On the rising costs of housing in Houston (and much of Texas)

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In recent months, I’ve encountered a series of events that have driven home to me a very important economic phenomenon that has occurred in Houston (and indeed much of the Houston metropolitan area). Namely, it is hard for long-time residents not to notice that the price of housing in the Houston area has gone up quite substantially over the past 5-6 years. I will examine at least some of the ramifications for Houston in this epistle.

On the historical cost of housing in Houston (and Texas)

The hard, bitter reality of living in Houston (and Texas as a whole) is that Houston is not exactly the most attractive place in the world to live. Let’s face it: Houston was originally sold as something of a swindle job by a pair of brothers from New York. The city is built on swamps. Houston is swampy because it’s hot for much of the year and it rains a lot around here. To add insult to injury, Houston gets whacked by a hurricane every once in a while.

So what could locals do to entice people to come live and work in Houston? Well, we do have real strengths. There were (and are) many opportunities on offer. Furthermore, we are blessed with plenty of land in Texas, and that meant that locals could build themselves a nice little hacienda for very little money. For many decades, observers of urban areas have noted that the cost of a house in the Houston area hovered at around three times the annual median household incomes of Houston residents, and that this compared quite favorably with the costs of housing in many other urban areas around the United States (and indeed around the world).

This happy state of affairs in Houston held true until around 2011 – 2012. As this site on the real estate website Zillow shows, the median list price of a house for sale in the City of Houston rose from $78 per square foot in January 2012 to a whopping $157 per square foot by April 2015 – a doubling of prices in a period of a little over three years! House prices per square foot have more or less flattened over the past two years since this huge price climb, but prices  remain elevated. Similar price climbs have been registered for the broader Houston metropolitan area, with Zillow reporting that house values have climbed from $125,000 in January 2012 to $175,000 in January 2017. The website Zillow shows area median housing prices at $185,600 as of the beginning of 2018.

Anecdotal stories also abound. I spoke a while back with a Hispanic lady who lives on the near northside of downtown Houston. She said her property taxes have gone up from $1,000 per year to $1,800. Given that property tax rates have not gone up much, the implication from what she told me is that the value of her house has nearly doubled. I had an idea of buying the house I grew up in, located in the Spring Branch area. However, my ideas were sunk when the value of my parents house went up from roughly $100,000 back in 2000 to over $500,000 when they passed away not long ago. Paying the property taxes on a house worth $500,000 and up in Houston would have meant I would have had to pay roughly $900 – $1,000 per month in property taxes. I cannot afford to pay 30 percent of my income to the federal government in the form of income and Social Security / Medicare taxes, save money for my 401-k, take care of family issues, and pay another $900 – $1,000 per month in property taxes. Much like John Nova Lomax’s lament for what has happened to Montrose, I too was priced out of the neighborhood I grew up in.

It would be a good point to stop here and observe that this massive price rise in housing has not been evenly distributed throughout Houston. Some neighborhoods, like those of my childhood home, have experienced four-fold price rises, while poorer neighborhoods like Houston’s Fifth Ward have experienced price rises of perhaps 50 percent. Also notable is what has happened with apartment rents. The Houston Chronicle reported last year that one bedroom apartment rents fell about two percent from last year, and are now averaging about $1,068 per month. I can remember paying $475 per month for a one-bedroom, 700-square-foot apartment circa 1995-1996 at Washington Avenue and Westcott, perhaps 3-4 miles away from where my job was. Accounting for inflation, it seems that apartment rents in Houston have increased perhaps 10-20 percent over the inflation rate over the past 20-25 years, which indicates that builders have (more or less) been building enough to keep up with demand.

Why did housing prices rise so quickly over such a short period of time?

I posit four words: Crude oil and fracking.

The housing price boom in Houston over the past 5-6 years is correlated with the combination of the recent boom in oil and gas prices and with the fracking boom. There was clearly a boom in construction from roughly 2005 / 2006 until the global recession of 2009. However, building in Houston picked right back up as soon as the American economy regained some semblance of normality in 2010, and continued all the way until the start of 2015. As for house prices, they did edge upwards during the previous decade, but as the Joel Kotkin article noted above, as late as the start of 2012, housing costs in Houston were still at three times the annual household income level. The price spike correlates with the rise of crude oil to $80 – $100 per barrel, but only when combined with the massive increase in crude oil production that occurred in Texas (and the United States) that resulted from the fracking revolution did housing costs spike dramatically. It wasn’t enough for a huge increase in oil prices on their own to cause a sudden dramatic rise in housing prices. It took both a rise in oil prices combined with a huge increase in oil and gas production to produce the sudden, sustained increase in housing prices. Factor payments from anywhere where oil and gas is being produced are flowing like a river towards Houston, as Houston is the primary location of the agglomeration of knowledge on how and where to lift oil and gas out of the ground.

I would also offer here a simple observation regarding the Houston area’s population growth. The Houston metropolitan area has experienced spectacular growth over the past 30+ years. The population of Harris County has grown from 2.4 million in 1980, to 2.8 million in 1990. It reached 3.4 million in 2000 and now stands at roughly 4.5 million. When combined with the growth in Fort Bend County and Montgomery County, the region’s population now stands at over 6 million. Sooner or later, this immense population growth was bound to lead to pressures in the real-estate markets.

What about commercial real estate in Houston?

The markets for commercial real estate in Houston have been decidedly more mixed than the prices for housing. Forbes ran an article nearly two years ago, describing how the oil price bust had dramatically affected commercial real estate in town. There were no fewer than 22 major projects under construction in 2016 – 2017, even as crude oil prices fell. Houston’s hot spot rankings during the oil boom predictably fell. Anecdotally, I’ve heard of a number of stories of once fully-occupied office towers that are now half empty. I suspect it’s going to take a while for the commercial building overhang to clear.

What about the effects of the recent Republican tax bill passed by Congress?

The Republican majority in Congress recently passed the largest overhaul of the federal tax code since the 1986 tax code reforms. Since the reach of the federal government is so vast, there will always be important consequences any time Congress decides to substantially change the federal tax code.

While the new tax bill will result in lower federal tax burdens for many, one of the more important aspects of the tax bill is a provision that limits federal tax bill write-offs for paying state and local taxes to $10,000 per year. What this means for most Texans is that as long as your home and property are worth less than roughly $450,000 – $500,000, then you should still be able to claim a full federal tax deduction. That is because, as state senator Paul Bettencourt recently pointed out, the average property tax rate in Texas is roughly $2.48 on $100 value of the house and property. Ergo, this provision of the new tax bill will likely not affect most Texans, but it will hit the affluent.

Over the long haul however, the real test of the limitation of the state and local tax write-offs will not only be whether they help constrain state legislatures and local governments. It will also be whether it helps to spur building of new housing. The argument here is that if taxpayers aren’t going to get an unlimited write-off on their local and state taxes, they will at some point start to agitate for legal ways to avoid paying the extra taxes. One such way would be to push for looser zoning and land-use laws that would allow for market demand for housing to be better met instead of putting up with situations where it’s impossible to build anything. That in turn would help keep a lid on the cost of housing. Crucially though, there is no guarantee that Americans living in high-value housing will actually support such policy decisions.

Is there any hope that Houston will ever again become a low housing cost region?

Something tells me to doubt that Houston will return to the days where average folks could snap up single family homes for $75 per square foot. Don’t get me wrong – it is still possible to find relatively cheap housing around the Houston area if you look hard enough for it and are willing to make some compromises. However, as much as real-estate agents are dancing in the aisles over the increase in the cost of housing, I’ve never been much of a fan of rising prices for anything, and that includes housing. There are very good reasons for thinking the way I do, amongst them that high housing prices can cause some real hardship for those who can’t afford to buy or rent.

The most obvious way forward to regain Houston’s low housing cost reputation would be to allow market forces to work so that more housing comes online. The idea here is that the $300,000-plus price tags for single-family homes will cause developers to sense the smell of profit, and will keep building like they usually have. However, I do fear that a widespread political constituency will form in Houston to agitate for keeping housing expensive, as has happened in cities along the East and West coasts. Not only would such a coalition consist of existing homeowners, but it would also consist of politicians representing cash-strapped city councils and county governments as outlined in this recent post by former City of Houston mayoral candidate Bill King. If Senator Paul Bettencourt, who has built much of his entire political career railing over property taxes, really wanted to see property tax burdens fall, he would be doing everything in his worldly power to encourage more building of housing to drive housing prices down, not only in Houston but in the Dallas/Fort Worth metroplex as well as in Austin. All three areas have seen large-scale increases in housing costs in recent years.

Flooding as an issue looms large in Houston’s future, but don’t forget housing. I’d hate to see Houston fall to the same forces that have made housing so expensive in places like California, New York, Australia, and Britain. The fortunes of many ride on the outcome.


  1. Good analysis, but don’t forget the impact of ultra-low interest/mortgage rates after the 2008 crash. That stimulus pumped up prices regardless of demand because people could afford more house for their income, thus they bid up housing. If interest rates move back up, as it looks like they’re going to do, housing will stagnate or possibly even drop.

  2. I believe real estate prices in Houston, and most of Texas for that matter are like California 1965. Wages are lower here than most cities along the East and West Coasts, so companies have been and will continue moving here for the foreseeable future to take advantage of these lower wages. I agree that a widespread political constituency will ensure that prices are kept expensive. I would love to see Houston regain it’s low housing cost reputation, but I don’t see how that happens.

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