The 2018 economic outlook for the Houston area looks good, according to Ted Jones, senior vice president and chief economist of Stewart Title Guaranty, and Robert Dietz, chief economist for the National Association of Home Builders.

Jones and Dietz served as panelists for the Greater Houston Builders Association’s annual Economic Forecast Luncheon on Wednesday, where they discussed Hurricane Harvey’s effect on home sales, how the Greater Houston area compares to the U.S. in home sales and the federal tax reform’s anticipated effect on the region.

“We think the tax reform bill will be extremely good for the economy,” Dietz said. “We marked up our GDP (gross domestic product) forecast for 2018 to 2.6 percent rate because of tax cuts. We think business investment is going to get higher over the next 10 years, and that’s good because it encourages economic growth.”

Here are five takeaways from the 2018 GHBA Economic Forecast Luncheon:
1. Federal tax reform’s mortgage interest deduction cap impacts small percentage of Houstonians

On Dec. 22, President Donald Trump signed the Tax Cuts and Jobs Act (H.R. 1) into law. Economists anticipate the tax reform will have a positive effect on the overall economy and on homebuilders, Jones said.

A specific portion of the tax code affecting Houston-area residents is the reduction of the mortgage interest deduction cap from $1 million to $750,000. However, Jones said, the cap is only expected to affect 2.75 percent of the population in the Greater Houston area.
2. Residential, commercial real estate sales in Greater Houston area increased

Within the Houston-The Woodlands-Sugar Land metropolitan statistical area, also known as the Greater Houston area, residential and commercial real estate sales increased between 2016 and 2017, Jones said. There was a 2.4 percent increase between 2016-17 in single-family home sales located in Fort Bend, Galveston, Harris and Montgomery counties, Jones said.

Additionally, the Greater Houston area's commercial real estate sales revenue increased by 46 percent year-over-year, while the U.S. commercial sales declined 6.7 percent year-over-year, Jones said.
3. New job creation high in Greater Houston area, despite jobs lost from Hurricane Harvey

Immediately following a natural disaster like Hurricane Harvey, Jones said there is understandably a large economic effect—often in loss of jobs and decreased home sales. However, within six to 12 months, regions typically experience an economic upturn on job growth and home sales.

The same was proved in the aftermath of Hurricane Harvey. Although statistics from the Bureau of Labor Statistics showed 27,500 jobs were lost in August and September due to the storm, 45,500 net new jobs were still created in the Greater Houston area in the last 12 months, Jones said.
4. Recession probability low for 2018

Economists also expect a 2.6 percent GDP growth in 2018 post-tax reform.

“We have no recession predicted over the next two years, and if that forecast is true, this will be the longest growth cycle in American economic history," Dietz said. "It’s not the 3 percent growth we’d like to see, but we will take modest, ongoing growth to keep the cycle moving. In that sense, [the tax reform] probably gave this growth cycle some additional legs.”

While the probability of the U.S. experiencing a recession in the next 12-18 months is low, sitting at 10.9 percent, Dietz said the probability of a recession is anticipated to increase.

"The probability [of a recession] is going up, and the reason for that is we are on the back end of a growth cycle, so interest rates are going up—the tenure treasury is at 2.7 percent—so the probability of a recession is rising," Dietz said. "I would say over the next four or five years, recession is more likely than not.”
5. National housing affordability declining

According to the quarterly index from NAHB and Wells Fargo Housing Opportunity, national housing cost affordability peaked in 2012 at 77.5 percent, meaning 77.5 percent of new and existing homes on the market were affordable for the average American family.

However, the housing affordability rate in 2017 declined to 58.3 percent due to rising home costs caused by a scarcity of single-family homes, Dietz said. The scarcity of single-family homes is due in part to an elevated number of unfilled construction jobs, he said.

“Those home price gains are having an impact on that potential entry-level, first-time homebuyer,” Dietz said. “[We need to consider] whatever we can do from a policy perspective, including lowering impact fees, lowering regulatory costs, things that are going to be able to help that first-time homebuyer get into the market even as prices go up.”