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It isn't quite the '80s in Houston. But things certainly aren't bad. "The majority of Houston is oil and gas," says Howard Mills, a regional sales director who covers Louisiana, Texas, Oklahoma, and Arkansas for Hanley Wood Market Intelligence (HWMI). "Those people are making money. They don't all have Lear jets, like in the '80s, but they're not hurting."

HIGH-END GAINS: Whether near Houston's downtown and major Interstates or out in master planned communities, high-end homes do well in Space City. Photo: Courtesy Houston Visitors & Convention Bureau Yes, when oil and gas are going well, Houston is going to be doing well. But Space City's reliance on the energy sector isn't what it used to be. New industries, such as medical, education, and professional business services, have muscled their way onto the Houston scene. What does this mean for home builders? A fairly brisk top-end market. But that's not enough to save the lower end from the subprime meltdown that's hurting many of the nation's other cities.

Past Tense

Remember those Lear jets of the 1980s? They went away in 1986. After enjoying stunning growth and profits from the late-1970s to the mid-1980s, Houston fell on hard times when oil supply suddenly opened up.

"Oil prices had been falling through most of 1985, and then plunged roughly 60 percent from November 1985 to July 1986," says Skip Kasdorf, manager of research for the Greater Houston Partnership.

Combine that with a number of homes that were financed with variable rate mortgages and had negative amortization, and you had a market collapse. "A large part of the cause of that crash was the oil industry," says Pamela Minich, owner of Minich Strategic Services, a Houston-based firm that specializes in strategic marketing and market research for developers. "As Houston crawled back to life, local leaders made a concerted effort to diversify the economy."

That's certainly happened. Professional and business services constitute almost 15 percent of Houston jobs, while health care and social assistance represent almost 10 percent. In the past 10 years, the city created 40,000 new jobs a year, according to David Jarvis, a director at Metrostudy, a housing research firm based in Houston. Last year, the city created 90,000 jobs; Jarvis projects another 60,000 to 70,000 more jobs this year.

Health care is a rapidly growing segment. The Texas Medical Center, which has 45 member institutions and 73,600 employees, is based in Houston. "Houston is the largest medical center in the world, and it's still growing," Jarvis says. "Health care and social services produce a tremendous number of good jobs."

The educational system (which is connected with the medical industry) is another huge driver of the local economy. Houston has 40 colleges, universities, and institutes, including the University of Houston, Baylor University, and Rice University. Although these colleges were around in the '80s, they're currently in growth mode.

"They're continuing to grow those institutions," says Joe Zimmerman, the president for KB Home's Houston division. "It's actually robust from the standpoint of growing additional jobs."

Shipping is also a big jobs driver. The Port of Houston is ranked first in the United States in foreign waterborne tonnage, second in the U.S. in total tonnage, and 10th in the world in total tonnage. And, it's expecting even more volume. "They just got through a major expansion of the port," Zimmerman says.

Finally, there's construction. While residential has tailed off, commercial construction remains strong (as evidenced by two high-rises being built downtown). "The commercial sector in Houston is doing great," Minich says. "Any loses in the single-family sector are being offset by what's going on in commercial construction."

Econ 101

WESTERN DESTINATION: One model doing well in KB Home's Westgate Community is the Dartmouth floorplan. Photo: Courtesy KB Home Yes, medicine has grown in Houston. So have shipping, education, and government services. But make no mistake. Oil is still king. ExxonMobil, Shell Group, ConocoPhillips, and British Petroleum Co. all have huge operations in Houston. Technically, oil natural resources and mining (which includes oil) account for only about 3 percent of the city's employment.

"The importance of that 3 percent is dramatic," Kasdorf says. "Both oil and gas extraction and support activities for mining are highly concentrated in Houston. Oil and gas extraction has a location quotient (LQ) of 16.58 and support activities for mining are 7.64. As a rule of thumb, an LQ greater than 1.2 indicates that an industry is exporting from a region, and double-digit LQs are exceedingly rare."

Bart Smith, an economist at the University of Houston, divides the economic base employment into upstream, downstream, and energy-independent. Upstream includes exploration and production, pipeline transportation, and the manufacture and wholesaling of oilfield equipment. He believes upstream energy accounts for 227,300 economic base jobs, 9.1 percent of the city's total jobs. "When you look at Houston, you have a pretty strong oil and gas market that's supported by ancillary businesses–the engineering companies and pipe companies and everything that services that business," Zimmerman says.

The good news for Houston is that these jobs produce lots of income. "Mining and natural resources is by far the most highly compensated industry in Houston," Kasdorf says. "That employment in mining and natural resources grew 10 percent over the most recent 12 months means it's contributing disproportionately to Houston's economic health."

The question is: Will it continue? As Halliburton moves its headquarters overseas to Dubai, there's some concern oil companies will see a loss in energy-related jobs. However, with the oil infrastructure in the city and the amount of knowledge that's not a huge concern. "In terms of worldwide demand, unless someone can point to real changes in geopolitical and world demand, I don't see a change," Jarvis says. "I don't know if I could find anyone that would be too worried about those issues at this time."

Learn more about markets featured in this article: Houston, TX.