Current estimates project that Harvey will be the second most expensive natural disaster in history, costing about $125 billion in damage.
Houston may not be the leading trendsetter for fashion and culture, but it is a thriving town where 2.45 million working professionals enjoy long, stable careers in energy, manufacturing, aeronautics and transportation. The city’s population and real estate market are often driven more by business than glamor; but over the last year, and far more publicly than Houstonians are used to, the biggest headline has been the weather. There is much more to our market’s story, though.
The Rest of the Story
Before Hurricane Harvey, an important story was already playing out that had a huge influence on the economy and real estate market: the boom in the energy sector leading into 2014, followed abruptly by a sharp downturn in the commodities market. The net population that had steadily grown before 2015 was slowing down significantly by 2016. With fewer people attracted to Houston for its shrinking energy opportunities and more needing to downsize in the wake of layoffs, real estate investors were able to purchase homes at a discount. At the same time nationally, large real estate investment funds that were capturing larger market shares had their sights set on Houston as an easy market to break into.
Then came Hurricane Harvey. Over the course of the storm, 27 trillion gallons of water dumped on Houston, affecting nearly 135,000 homes. Current estimates project that Harvey will be the second most expensive natural disaster in history, costing about $125 billion in damage. People in areas that had never flooded suddenly found themselves seeking higher ground, not just during the rainfall, but also afterward as stressed water reservoirs were discharged to avoid breakage.
Hurricane Harvey essentially amplified what was already happening in the Houston real estate market. Dispersed and unexpected flooding meant that many homeowners who did not have flood insurance or the means to repair significant flood damage out of pocket would need to sell their homes. Local Houston real estate investors who were already engaged with the community during the energy downturn were prepared for the calls soon after the disaster as people came to emotionally difficult but financially responsible decisions to sell at a discount. In this way, the market recovered remarkably fast to pre-Harvey conditions because homeowners with the desire to sell could do so quickly to plenty of interested buyers.
Unseen but Important Results
The most profound difference Harvey made on the investment market was unseen in the headlines. The storm reminded outside investors that, while opportunity exists in this market, there is a significant risk in purchasing hundreds of investment homes in Houston. Taking the financial liability aside, directing the operational impact a natural disaster like Harvey could have on a large rental portfolio is a job that could quickly cancel out the positive attributes of investing in the Houston single-family rental market. Of course, many hedge funds continue to buy homes in the greater Houston area, but not with the same power and urgency as other areas. The insurance costs, risk management and procedures for managing a situation like Harvey should scare institutional investors who aren’t used to handling the niche Houston market.
This is good news for local buyers. In the months since the flood, conglomerates and other out-of-state private investors have moved in. Those who really understand investments in single family real estate know that investors profit by solving problems. An event like Harvey is a disaster that few are equipped to overcome. Many have come to Houston from other markets, identifying Harvey as an opportunity. And now that most of those homes are absorbed from the markets, those new investors in town are looking for a good reason to stay. The result? Rising marketing costs and more competition for local investors. However, the severity of flooding has prompted many companies unfamiliar to Houston to evaluate their strategy — do they buy significantly damaged homes in flood-prone or flood-uncertain areas as-is, or do they only focus on the quick flips? The big question really is, will it soon flood again or not? Perhaps the more accurate question is, when is it going to flood like that again?
All investors will continue to have a place in the Houston market. Houston is a large metropolitan area retaining its resiliency. Even though the rate of new residents moving here has slowed, it hasn’t halted or reversed. Economic opportunity overall outpaces both disaster and downturn potential. Investors can learn from Houston to simply follow the need, whether it’s alleviating homeowners from distressed situations, or fulfilling the demand of the next wave of new residents following a good opportunity. So much depends on the weather, but as Houston gains more global attention and economic diversity, Hurricane Harvey’s hardships, like its floodwaters, will recede.