Lower Prices Raise the Stakes

Who in Houston doesn’t know the infamous Mattress Mack? Since his first television ad in 1983 he has been the guy who “Saves You Money” on furniture. Jim “Mattress Mack” McIngvale started Gallery Furniture with $5,000 after a potential investor didn’t follow through with a proposed loan. Initially he did fairly well, but when the oil industry took a turn for the worse his business slowed down dramatically. Perhaps that is what has spurred his latest friendly wager with customers; for a limited time buy $7,000 worth of furniture and if the price of West Texas intermediate crude oil rises to $85 a barrel by the close of trading on December 31 he will give you back your money.

Mack isn’t the only Houston businessman placing bets based on the declining price of oil. Steve Zimmerman, owner of La Colombe d’Or, the fabulous historic boutique hotel and classic restaurant now known as Cinq, made national headlines during the 1980s oil bust by offering an executive lunch for the day’s price of oil. “We were actually just thinking about bringing it back,” laughs Zimmerman. “If the oil prices drop into the $40 range per barrel maybe we’ll do an Oil Barrel Special, a three-course dinner for the price of oil.”

So while Houston consumers may find some good deals in the short term, businesses are keeping a close eye on the dropping price of oil. Houston is not as dependent on the oil business as it was in the ‘80s, but a worldwide oil glut can still send ripples through the local economy. The most recent drop began in mid-’14 and traces its roots to U.S. overproduction, weak global growth, and the Saudis deciding to put a greater priority on market share than price. On June 23, 2014, West Texas Intermediate (WTI) traded at $107.95 per barrel. At market open on January 13, 2015, the price had fallen to $44.91. The energy industry — feeling the storm coming — is cutting back on programs and new hires, and laying off some employees.

Realtors may also be worried about how falling oil prices will affect their business, which depends on the strength of the local economy. Cost-cutting measures due to the declining oil prices could stem the flow of new residents to Houston, hurting Realtors’ relocation business. Job cuts will curb families’ incomes and plans to purchase homes. These impacts, however, will take time to trickle down to the housing market.

The housing market is “very loosely associated” to the energy industry, according to Jim Gaines, a research economist with the Texas A&M University Real Estate Center. For example, Houston’s best housing year before the recession – $15.8 billion in home sales in 2006 – also saw an average West Texas Intermediate crude oil price of $66 a barrel.

However, not all economists are so optimistic about Houston’s housing market in the face of tumbling oil prices. Ted Jones, Stewart Title’s chief economist and former Houston Association of Realtors chairman, forecasts a 10% to 12% decline in home sales over the next 12 months. However, Jones also predicts a 6% increase in home prices, which could buoy Realtors’ commissions.

bizjournals.com; houstonculturemap.com; houston.org

Bullets

• December was the sixth consecutive month in which monthly average Brent prices decreased, falling $17/barrel (bbl) from November to a monthly average of $62/bbl, the lowest since May 2009. The December price decline reflects continued growth in U.S. tight oil production, strong global supply, and weakening outlooks for the global economy and oil demand growth.
  eia.gov

• Driven largely by falling crude oil prices, U.S. weekly regular gasoline retail prices averaged $2.14/gallon (gal) on January 12, the lowest since May 4, 2009. U.S. regular gasoline retail prices are projected to average $2.16/gal in the first quarter of 2015.
  eia.gov

• Astronomers are predicting there are at least two more planets in the Solar System, according to Universe Today.
  latinpost.com

• Canada possesses approximately 175 billion barrels of oil that can be recovered with today’s technology. Of that number, 170 billion barrels of oil are located in Canada’s oil sands. Canada is our biggest supplier of imported oil and natural gas providing 21% of the total.
  illinoisenergyforum.com

• More than half (56%) of home candle fires occur when something that can catch on fire is too close to the candle. December is the peak time of year for home candle fires. In December, 11% of home candle fires began with decorations compared to 4% the rest of the year.
  states.nj.us