This year will be a really good year for Texas real estate. The momentum has been building for the last year and a half. After a down year in 2016, Texas began its recovery last year.
Energy is back. Real Estate Center estimates are based on $55-per- barrel oil as the yearly average. We are not anticipating any kind of falloff from that price. Historically you could gauge Texas' overall economic health by just looking at the rig count. However, rig counts have leveled off thanks to technology that reduces the number of new wells needed to produce millions of barrels of oil. Oil production was down in the 1980s and '90s, but when fracking debuted in 2010, production rose significantly, and it continues at a high level.
Texas produces about 40 percent of all U.S. oil. That's a lot for one state when you consider the U.S. total includes Alaska, the Dakotas, and California. If Texas were a country, it would be the world's sixth-largest oil producer. Texas produces roughly the same amount of oil as Canada.
We are estimating Texas gross domestic product for 2018 will be in the neighborhood of 4.1 or 4.2 percent. Some of that, about half a percentage point, will be inflated because of Hurricane Harvey recovery but still reflects strong economic activity.
Population growth continues to be a big factor in Texas growth. In 2016-17, the Census Bureau calculates the state gained around 400,000 new residents. In the last two years, half of the 800,000 gain was from foreign and domestic immigration and half from births outnumbering deaths. California and New York sent us the most people.
Population growth fuels the housing market, which will remain strong. Housing sales will go up another 5 percent in 2018, setting yet another record.
Home prices will increase thanks to an inventory shortage. On average, Texas needs 820 new single-family homes for every 1,000 households created. However, we've been building only about 600 each of the last seven years. Texas is somewhere between 325,000 and 350,000 single-family homes short. We expect prices to increase around 5 percent or more overall.
Multifamily housing is another story. Multifamily housing is fueled by the shortage of single-family housing and by a burgeoning youthful population. Texas is a young state. We've been attracting 20- and 30-somethings, college graduates, and job seekers. Many of those tend to rent.
The single-family home market is tight because it's difficult for builders to build new homes for less than $250,000 to $300,000. That's the entry-level for most first-time buyers. We just can't produce the volume of homes needed in that price range. The situation is further complicated because first-time buyers have the most difficult time getting financing.
Dodd-Frank* curtailed loans to anyone who could not demonstrate an ability to repay. Entry-level buyers generally have lower FICA scores, lack credit history, haven't been in the job market long, and lack the 20 percent down payment. Federal requirements have eased, but there just aren't enough homes to meet demand.
One of the biggest population segments is in its prime home-buying stage of life. Older millennials are in their late 30s. They're married with children; they're looking for homes in both the suburbs and urban centers. They are driving home sales.
Older Americans are aging in place. The over-55 generation hasn't been relocating to the degree predicted. That means they're not selling their homes. They've refinanced their home at 4 percent and have no incentive to sell. In the past, the average home sold every four to seven years. That's now nine to 12 years. This trend has contributed to the low number-of-homes-available-to-sell inventory.
Real estate in all of Texas' major urban areas will do well in 2018. Texas is still the bellwether state for home construction. California is a distant second. Both Houston and Dallas built more houses last year than all but four states. Homebuilding in those cities was just average for what they do over the long term. Moreover, both metros were way below their historical highs set back in 2005-06.
Statewide homebuilding permits will be up about 9 percent this year. Houston permits will be up nearly 14 percent, but some of that will be Harvey rebuilds.
There are two primary speed bumps on the road to new home construction. First, there isn't much developed lot inventory. The cost to develop a lot suitable for homebuilding is high. Labor is the other big hurdle. It's not that we don't have any labor; it's that we don't have enough labor.
Historically, you could get a new stick-built house framed in a week if you had a full crew. Now, a framing crew might be only two or three people, and they could take four weeks to frame the same house. A new home that could be built in four or five months a few years ago now takes eight or nine to complete.
Multifamily construction will likely decrease this year. We've already seen a drop in building permits. The residential construction leading index the Center prepares currently points up, despite multifamily construction holding the total down.
Some Texas markets were becoming overbuilt. Houston was potentially overbuilt until the hurricane. Harvey sent the Houston apartment vacancy rate to zero. Statewide rents will continue to rise. Owners are more likely to offer concessions, like a free month's rent, rather than lower rent.
The bottom line is 2018 will be a good year economically, including the housing market. Another 350,000 to 400,000 Texans will be added. Unemployment will remain low.
Not only will the United States prosper in 2018, so will the whole world. The good news is that when countries do well economically, they demand more oil. More oil sales translate into a bigger, stronger Texas economy.
*Dodd-Frank Wall Street Reform and Consumer Protection Act