Is the News Media Exaggerating How Lower Oil Prices Will Affect Dallas Real Estate?

Even T. Boone Pickens himself is selling off part of his ranch!

January is almost behind us, and most media outposts have started playing the “oil prices down = sucky real estate” cards: lower oil prices hurt the Texas economy and, therefore, its real estate. If you have real estate in Houston or Midland, oh we agree. Markets there definitely cooling. Steve Brown has waxed on about this from the Builders Show in Las Vegas, and other outlets have even gone so far to say that some high end agents find the high end market cooling, really cooling.

Really?

I’ll give you this: In The Hamptons, sales of luxury homes tumbled 16% in the third quarter from a year earlier to 52 transactions, according to a report from appraiser Miller Samuel Inc. and brokerage Douglas Elliman. The inventory of such properties—defined as the top 10% of the market by price—climbed 34% to 292.

Here we just had the January sale of Thomas O. Hick’s 25.5 acre estate to Andy Beal, who says he is not going to sub-divide it. (I think he bought it to use for Donald Trump fundraising. Then Lisa Baron Blue’s house will be hosting all the Hillary Clinton parties. Get ready: Preston Road is going to be jam crammed come this fall!) Then there’s Jordan Spieth’s purchase of Hunter Dehn’s home, which meant that Hunter had to buy a house somewhere (lips sealed) because he and his wife and kids need someplace to live, right?  In fact, sales of houses priced at $1 million or more rose more than 12 percent in 2015; up 15% in 2014. The rate of increase of DFW luxury home sales was about twice the overall growth of preowned home purchases.

There were more big whig sales. 2015 was a pretty damn good year for Dallas real estate:

Golfer Lee Trevino bought a home on Park Lane in Dallas, downsizing from his 10,000 plus square foot estate at 4906 Park Lane at Sunnybrook that has not sold but has a buyer circling. Jonathan Rosen and Christy Berry have half the Creeks at Preston Hollow sold, these puppies being in the $5 million range or more. Museum Tower is inching up to 50% sold and has a famous new resident who used to live on Walnut Hill Lane. Ritz Residences, almost sold out. Ditto The House. Dave Perry Miller’s Jarrad Barnes sold 4700 St. Johns, that $15 million magnificent masterpiece built by Saad Chehabi, a fortress, and that stunning $15 mil Justin Leonard house at 3700 Euclid sold. Glory be Joseph and Alisha Sinocola’s house at 3800 Beverly may finally be under under contract I hear (after the price tempered a bit down from an aggressive $14 million). Secondary home market not too shabby: Kyle Crews at ABA and Concierge Auctions sold Timbercreek ranch at Lake Cypress Springs, John Goff’s Eagle Mountain Lake house may be next. Even the Mary Kay Mansion sold and CLOSED. OOOps, that may have been Jan 4, 2016. Well, close.

The $725 million Waggoner ranch will be under contract in 2016.

The thing about high end luxury real estate: you cannot give it the same barometer you give $500,000 real estate or even $1.2 to $3. It’s a different animal, says Texas A&M’s James Gaines: far fewer buyers who are way more picky. So picky because they can always go buy the land and build exactly what they want. As a top Hawaiian Life agent told me about selling luxury homes to wealthy buyers: you can’t hold open houses and expect the titans to come schlepping through Sunday from 2 to 4 in their Lears. Luxury real estate is a different ballgame. These people don’t drive around  looking for open houses. They have multiple assistants and advisors and value their time like their portfolios. And they shop a lot on iphones and ipads.

But the hardest article for me to swallow was the recent New York Times piece on T. Boone Pickens’ new fund, a Tommy Vu approach to buy up distressed ranches. Funny thing is, the reporter failed to note that T. Boone is actually selling off part of his Mesa verde ranch —  16,000 plus acres in the east division for more than $20 million. “Mr. Pickens’ initial purchase of 2,900 acres in 1971 has now expanded into roughly 68,000 acres spanning approximately 24 miles of Canadian River bottomland, together with rolling sand hills, ridges and elevated mesas. This long term assemblage of Canadian River ranchland has enabled Boone to create one of the finest recreational ranches to be found in this area of Texas.” Even though he is selling some land, his partner says the fund is cleaning house on ranch distress sales.

“Right now, you’re seeing the first signs of panic,” said Mr. Ellis, who started Sporting Ranch Capital, based in Dallas. In 2012, the group, which is backed by the Texas billionaire T. Boone Pickens, opened its first private equityfund to buy and restore ranch property throughout the West, including Colorado, Idaho, Utah and New Mexico.”

Well, they haven’t exactly bought up Alice Walton’s ranch, have they? Sounds like Mr. Ellis and his backers are going in for ranches on the brink of foreclosure, the ones owners want to shed quickly and quietly, like homes that someone wants to shed tomorrow because of death or a divorce:

Now, Mr. Ellis is raising a $100 million, Texas-only ranch fund. The first fund focused on restoring and enhancing ranch property to improve hunting and fishing habitats, but the new fund is aimed at scooping up $15 million to $25 million “trophy ranches” from owners who want to sell quickly and quietly. “When you make your giant hit down here, you buy a ranch and a jet,” Mr. Ellis said. “The ranch goes first because your jet goes with your obituary.”

But as Allen Crumley, who leads the ranch sales division at Fort Worth’s Williams Trew, said: the very fact these guys are buying up the land means they must believe it’s going to come back up again.

Briggs Freeman Sotheby’s David Burger seemed to be the lone voice of reason in this story:

“Strong oil prices didn’t hurt, but it’s not the only thing driving prices,” said Mr. Burgher, who said he had not seen a significant decline in land prices.

Also Brian Sharpe, a U.S. Trust investment guy in Houston said that “Clearly, the fact that oil prices are going down isn’t going to help ranch prices,” but whether land prices will fall along with crude, however,

“remains to be seen. Not only is the economy more diversified, he said, but there are areas within oil and gas, namely refiners, that have not been hit as hard. “I’m not sensing any panic or abnormal stress,” he added.”

I repeat: this from someone in Houston.

Then the nut graf:

Statistics from Texas A&M support this observation. (Ed: no panic or abnormal stress). Prices per acre increased in each of the first three quarters in 2015, and preliminary numbers for the fourth quarter show the median price per acre hitting new highs. “I don’t think there’s any way we will be unscathed, but there are things that make it different than in the past,” Mr. Gilliland said (Ed: he is Charles Gilliland, a research economist with the Real Estate Center at Texas A&M University). He said the large quarterly increase corresponded with a drop in typical acreage, which may suggest that it is the smaller ranches that are selling.

So why the fuss? Well, for one thing, it’s good publicity for Sporting Ranch Capital, based in Dallas. Can’t blame them for wanting that! For another, the story was written in typical inverted pyramid fashion: the top lead focused on the thesis the writer wanted to prove, that dropping oil prices are affecting the price of Texas ranch land —

“Oil is $33. Markets are in turmoil. The timing couldn’t be more perfect,” he wrote in a recent email. (Oil has continued its slide since, settling below $29 on Monday.) Although many in his state fret about the implications of cheap oil, Mr. Ellis sees it as an opportunity to buy another crucial asset: ranch land.

But then, as you read, the story emerges that not everyone believes this thesis. Indeed, the first fund was started in 2012, and is buying ranches not just in Texas but in Colorado, Idaho, Utah and New Mexico. Stepping up the game now, yes, because there are always people who bite off more than they can chew, especially with a ranch.

I had to call James Gaines, Texas A&M Real Estate Center’s chief economist and the guy I most trust to tell me what’s really happening with Texas real estate. Oil has certainly slowed Midland and Houston he told me, but it’s really too early to see what the total state impact will be.

“Oil prices go down, there’s an immediate short-term impact,” said Dr. Gaines. “But the multiplier and other ancillary impacts take a while to hit — like one to three years. We will know more by the mid to end of 2016.”

Frankly, he said, he thought the cool-down might have shown up sooner…  but Texas enjoyed the best economy and the best real estate market ever in 2015: about 300,000 sales!

“If we start comparing 2016 to 2015, it’s going to look, well, like it’s down,” he said. But comparing the market to 2015 is an unnatural comparison. 

I told him I remembered him saying that we would have a “new normal” market, not steroidal as was 2015. He said I remembered right. But he also said Texas was in for less economic growth, down from more than 4% to just 1%.  He thinks the job growth rate will gradually decline in 2016 –the energy sector job losses, the national economy, and the value of the dollar. But we just really have to see how low oil goes, coupled with other economic news down the pike, before we get to fussing. Asked where the best place to live in Texas this year might be, economically speaking, he said Dallas-Fort Worth and maybe Austin.

So be on the outlook for a lot of writers wanting to get all Debbie Downer about the real estate market. I mean, the frenzy may be over, the stock market is reacting to low oil prices, big issues in China — the Chinese are buying up a lot of U.S. and Canadian property, agents tell me, capital flight there is crazy. And the price of oil is way down, depressingly down. Of course, when I can fill my tank for $25 I tend to feel a little richer than I do when it costs $55. I might go get a Starbucks (helps my SBUX stock). Buyers might not hesitate to buy homes they have to drive longer to get home to, since gas is cheap. They might keep the swimming pool heater on a little longer. It’s just not such a pinch for the average consumer.

I’m not saying it might not hurt us at some point. After all, the real estate market is always, always cyclical. We’ve been riding pretty darn high since 2014.

“I think the housing market will slow down a bit in 2016,” said Gaines. “It’s not going to fall off a cliff, though.”

“I have a lot of clients who are thinking of selling this year or next, and then maybe renting for a couple years,” says Becky Frey, one of Briggs Freeman Sotheby’s largest producers.

But where are they going to live? The one big difference between the last downturn and the next one coming will be less inventory.

And jobs — Mitchell Schnurman calls the I-35 firewall the biggest defense for the Texas economy and the new president of the Federal Reserve Bank of Dallas, says likely that will continue:

 Three major metros along the interstate corridor — Dallas, Austin and San Antonio — keep adding jobs even as oil prices plunge. And their gains may be enough to offset the energy shock.

At least they were last year, and that’s likely to continue, said Rob Kaplan, the new president of the Federal Reserve Bank of Dallas.

Houston and Fort Worth, a big manufacturing town, managed to grow just slightly in 2015, increasing jobs by less than 1 percent. Oil-dominated economies in Midland, Odessa and Longview had net declines in employment.

The bright spots were Dallas, Austin and San Antonio, which together created 168,000 jobs — the exact net gain for the entire state. While Dallas slipped in manufacturing, it grew strongly in professional services; trade, transportation and utilities; and leisure and hospitality.

Health care was also a strong contributor to job growth as more Texans got insurance through Obamacare and Medicaid.

The I-35 firewall kept Texas in positive territory for the year, and some businesses, such as restaurants and theaters, benefited from low gasoline prices. But cheap oil was a drag on growth in the state.