Texas' warm homebuilding climate cools

NEW YORK (Reuters) - Things are about to get tough for homebuilders in Texas, which until now has been a rare safe haven for recession-battered builders.

The second-largest state both in area and population, Texas has bucked the broader downturn because it did not experience the price bubble and resulting overbuilding that inflated housing markets in states such as California, Florida and Nevada.

But now, declining prices in oil and natural gas -- key industries in the Lone Star state -- are beginning to impact the state's housing market, and experts are predicting a rougher road.

While big builders should still fare better in 2009 in the state's major housing markets than in most other states, Texas will not be quite the haven it was, said Pam Minich, a real estate consultant specializing in Texas.

"Texans are a little bit shell-shocked because it's come home that we're going to deal with this, too," Minich said.

Nationwide, home prices fell by 14.4 percent in the 12 months ending in November 2008, according to the S&P/Case-Shiller 20-city composite price index. Yet Texas' major markets saw prices rise during that period, said David Jarvis, Houston director at national homebuilding consultancy Metrostudy.

Of the big builders, Meritage Homes (MTH.N) is the most concentrated in Texas, with about 65.4 percent of its communities there, according Wachovia analyst Carl Reichardt. Lennar Corp (LEN.N) has about 30 percent of its communities there; Ryland Group (RYL.N) has almost 27 percent. Eight of the top 10 builders have operations in Texas.

"We continue to be cautious until we're more comfortable with the activity in our Texas region," Chief Executive Steven Hilton said during a conference call after reporting that Meritage's fourth-quarter orders there fell 61 percent.

BUBBLE-FREE ZONE

Texas' regulatory laws, relative to those of other states, make it easier and faster for builders to respond to demand, which helped the state avoid developing a bubble, said Metrostudy's Jack Inselmann.

The absence of a bubble, he added, also made Texas less attractive to speculators who exacerbate inflated conditions.

On the other hand, above-average job growth in recent years, particularly in Houston's energy and Dallas' financial sectors, drove real, sustainable housing demand, Minich said.

In a sense, housing in Texas is a victim of the state's success.

"As the housing industry suffered, everybody heard Texas was holding up, so homebuilders from other parts of the country came here and got too aggressive for reality," Minich said.

While Texas did not experience the most extreme overbuilding, that carpetbagger enthusiasm produced too many developed lots, complete with utilities, Minich said.

TEXAS TURNING?

Texas' recent job growth has slowed. In January, the state comptroller forecasted a loss of 111,000 Texas jobs and announced a 10.5 percent drop in tax revenue in this fiscal year.

Local forecasters are projecting a loss of between 10,000 and 45,000 jobs in Houston alone in 2009, Minich said.

Job losses will lead to more foreclosures, which increased about 30 percent in 2008 over 2007 and will likely rise another 20 to 25 percent in 2009, Inselmann said. Foreclosures depress prices by adding to supply and because banks, which do not want to be landlords, tend to slash prices until the home sells.

A 24-month lot supply is the equilibrium level, but Austin has 41 months while San Antonio has 38, Minich said.

Such gluts can weigh on prices because builders exploiting the excess can undercut those who bought closer to the peak. In December, the median home price in Texas fell 4 percent, according to Buck Horne, an analyst at Raymond James.

"It would be difficult for me to sit here and say we're going to have another year of price appreciation," Inselmann said. "We could have a little depreciation this year."

RELATIVE OUTPERFORMANCE

What happens to home prices in Texas depends on how many jobs the state loses and how many foreclosures hit the market, Inselmann said.

In October, UBS analyst David Goldberg predicted Texas would lead a broader recovery. He stands by that statement today in the absence of a significant rise in unemployment or any further decline in energy prices.

Many builders are still counting on the state's recent history of economic growth and price stability.

Meritage, despite its cautious stance, says Texas remains its "strongest region." No. 3 U.S. builder Centex Corp (CTX.N) said during a recent conference call that it would develop land in a few "relatively robust" markets, including Texas.

"We continue to believe that Texas will not experience anywhere near the same level of housing price declines that we've seen in other more distressed markets," said Horne. "However, outperformance is a relative term."

(Reporting by Helen Chernikoff and Joan Gralla; editing by Patrick Fitzgibbons and Matthew Lewis)