"How Bad Can Texas Get?" Goldman Answers

Tyler Durden's picture

On Friday, we noted that at least some local businesses in Texas are sympathetic to the pitiable plight of the state’s beleaguered oil patch workers.

Houston-based Gramercy Cleaners on Richmond avenue, we observed, is demonstrating their compassion for the imploding energy sector by offering service discounts.

Much like Calgary and many other oil boom towns north of the border, many a Texas city is feeling the squeeze of rock bottom crude prices. As we documented in "The Next Chicago? Houston Faces Pension Crisis In Latest Example Of Local Government Fiscal Folly," Houston is staring down a $3.2 billion funding gap and reduced revenue from oil and gas ops isn't doing anything to help.

"Home sellers are slashing prices and offering incentives to keep buyers from walking away from contracts as an 18-month oil slump buffets this city’s once-booming housing market," WSJ wrote last week, underscoring the impact "lower for longer" is having on the city. "Home-construction permits in the area plunged 26% from a year earlier in the third quarter, while December sales of existing single-family houses fell nearly 10% from the same month of 2014."

In short, a year of crude carnage has wreaked havoc upon what, until last year anyway, was the engine driving the "robust" US labor market

As we showed in November, layoffs in Lone Star land far outrun job losses in any other state:

"The Texas recession is only in its early innings," we said on Friday, because we are just now beginning to witness the bankruptcies and shut-ins that will soon become endemic and sweep across the entire US oil patch as revolvers are reigned in and Wall Street suddenly refuses to finance uneconomic producers' funding gaps.

So what happens when the pain really begins to hit home in Texas, you ask? And what are the implications for the broader economy considering the state has for years served as a kind of counterbalance to a job market that increasingly resembles a feudal system as opposed to the manufacturing-led middle class utopia American enjoyed five decades ago?

Here with some answers is Goldman who sets out to address the US oil patch's burning question: "How bad can Texas get?"

*  *  * 

From Goldman

The historical episode most similar to today’s ‘lower for longer’ environment is the oil bust of the 1980s, when WTI oil prices fell from $31/bbl in 1984 to $10/bbl in 1986. Given its high exposure to the energy sector, Texas experienced significant stress in the 1980s. The unemployment rate in Texas rose sharply to 9.2% in 1986, an all-time high for the state. Real house prices fell 30% peak to trough, and the number of bankruptcy filings (including both business and non-business filings) more than doubled from 1984 to 1986.

The experience of the 1980s has naturally raised concerns over oil and Texas today. When banks reported their 2015Q4 earnings recently, bank executives stated that they are increasing reserves in anticipation of losses in the energy sector. In this Global Markets Daily, we compare the experience of households and businesses in Texas during the two oil busts. We find that damages in Texas have been significantly more contained thus far relative to the 1980s.

Loans backed by properties in the oil-producing states of Texas, North Dakota, Oklahoma and Louisiana comprise 10% of US commercial mortgage-backed security collateral, so the performance of commercial real estate in these areas is in focus for structured product investors. The office vacancy rate in Houston increased sharply in the early 1980s, likely driven by a combination of two recessions, elevated supplies and the oil price plunge. In 2015, the vacancy rate of Houston office properties also moved up, but remains far below the levels seen in the 1980s. We expect the vacancy rate to climb further over the next few quarters, posing downside risk to loans backed by Houston commercial properties. But we do not think default rates will match the 1980s experience.

Turning to the residential sector, the 2014 oil price decline has so far manifested itself in the housing market quite differently from the 1980s experience. The right panel of Exhibit 1 shows that the share of residential mortgages in foreclosure in Texas increased sharply after the 1985 oil price peak. In contrast, the Texas foreclosure inventory has continued to edge down over the past year. One explanation for this difference may be that the housing market is still recovering from the 2009-2011 foreclosure crisis. The impulse from the healing process so far outweighs the shockwaves from lower oil prices.

The Texas housing market may be more resistant to mortgage defaults and foreclosures than other states in the US. Even with the large house price decline in the 1980s, foreclosure inventory in Texas peaked at below 2%. In contrast, foreclosure inventory surged to 6% in Arizona and California in 2009 and over 10% in Florida and Nevada in 2010. One reason for this difference may be the home equity restrictions in place in Texas. Texas residents are generally prohibited from taking out cash-out refinancings or second liens that would raise the total loan-to-value ratio to above 80%.

Five quarters after oil prices peaked, business and non- business bankruptcy filings increased 30% and 70%, respectively, in the 1980s. In contrast, both types of bankruptcy filings fell by about 10% from 2014Q2 to 2015Q3. In the case of non-business filings, the more limited response in the current episode may partly be due to effects of the 2005 US bankruptcy legal reform, which introduced tighter eligibility requirements for consumers filing for bankruptcy. 2015Q4 US bank earnings releases featured increases in loss reserves, in anticipation of possible future losses on energy exposures. However, the losses experienced by the banks to date have so far been limited. Our bank analysts believe the recent sell-off in bank equity is pricing in a worse loss scenario than is likely.

*  *  *

In other words, things are going to get bad but not, Goldman figures, as bad as they could be.

Muppets should take that with a grain of salt because as Scott Merovitch, Houston division president for builder Chesmar Homes told WSJ, Texas may have figured out "how to diversify [its industry makeup] a lot, but it's still going to ebb and flow with oil and gas.”

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navy62802's picture

Deflationary pressure can be deferred but cannot be avoided. Furthermore, the longer we defer the deflationary pain with artificial policy initiatives, the worse the impact is going to be. Those policy initiatives cannot last forever, and when the ammunition finally runs out, things are going to get ugly. We are seeing the initial stages of exactly such a situation.

Looney's picture

All Texas’ problems can be easily fixed by moving the Mason-Dixon Line above Toronto. ;-)


curbjob's picture

Talks of seceding are receding with every new ebt card.

Money Counterfeiter's picture

Pretty sure they know the Fed set their ass up.

curbjob's picture

If by they, you're referring to even 5% of Texans, I wouldn't bet on it.

I need more asshats's picture

I wonder if Kyle will now use that dry cleaner?

cheka's picture

the gulf coast, minus florida is in an oil production slowdown

no housing bubble to pop, refineries making bank, chem plants treading water, the pain is concentrated in upstream (and the bonds of)

In.Sip.ient's picture

Well, Venezuela is in trouble.

Saudi Arabia is in trouble.

Alberta is in trouble.

Texas is in trouble.


If someone decides to put their oil terminals

out of production for "much needed maintenance",

how long do you suppose that 15 day oil glut

will last for??? 


And the price of oil will be????


And nobody really needs to fire a shot...


itstippy's picture

Reducing oil terminals would make the crude glut worse.  The only way to reduce the crude glut is by cutting production at the wellheads.  

sun tzu's picture

That would be fine if they didn't have any debt to service or bills to pay. If it could be done, it would have been done months ago. What is stopping Venezuela, Brazil, or Russia from doing it?

In.Sip.ient's picture

Note:  They ( Russia, Brazil, etc... )

Ain't in TROUBLE ... just yet.


But when it gets there, what's to stop 'em???


Keep in mind, what happens if that "glut" suddenly

dissappears.  Price is irrelevant, when your reserve

currency just got smoked ;)


mandalou's picture

Brazil is in deep shit. Russia is not improving either. They have major concerns. Do some searching of the most recent articles and you will find a lot of troubling news about "they".

Price is irrelevant at the point you speak of because it will be every man for himself at that point. Currency will cease to exist and money will come back in the picture. And money will be whatever one needs to survive.

Oldwood's picture

Debt is the monster, be it in oil or houses or just about anything else. Debt eliminates alternatives. Oil is going down because producers have no choice but produce as they need cash flow to make their note payments. Oil producing areas have embraced this "peak oil" mentality for so long that they thought they were bulletproof and leveraged accordingly, from South Dakota to Saudi Arabia, Russia to Venezuela, around the world. We have see how the oil related defaults contagion affects the rest of the debt ponzi. I think they will try to bail it in our out as they know it is another Greece, another subprime and they know this time will be different.

commie's picture

The old boom and bust oil patch story. This is news? A lot of people will pull up sticks and move elsewhere following the jobs until another boom cycle starts. No wonder families are so ragged nowdays. 

sun tzu's picture

Some people seem to think that oil can only boom and never bust. They weren't around in 1985 when oil dropped 75% went into a 18 year slump until the Iraq War in 2003.

Ms No's picture

There was a boom in the 50s too.  So this is at least the 3rd time this has come around in most places.  I don't believe for a minute that the next time there is a boom that they won't think it's permanent.... again.  All they need is the MSM and some oil companies to tell them otherwise.  Same thing with housing.

buzzsaw99's picture

the squid doesn't care about anything or anyone except their own damn bonus. texas produces. manhattan maggots only take take take scam scam scam.

Ms. Erable's picture

The Squid only 'ventures a guess' in print when they're looking to set suckers up on the other side of their trades.

Normalcy Bias's picture

They probably know that a major Middle Eastern or even another World War is in the offing.

ah-ooog-ah's picture

well, well, welll.   three holes in the ground

I am Jobe's picture

Texas can solve the problme by raising property taxes, Gasoline tax and Sales tax. Problem Solved

sun tzu's picture

What problem? All I see are companies like Toyota, Blue Cross, Fedex etc moving into Texas. The roughnecks are getting laid off, but they were making $200K a year for the past few years. They can sell their jetskis. trucks, and ATV's until the next boom or go find a construction or plumbing job.

skidrow's picture

And Perot is still rocking hard in DFW:

AllianceTexas, developed by Hillwood - a Perot Company, is an 18,000-acre master-planned, mixed-use community located in north Fort Worth. AllianceTexas offers a variety of commercial real estate options, including new industrial, office and retail space. Anchored by the multi-modal inland port known as the Alliance Global Logistics Hub, AllianceTexas is home to more than 425 companies, over 44,000 employees and integrated home options for any budget and lifestyle. - See more at: http://www.alliancetexas.com/Home.aspx#sthash.YXTW9LRe.dpuf
thisguyoverhere's picture

Ha, you really think those oil companies were paying high wages don't you.
Wrong again, most people made between $60k-$150k working most of the year (10 mo or more).

Lots of h-1B visas, lots of contractors hiring resident aliens and illegal workers - lots of money going to Mexico, El Salvador, Guatemala and Honduras. God knows if we didn't give those countries a safety valve like unrestricted emmigration to the US, their governments would topple like dominos. I don't like the policy, but its reality.

Lots of hyperbole here, hating on oil and infrastructure workers.

These people are willing to earn their living and not feed off tax payers, they earn my respect wherever they are from.

sun tzu's picture

I don't hate on them at all. They worked hard and earned their money. It's just a fact of the oil industry that there will be booms and busts. Oilfield workers tend to blow most of their money on junk and strippers. Highschool dropouts making $150K a year should be grateful, because there is no way in hell they could make that money anywhere else. 

The illegals can go back to Mexico or Guatemala with their trucks and live like kings. Let the bankers eat shit.

booboo's picture

Yes because we all know government needs more money to piss away

homiegot's picture

H aha ha ha ha hah ha ha ah 

The Deacon's picture

Take down Russia and Texas in one fell swoop.


Some peoples' dream come true.


homiegot's picture

I sense bitterness and jealousy.

The Deacon's picture

Notice I said 'some peoples'.....you may have to think who would benefit from those 2 entities losing power....it's a pretty small group.


I am in the heart of oil country in Alberta's North. T'ain't my dream come true.

I tend to not wish misery on others.  However that seems to be the only thing some people live for.

roddy6667's picture

Texans likes to think they are shrewd businessmen who are self reliant, not like all those states that need more money from Washington than they pay in taxes. Texas is the ONLY Red State that pays in more than they recieve. That's because they pump money out of the ground. Texans are not any smarter or self-reliant than the rest of the Red States. Now that oil is under $30/bbl, they can join the rest of their club. You know, the ones that are on welfare.

They think they have a diversified economy. Those businesses are just there to soak up the oil money. Now you will see them tiptoe out of town after dark.

Money Counterfeiter's picture

Texas does not need NYC money counterfeiters.  Really they don't.  Texas would do just fine on their own exchanging gold for oil.

sun tzu's picture

It's terrible that Texas pumps useless oil and natural gas instead of stealing money like Goldman Sachs or producing useful technology like FaceFuck and Twatter.

itstippy's picture

"Texas does not need NYC money counterfeiters.  Really they don't.  Texas would do just fine on their own exchanging gold for oil."

Bullshit.  Texas oil is pricey to produce.  It can't compete with the cheaper producers; it only thrives during times of high demand.  Texas oil is fucked until world oil demand increases and/or cheaper world oil production decreases.  Then it'll boom again.

Every single oil boom Texans strut around like their prosperity is due to their being superior Texans.  Every single oil bust Texans piss and moan about the damn Saudis and NYC bankers.

Midwestern farmers don't crow about how smart and ruggedly independent they are when corn and soybean prices are high.  They know damn well that in a couple years they'll be facing lows again.

jcaz's picture

You really think there are any farmers left in the Midwest?   How do you think the prices of corn and beans have grown so much?   Who's being naive now?.....

You need to have a chat with my corporate "farmer" buddy, who hasn't planted half his land for the past 10 years, because that would cause the Government checks to stop arriving in the mail.......

itstippy's picture

I agree; those programs are a disgrace.  Big Ag has destroyed the small independent family farm.  It's sad.

I don't mean to disparage all Texans.  I do not like Houston Oil Men, Wall Street Bankers, Community Organizers, Media Moguls, Political Power Brokers, Rap Music Promoters, Advertising Executives, Big Pharma Administrators, Professional Lobbyists, anyone at Davos, or Justin Beiber.  They rankle me.

cheka's picture

from a texan, square in the middle of this topic....  you are fooled by what you see on nyc media

do some real homework or stay silent

sun tzu's picture

You're a fucking fool. Only the frackers will take it up the ass. You really think Exxon, Halliburter, Baker Hughs, and Chevron will go bankrupt? They survived the 20 year oil bust from the 1980's already. There are still hundreds traditional wells that were drilled decades ago that are still producing. Some of them might be capped, but the landowners don't care. They went through this bust in the 1980's and capped their wells for 20 years. The only ones crying about the Saudis are the Wall St assholes getting reamed. The producers just keep producing. If they run out of money, they go bankrupt and the bankers take it up the ass. Then the producers find some more idiot bankers to borrow money from when oil prices go higher. 

You seem to have a problem with people that actually produce things while defending the parasites in NY and DC that do nothing but steal from others

sun tzu's picture

Good thing the blue states like New York don't take any welfare, unless you count the $5 trillion from the Fed to bail out Wall St.

I find it amusing that the blue states are the ones that are always voting for higher federal taxes and more welfare, then they constantly bitch about higher taxes and welfare. They are a bunch of retards.

cheka's picture

and and and...


just one example -- 30 plus billion for the tiny tropical storm named sandy.  a fraud orgy -- that stole from the whole country

Lord Koos's picture

Unlike the the blue states, the red states take more federal money than they contribute... they are the "takers" that conservatarians like to bitch about.  The bailout being a separate issue...

directaction's picture

Housing prices in Texas haven't slipped all that much ... yet. 

buzzsaw99's picture

property taxes keep real estate prices from going full retard in texas


I just paid my 2015 Texas property taxes.  3.12 acres undeveloped. $267.40. 


I am Jobe's picture

Collegues of mine in Austin seem to think all is well. Maybe they are living the illusion . Give it a few months and then lets watch property taxes increase to fund the roads, schools and never ending bond issues. Gonna hurt badly .