Clear Capital: Gulf Coast housing afflicted by more than BP oil spill

Alex Villacorta is the senior statistician for Clear Capital, a mortgage and lending valuation firm. He recently conducted a survey with Clear Capital that found 25% of realtors felt the BP oil spill halted home sales along the Gulf Coast. Villacorta attributed the halt to a social stigma surrounding the spill. Villacorta sits down for this edition of In This Corner to discuss the effects of the oil spill on the Gulf Coast economy. Based on your survey, a quarter of real estate professionals are painting a bleak picture of the Gulf Coast market. Have any respondents put a timeline on how long these perceived effects would last? Since this survey was conducted before the current cap was placed, respondents were hesitant to place any limitations as to the duration and severity of the overall impacts?both real and perceived. Now that the well is capped, there is less anxiety about the total devastation, but concern remains about possible far-reaching economic effects. A common sentiment among many real estate professionals in markets along the Gulf is a downturn in prices is likely if the employment outlook does not improve. Respondents in areas most heavily dependent on Gulf Coast industries, such as fishing and oil,  processing expressed the most concern, even when these markets are sufficiently removed from the physical effects of the spill. Many real estate professionals in markets from Florida to Texas are already feeling the effects of decreased employment and many respondents from other areas predicted these impacts will ultimately affect their areas. Most of the respondents indicated the typically busy summer buying season was lost and they have written off the rest of 2010 with an eye towards a fresh start in 2011. Some had a less optimistic view, forecasting lasting impacts well into the next few years. We expected a great disparity in how individual markets are being impacted. The only way to accurately evaluate the micro effects is through continued communication with local professionals and statistical analysis of housing activity?steps Clear Capital is committed to taking. One final thought. With the fifth anniversary of Hurricane Katrina coming up this weekend, new reports have been released estimating the recovery to last another 10 years. I mention this not to compare this disaster to Hurricane Katrina, but rather illustrate that rebuilding and clean up efforts can be extremely difficult. Restoring an area to health and prosperity can take a number of years, not months. What were some of the more alarmist sentiments? In terms of hypothetical worst-case-scenarios, the most pessimistic real estate professionals expressed concern that the leaked oil would be picked up in the ‘loop current’ and be carried through the Florida Keys, along the Miami-Dade beaches and up the East Coast of Florida. Under that scenario, dramatic losses would be expected, with the tourism industry taking the brunt of those losses. Now that the well is capped, however, that scenario is looking less likely. Respondents also expressed fears of a strong hurricane season splattering coastal markets with oil and making clean-up efforts more difficult, in addition to adding another round of negative press for the region. The most common and probable fears communicated by respondents revolve around the Gulf-based employment outlook. Some respondents report the drilling moratorium is causing layoffs and company relocation, potentially causing more long-term negative effects to the region. Similarly, other real estate professionals reported on the large shock to the fishing industry with many fishermen out of work, and all the businesses that support, or are reliant on these industries are suffering as well. This is still a very real concern, and one not fully realized. With reportedly 100,000 projected job losses attributed directly to the spill, markets with high concentrations of employment in one or more Gulf sectors will be faced with overwhelming pressure to maintain current home price levels. Of those that didn’t report a negative effect from the spill, what was their reasoning? The two main themes from areas not reporting an impact was distance and economic independence from Gulf industries. Coastal markets that cited distance did not rule out a potential impact if one of the worst case scenarios takes place. Scenarios like oil entering the loop current, employment and industry collapse, or hurricanes redistributing the existing oil. Real estate professionals in other markets reported economic diversity as a reason for not being impacted. Respondents from downtown New Orleans, for example, reported no impact from the spill due not only to their distance from the spill, but also because industries and attractions in New Orleans are not solely dependent on the Gulf Coast. Surrounding cities such as Harvey and Mandeville, however, were not as optimistic. Respondents reported pockets in their markets heavily reliant on the oil and seafood industries. They anticipate significant market hardships, if these industries cannot get back to work. It is important to note that respondents that did not report an impact did not report optimism either. Most brokers and appraisers expressed a high degree of uncertainty as to how this situation will play out in their market. What areas of the Gulf Coast are expected to be hit the worst? Clear Capital is monitoring sales and listing trends closely to identify both positive and negative market changes. The picture being painted is that long term changes in employment and industry are likely to have the greatest, most lasting impact. Physically impacted areas are certainly feeling the effects, as well. As long as oil is on land or in the water, the housing markets will continue to suffer. Several real estate professionals reiterated that the summer buying season has been lost, but are hopeful that buyers will return next year. Unfortunately, the employment picture may not be as promising. If companies shut down or relocate, markets that are heavily reliant on those industries could be devastated. The early indications are that tourism is not one of these industries. While tourism has taken a significant hit, it is expected to rebound as clean-up efforts continue and negative perceptions ease. Exactly how long that shift in perception will take is unclear. As one New Orleans broker stated: ‘If the moratorium of deep water drilling continues, then the entire Gulf Coast economy will be affected, jobs will be lost, and housing prices will go down.’ How much stock can we put into perception of events like the BP spill? House prices were already falling in many of these areas to begin with. Do the economic effects of an event like this, however tragic, have the potential to be overblown? Indeed, it is difficult to accurately isolate any one factor. And there may be a tendency to disproportionately allocate blame for poor market conditions to one particular event.While attributing the overall decline in real estate prices to a single economic factor may get overblown, the net effects for a given region are real and very significant. In writing our report, we considered the coinciding of other economic factors such as the expiration of the tax credit in our analysis. For example, in Florida we compared non-Gulf cities such as Miami and Orlando to the Gulf communities and found that the gulf communities are experiencing steeper, more dramatic decreases in sales than their inland counterparts. We also considered the strength and gains many of the affected markets exhibited leading up to the spill, only to see the momentum shift and sale volumes retreat. It is true that sales are down in most markets since the expiration of the home buyer tax credits, but markets that are also reporting physical damage from the oil or a negative impact due to social stigma or employment, are exhibiting further declines as compared to their pre-spill trajectories. If the negative perception of the spill continues along with the weak economic environment, it won’t matter how much blame is attributed to any one source, since the increased anxiety will be too much negative pressure for those markets to maintain trends consistent with the national or regional norms. If the BP spill is having a direct effect on the Gulf Coast economies, what are the dangers of that effect overflowing into other non-coastal markets? Non-coastal markets, but markets reliant on the Gulf for much of their employment, are certainly being affected by the spill. This was one of the possibilities we highlighted in our most recent report. As it stands now, non-coastal markets not dependent on Gulf industries face little danger of residual impact. In short, any area with any connection to Gulf fishing and energy industries will be subject to negative economic impacts for the foreseeable future. Because of these connections, it is critical that lenders, mortgage servicers and investors understand the unique situation of a given local market, and that they have the ability to receive accurate valuations to help them better understand local market dynamics. Clear Capital continues to analyze data, conduct surveys and gather information from coastal and non-coastal markets to determine what areas are being affected by the spill and how those effects are impacting home values and sales. Have someone that would be perfect for In This Corner? Email the editor.