Dakota more than quadrupled between July 2009 and July 2014, from 45 to 190. During the same period, employment in the mining and logging subsector increased from 6,700 jobs to 30,300 jobs, an annual increase of 4,720, or 70 percent. Rig counts have since dropped to 33 rigs in March 2016, and mining and logging subsector employment has fallen to 17,300 jobs. People who moved to the area for jobs are now beginning to leave because of the declines in rig counts and jobs. North Dakota’s labor force increased by 2.6 percent annually from 2009 to 2014, reaching a total of 425,100 before falling by 1.4 percent annually to 415,300 in March 2016. North Dakota is facing a revenue shortfall of $1 billion following declines in oil severance taxes and sales tax revenues.
Williams County, which sits atop the Bakken Shale Formation, has become an epicenter for energy exploration in North Dakota. The economy in Williston, the county seat, depends heavily on oil exploration, and the decline in oil prices has severely affected the area. From July 2009 to July 2014, the labor force in Williams County rose from 14,800 to 33,050, an average annual increase of nearly 25 percent. Since July 2014, the labor force has declined by 13 percent annually to 26,000 in March 2016.
The reduction of the labor force in Williams County has significantly affected Williston’s housing markets. During the first quarter of 2016, the vacancy rate for newer, stabilized apartments was 30 percent, more than triple the 9 percent vacancy rate in the first quarter of 2015 and far higher than the estimated 2 percent vacancy rate in the first quarter of 2014. The current average rent for a new, stabilized apartment is $1,175, a decrease of nearly 50 percent from $2,250 in the first quarter of 2015. Labor force reductions, coupled with high levels of apartment completions, have contributed to the current soft rental market.
The high level of apartment construction and decreased renter household growth have led some developers to default on their loan obligations. Recent indicators suggest that apartment projects in western North Dakota have incurred nearly $200 million in bad debt. In Williams County, an average of 30 apartment units were permitted annually from 2006 through 2008, which increased to an average of 1,450 units annually from 2012 through 2014. During 2015, however, multifamily permitting fell dramatically to 630 units permitted as energy-sector employment declined and people left the area. Single-family production followed a similar trend. From 2006 through 2008, an average of 90 single-family homes were permitted annually; this figure rose to an average of 510 homes permitted annually from 2012 through 2014 before falling to 180 homes permitted in 2015.
Figure 2. National Energy Sector Employment Trends (in thousands)
Source 2: Bureau of Labor Statistics
Decreased employment and slower population growth have put downward pressure on home sales. According to Metrostudy, existing home sales in Williams County increased from 400 in 2006 to 590 during 2014 before declining to 420 in 2015. New home sales increased from 10 during 2006 to 130 in 2014 before falling to 90 in 2015. During the 12 months ending March 2016, existing home sales declined 32 percent to 375 homes sold, and new home sales declined 58 percent to 65 homes sold. Existing home sales prices increased from $100,700 in 2006 to $264,400 in 2014, while new home sale prices increased from $125,500 to $329,400, amounting to average annual increases of 20 percent each. Although home prices continued to increase during the 12 months ending March 2016, the rate of appreciation slowed dramatically. Existing home sales prices increased 3 percent to $270,300, and new home sales prices increased 10 percent to $362,000. The percentage of distressed homes, defined as homes with mortgages that are seriously delinquent (90 or more days late or in foreclosure) or have transitioned into real estate owned status, is rising in Williams County. During March 2016, 1.2 percent of home loans were distressed, up from 0.4 percent a year earlier and approaching the peak of 1.8 percent in February 2010.
The Utica Shale area extends 60,000 square miles across Ohio, West Virginia, Pennsylvania, and New York; however, most drilling activity has been centered in Ohio, which is believed to have the richest oil deposit. Drilling and production in Ohio began in 2011, with more than 1,725 gas and oil wells drilled and 1,270 wells in production as of April 2016.
The Utica Shale area is expected to become a dominant source of natural gas for the United States in this decade. Generally, U.S. natural gas production increased at a slower pace in 2015 than in the previous year. Ohio has been an exception, with production increasing by 1.4 billion cubic feet per day in 2015, or by 41 percent above 2014 production levels. According to the U.S. Energy Information Administration, Eastern Ohio’s portion of the Utica Shale area is projected to be the single shale play among the top seven in the country to increase natural gas production in the near future. Utica’s oil production is expected to remain unchanged at 82,000 barrels per day. Although the presence of oil makes drilling in Ohio a potentially attractive prospect, most exploration in the area is focused on natural gas.
Oil and gas production per rig in the Utica Shale is on the rise even as depressed oil and gas prices have caused job-intensive exploration and drilling to slow dramatically. The number of active rigs fell from an average of 31 in March 2015 to 11 a year later. The observed increase in production comes mainly from cost cutting, efficiency improvements, and from placing previously drilled wells into production.
The Youngstown-Warren-Boardman OH-PA metropolitan statistical area (Youngstown MSA) consists of Mahoning and Trumbull counties in northeastern Ohio and Mercer County in western Pennsylvania. The two Ohio counties are where most shale development takes place and where local economies have been most affected by declining energy prices. During the first quarter of 2016, nonfarm payroll jobs in the Youngstown MSA totaled 225,700, a decrease of 400, or 0.2 percent, from the first quarter of 2015. As a comparison, nonfarm payroll jobs increased by 1,100, or 0.5 percent, a year earlier. During the first quarter of 2016, the mining, logging, and construction sector declined by 200 jobs, or 2.2 percent.
The slowing economy in the Youngstown MSA likely contributed to the lack of growth in home sales. During the 12 months ending March 2016, home sales totaled 9,320, unchanged from the previous 12 months. By comparison, total home sales during the 12 months ending March 2015 represented a 10 percent increase from the 8,450 homes sold during the previous 12 months. The average home sales price during the 12 months ending March 2016 increased slightly by 0.3 percent, to $112,200.
Despite recent job losses, the apartment market in the Youngstown MSA remains tight, partly because construction activity is low. During the first quarter of 2016, the apartment vacancy rate in the metropolitan area was 3.6 percent, down from 4.7 percent in the first quarter of 2015 and 6.1 percent in the first quarter of 2014. An average of 10 units were constructed annually from 2009 through 2015 compared with an annual average of 150 units from 2001 through 2008. The average rent in the Youngstown MSA is currently $531, which is an increase of only $7, or just above 1 percent from a year earlier. The metropolitan area reported an annual average rent growth of slightly more than 1 percent during the past 4 years.
During the first quarter of 2016, the manufacturing sector, including the manufacturing of parts for oilfield activities, declined by 21,600 jobs, or 8.4 percent, from the first quarter of 2015. Photo by Carol M. Highsmith
Houston is known as the energy capital of the world. The Houston metropolitan area is home to 26 Fortune 500 companies, 23 of which are involved in the energy industry in some way, whether by extracting and refining crude oil, manufacturing parts used in oil exploration, or providing technical services. Nearly half of the 30 largest employers in the Houston metropolitan area are involved in the energy industry; as a result, variations in energy prices can have a significant impact on the Houston economy.
During the first quarter of 2016, nonfarm payrolls in the Houston metropolitan area totaled 2.98 million, an increase of 11,900, or 0.4 percent, from the first quarter of 2015. This rate is considerably slower than that of the first quarter of 2015, when nonfarm payrolls increased by 103,200 jobs, or 3.6 percent. During the first quarter of 2016, the manufacturing sector declined by 21,600 jobs, or 8.4 percent, from the first quarter of 2015. Most of the manufacturing job losses were at firms that manufacture parts for oilfield activities as demand for new parts declined. The mining and logging subsector also lost a significant number of jobs —16,200 — during the first quarter of 2016, a 15.1 percent decrease from a year ago.
Houston’s economic slowdown is starting to spill over into the housing market. During the 12 months ending March 2016, home sales in the Houston metropolitan area totaled 78,900, a decrease of 1,450 sales, or nearly 2 percent, from the previous 12 months. The number of homes listed for sale during March 2016 totaled 23,050, an increase of 5,450, or more than 30 percent, from the 17,600 homes listed for sale during March 2015. The number of listings has increased in part because of job losses in the energy sector and the need to relocate for work. The average sales price of a home in the Houston metropolitan area during the 12 months ending March 2016 was $279,000, up 2 percent from the previous 12 months, but the most recent price gains are much smaller than the average increases of more than 8 percent annually during 2013 and 2014.
The apartment market in the Houston metropolitan area is also softening in response to falling energy prices. During the first quarter of 2016, the Houston area had an apartment vacancy rate of 9.7 percent, up from 8.7 percent in the first quarter of 2015 and 8.4 percent in the first quarter of 2014. The average rent in the Houston area is currently $1,021, an increase of 4.4 percent from the first quarter of 2015. Rent growth in the metropolitan area, although still positive, is well below the 7.5 percent rate recorded during 2013 and 2014. More than 58,000 apartment units have been permitted in the metropolitan area since the start of 2014, which is likely to further soften the rental market.
The Midland-Odessa combined statistical area (CSA) has long been a hub for energy exploration due to its location in the Permian Basin. The area’s economy depends heavily on oil exploration and is not as diversified as Houston’s. During the first quarter of 2016, nonfarm payrolls in the Midland-Odessa CSA totaled 164,000, a decline of 10,100 jobs, or 5.8 percent, from the first quarter of 2015. The mining, logging, and construction sector lost 6,100 jobs as the number of rigs in the area declined, reducing the need for workers. Those who moved into the area for jobs have started to leave; during the first quarter of 2016, the labor force declined by 6,925, or 3.9 percent.
With drilling activity in the area slowing and residents leaving to find employment elsewhere, the local apartment market has taken a severe hit. During the first quarter of 2016, the apartment vacancy rate was 11.7 percent, up from 7.9 percent in the first quarter of 2015 and 2.7 percent in the first quarter of 2013. The current average rent for an apartment is $961, down 15 percent from the first quarter of 2015. The rise in the vacancy rate from 2013 through 2015 was due in part to very high levels of multifamily production, which kept the area’s apartment market from becoming too tight. From 2010 through 2015, an average of 820 multifamily units were permitted annually, significantly higher than the 100 units permitted annually from 2000 through 2009. Construction began on approximately 1,400 apartment units in 2015, and these projects are struggling to reach stabilized occupancy following the decline in energy employment. Single-family production followed a similar trend. An average of 1,130 single-family units were permitted annually from 2010 through 2015 compared with an average of only 510 single-family homes permitted annually from 2000 through 2009. The large number of homes built, along with declining employment, have created a glut of homes for sale, which is causing prices to drop. During the 12 months ending March 2016, there were 3,200 home sales, down by 250, or more than 7 percent, from the previous 12 months. According to data from the Texas A&M Real Estate Center, approximately 1,150 homes were listed for sale during March 2016, more than double the number of homes listed for sale in March 2014, before oil prices fell. The average sales price was $243,400, down by $7,500, or 3 percent, from the previous 12 months.
Baton Rouge, Louisiana
Not all areas have been negatively affected by the drop in energy prices. The Baton Rouge metropolitan area benefited from the construction of natural gas liquefaction fueling facilities, which were built to allow the export of liquefied natural gas (LNG) to international markets. In 2015, the Tenaska Bayou LNG facility was built, and the first international LNG shipment occurred in February 2016 from Cheniere Energy’s Sabine Pass LNG terminal. More than $16 billion in industrial construction is currently underway in the metropolitan area, contributing to very strong employment growth in the area. During the first quarter of 2016, nonfarm payrolls totaled 408,700, an annual increase of 8,850 jobs, or 2.3 percent, since the first quarter of 2012. The construction subsector has led job gains in the metropolitan area, increasing by an average of 3,675 jobs, or 8.3 percent, annually since the first quarter of 2012.
The job growth has led to an increased demand for apartments in the Baton Rouge MSA. The apartment vacancy rate during the first quarter of 2016 was 3.5 percent, down from 5.3 percent during the first quarter of 2012. The vacancy rate has declined even as production of multifamily units has increased over the past few years. Since 2013, an average of 1,275 multifamily units were permitted annually, which is a sharp increase from the 460 units permitted annually from 2009 through 2012. Many new residents are renting apartments while working on short-term construction projects in the area. Although the area has not yet suffered from the downturn in oil prices, some are concerned that the area is overbuilding apartments in response to increased demand for rental units from construction workers. In addition, some construction workers who relocated to the metropolitan area in response to the increased apartment construction may find work elsewhere once the developments are completed.
Many energy analysts expect small increases in oil prices to continue through 2017, ending at around $60 per barrel. Oil prices at this level would make some domestic production profitable again. However, even if production increases in 2017, these energy-impacted areas are unlikely to see the employment gains of the past few years. For instance, North Dakota and Texas have a number of unfinished wells. An unfinished well is one that has been drilled but not completed. Completions represent more than 40 percent of the cost of a well, so holding off on the completion can save the company money in the short term while meeting lease requirements. An operator can complete a well in a week and boost production quickly. The completion phase of a well does not require the same number of staff as earlier upstream activities associated with exploration and drilling. As a result, increased production in these areas tied to well completions and hydrocracking will not require the same staffing levels.
Decreased employment needs resulting from technological improvements and well completion operations will keep pressure on local housing markets. Lower levels of net in-migration and slower job growth will likely lead to decreased demand for construction of sales and rental housing, especially following several years of significant construction. Within HUD’s Office of Policy Development and Research, a task force is monitoring the effects of oil and gas development on housing markets and has been publishing work since 2012. The task force will continue to monitor housing markets affected by the energy sector.