OREANDA-NEWS. Given continued pressure on oil prices and recurring announcements of reductions in related employment and capital expenditures, many investors are wondering how the Houston housing market will perform, according to Fitch Ratings. Homebuilders and multifamily operators appear sanguine given the initial resilience, but we believe it is premature to give the "all clear" given the similarities to New York City in 2008-2011 when the financial services industry was retracting.

Headwinds for the oil industry clearly remain a concern as oil, gas, and related industries comprise an estimated 35%-40% of Houston's GDP and have a multiplier effect on consumer confidence and market psychology.

With WTI oil at $42 per barrel, down from $100 and Fitch's long-term price deck of $70 through 2017, we expect continued pressure on employment and capital expenditures, which have historically been outsized relative to other corporate sectors. Headcount reductions have been a key part of the industry's adjustment to lower oil prices and capex reductions have averaged approximately 30%-35% in 2015 for independent E&Ps so far. Moreover, recent announcements likely foretell the beginning of the second round of reductions.

In many ways, Houston's employment outlook is similar to that for New York City in 2008-2011. Companies in the city's main industry (i.e. financial services in New York City, oil in Houston) continue to announce sizable headcount reductions although details as to where, timing, method, and seniority/role/income level remain unclear. Should New York be an appropriate guide, headwinds could persist for an extended period of time and reductions could occur in stages if employers determine a return to previous stronger levels is less likely.

While economic headwinds will weigh on both the multifamily and single-family markets, the magnitude will be influenced by the different supply and affordability conditions. Supply of new multifamily units in Houston is above the national average and concentrated in key submarkets. With deliveries expected to accelerate later in 2015 and into 2016, we view 2H15-1H17 as the time frame to measure performance given. Fitch expects REITs will look to maintain occupancy, thus pressuring net effective rents.

As for the single-family markets, supply began to decrease in 2011 (from eight months of inventory to 2-4) resulting in an acceleration in home prices beyond sustainable levels. Houston now ranks as the seventh most overvalued city in the US, per Fitch's Sustainable Home Price (SHP) model. As of 1Q15, Fitch's SHP model views Houston's home prices as 15% overvalued, having last been at sustainable prices in 2010-2013. Fitch expects home prices in Texas' most overvalued markets (Houston, Austin, and San Antonio) to be flat to slightly down over the next year.

Initial feedback from homebuilders indicates softness in demand has been more prevalent at higher price points. In response, Fitch expects homebuilders will shift more product offerings towards the entry and affordable categories and focus on volume and velocity in recognition of the need to restore affordability. Homebuilders' comments generally confirmed Fitch's RMBS findings; home price appreciation had begun to price out first-time buyers.

The report, "Under One Roof: Housing in Houston," is available at www.fitchratings.com.