Houston Recovers, Boston Falters

AN assembly of Boston developers and bankers gazes quietly as Houston real estate analyst and broker James A. McAlister displays comparative employment and housing data for the two cities. ``The study of employment is the study of real estate value,'' he says. ``The facts are clear - Boston is in for a severe real estate correction.''

It's widely believed on Wall Street that many of the nation's real estate markets face hard times. Analysts last week cited this prospect as one reason for declining stock prices. In this look at two cities, Boston could be heading for trouble while Houston is clearly coming back.

No one, including Mr. McAlister, says Boston will experience a real estate bust on the scale of Houston. There, by the mid '80s every major bank had gone under. Over 200,000 manufacturing jobs had been lost (partly offset by 100,000 new jobs in finance, government, and services).

An important difference between the two cities is that Houston added 75 million square feet of office space from 1980 to 1984 alone, while Boston has only built 72 million ``since the tea party,'' McAlister says. And Houston's work force is 1.5 million; all of Massachusetts's is only twice that.

Still, McAlister had barely left town when Bank of New England Corp., the region's largest real estate lender, raised its estimate of non-performing loans to $1.6 billion, up $700 million from three months earlier.

The news prompted a chorus of pessimism about New England property prices. Some analysts and industry figures predict that, prodded by uneasy regulators who fiddled and then got burned in Texas, banks will dump foreclosed holdings on the market this spring and drive prices down.

``Bank regulators are behaving as if they are prison guards expecting a riot,'' George J. Fantini Jr. of the Greater Boston Real Estate Board (GBREB) said in a year-end speech here.

Suspecting that Boston real estate was overpriced, McAlister first visited here two years ago in search of investor money. He and his Newton partner, Calianos Company, believed that capital wanting to flee northeastern prices could be guided to land bargains in Houston (see sidebar).

McAlister, who put together The Woodlands, a planned community of 150,000 north of Houston, for Mitchell Energy and Development, formed his own brokerage and research company in 1974. Since then McAlister Company Inc. has entered into real estate partnerships valued in excess of $140 million.

But the crash dried up local funds. He says modern atrium office buildings still go begging at fire sale prices of one-third to one-half of replacement cost.

``There is no money in Houston,'' McAlister says. Out-of-state banks have bought out failing state institutions, breathing new capital into them. But regulators restrict the values that banks place on their portfolios of foreclosures. These among other problems limit the banks' ability to lend.

Yet the city is bouncing back: The Texas Medical Center has begun a $1.5 billion expansion that will double employment on the 540-acre campus to 100,000. Foreclosures are down 42 percent from a year ago. Aerospace is soaring. The housing inventory in the Multiple Listing Service has fallen from a 26-month to a 10-month supply. Much of the South's shrunken oil industry has relocated to Houston.

One hundred thousand jobs have been added in the last 18 months, all without local bank participation to assist in diversification and expansion or to attract new companies.

As for Boston, McAlister's graphs are ominous. Massachusetts lost 40,000 manufacturing jobs this year. Construction employment is starting to follow, propelled by a sharp drop in contract awards. The Help Wanted Index has fallen steeply, indicating a weakening economy.

McAlister theorizes that Boston housing is overpriced in relation to a cost ``pecking order'' among cities established by millions of homes sales over more than two decades (see graph). Boston's median home price shot above San Francisco's for a time.

``The key to whatever happens is job growth,'' McAlister says. He stops short of making dire predictions, but he does expect Boston's median home price to take its old place below San Diego's again, and for Houston's to rise above the national average by 1993.

``We really ought not to talk about Boston and Houston in the same breath,'' argues Ronald R. Dion, president of the 101-year-old R.M. Bradley & Co. Inc., a real estate firm in Boston. He says that Boston's economy is much more broadly based than that of oil patch cities.

Mr. Dion made a bullish speech to the GBREB, stating flatly: ``The downturn is over; the recovery has begun.'' He cited the Central Artery/Third Harbor Tunnel project, which should add 10,500 jobs and $450 million per year to Boston's economy.

Even as he spoke, however, Bank of New England was announcing its bad news. In light of that, Mr. Dion now hedges his pronouncement. ``We just don't know what's in those [bank foreclosure] portfolios. We don't know what will happen if they are dumped onto the market.''

For instance, suburban office space might have a ``trickle-down effect'' on downtown. If that happens, he says, ``we will see a stall in the recovery.''