A recent Industry Report from equity research firm Sterne Agee highlights the possibility that falling oil prices could impact home sales in Texas. The November 9th report notes that the oil industry represents around 13,5% of the GDP of Texas today, but O&G companies play an outsize role in the economies of several Texas cities, including Houston, the most populous city in the Lone Star State.
Sterne Agee analysts Jason McCanless and Annie Worthman also note that “Buy-rated WCIC is our best non-Texas idea, and we view the shares as undervalued at current levels.”
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Texas is key state for national homebuilders
McCanless and Worthman point out that all the homebuilders they cover sell homes in Texas except for AV Homes Inc (NASDAQ:AVHI) (Neutral, $19 PT), WCI Communities Inc (NYSE:WCIC) (Buy, $21 PT), NVR, Inc. (NYSE:NVR) (Neutral, $1,100 PT), and M.D.C. Holdings, Inc. (NYSE:MDC) (Neutral, $27 PT).
They also argue that Texas is a key market as “it represents approximately 17.5% of our homebuilder coverage’s national footprint. As a percentage of company-level total communities, we anticipate Taylor Morrison Home Corp (NYSE:TMHC) (Neutral, $22 PT) has the highest exposure at approximately 45.0% followed by KB Home (NYSE:KBH) (Neutral, $18 PT) at 30.3%.” These figures just include communities in the four biggest markets of Austin, Dallas, Houston and San Antonio.
Rapid job growth in Texas is clearly related to oil industry
The Bureau of Labor Statistics highlights that unadjusted national nonfarm payrolls hit bottom in January 2010 at approximately 127.3 million jobs. Since then, national nonfarm payrolls have increased 9.8% to 139.8 million as of September 2014. During that period, gross unadjusted job growth was a solid 12.7% for San Antonio, 18.0% for Houston, 14.8% for Dallas and a scinttillating 20.1% for Austin. McCanless and Worthman note: “We anticipate oil and fracking have contributed to this growth but do not explain all of it.”
Oil prices impact on Texas economy
Mining and petroleum extraction was the second largest sector in Texas’ economy in 2013, representing 13.5% of GDP, behind manufacturing at 15.2% of 2013 GDP (USBEI data). Gross job growth in the mining and logging employment classification, which includes petroleum jobs, from January 2010 to September 2014 in Houston was 52.4% compared 18.0% growth for all employment in the city.
Of note, as a percentage of total nonfarm payrolls for Houston, mining and logging is only up from 3.1% of nonfarm jobs in January 2010 to 4.0% of nonfarm payrolls as of September 2014. The SA analysts conclude: “We believe this evidence suggests petroleum jobs have been a meaningful contributor to Houston’s and Texas’ recovery since 2010 but haven’t been the only contributor.”
Although McCanless and Worthman don’t attempt to quantify the impact of lower oil prices on homebuilders, nor suggest a price to which oil must fall to hurt the sector, they do suggest that “…investors need to be mindful of this risk when evaluating homebuilders.”