Lately there has been more discussion about housing affordability in Texas. For a number of years, entry level housing in Texas was in the $150,000 range, truly affordable compared to the rest of the nation, where entry level was 2 to 3 times more expensive. Housing has gotten more expensive over the last five years in Texas. That is a good thing. Texas has been blessed for a number of years by cheap land, cost of living, labor, and materials. That was evident by the amount of entry level housing available in Texas during the national housing boom and into the recession.
This price point has been a regular staple of the Texas housing supply for decades. However, due to supply and demand, this price point in new and resale has evaporated over the past few years. This staple of our ‘affordable’ housing is harder to find in new homes primarily because of an increase in hard costs and the limited supply of developed lots. Many in the industry (including me) have always felt this portion of the market has been one of the most important economic factors in housing for decades by creating opportunities for those families with moderate incomes to purchase a home and begin building equity.
Any market is subject to the demands of supply and demand. Nowhere is that more important than in a healthy real estate market. Home values may seem to have changed overnight. Look at the last 5-10 years and you will see that it is not the case. Most of our metros were in the low single digits in appreciation over that time. Yes 2013 was a great year, but it was an ‘outlier’ year that doesn’t come along often. Average the appreciation rate over seven years (the average time families live in one house) and you see 3 to 4% appreciation annually. The point is appreciation has not been excessive in this region.
The good news is that in 2014 Texas will remain strong due to great job growth and limited inventory. New home inventory will continue to be challenged for the remainder of the year. Why? Residential developments take 6 months to a year to conceive and bring to most Texas metro markets, with Austin taking a bit longer. Over the last five years little to no development has started due to the economy and reluctance of lenders. Over that period, with little to no development, values were stable, which is not natural in a normal economic cycle. For lack of a better term, we hit the pause button. That has all changed with job creation in this region and increased demand.
Low lot availability in this state was a good thing as lenders cleaned up their losses and restructured and realigned to the strengths of the changing market regionally. It would be easy to point to builders, developers, and equity for the increase in land and lot pricing, and the municipalities that continue to increase fees, delay permit approvals, etc. However, they are not the culprit. A strong economy is. In the last 10 years in just Austin, rents have escalated almost 60%, residential home appreciation 38%, wages 10%. This is a snap shot of the economy. Shelter costs and other living costs have continued to increase while wages have stayed stagnant.
Let’s look at median home prices here in Texas:
Austin – $244,300
Dallas – $212,400
Houston – $198,600
San Antonio – $182,000
Fort Worth – $143,500
How about those out of states markets that during this recession saw little to no depreciation?
San Francisco – $971,600
Seattle – $465,300
Boston – $359,400
How about those areas that saw double digit appreciation during the bubble, then depreciation?
Los Angeles – $520,500
Phoenix – $165,300
Chicago – $181,600
Orlando – $161,300
So why are people moving here?
The answer, of course, is that it depends. Many corporations big and small have reported that the moves have been based on Texas’s low cost of living compared to other metro environments, a favorable tax environment that includes zero state income tax, and solid quality of life ratings. The state’s relaxed regulatory environment, including primarily employer-friendly labor laws and its restrictions on business liability also get some credit.
The biggest factor is obviously job creation. Not only has Texas created jobs at a stunning rate, it has also created lots of quality well paying jobs. Indeed, the rest of the nation has looked to the Lone Star State as a model for dynamic growth, as a close look at employment data shows.
The first thing to point out is that Texan job creation has far outpaced the national average. The number of jobs in Texas has grown by a truly impressive 31.5 percent since 1995, compared with just 12 percent nationwide, according to Bureau of Labor Statistics data. Texas has also lapped California, an important economic rival and the only state with a larger population. The Texas employment situation after the financial crisis and recession was far from spectacular, of course, with the number of jobs growing just 2.4 percent from 2009 through 2011. But that was still six times the anemic 0.4 percent growth rate of the overall American economy.
Bureau of Labor Statistics data shows that many of the Texas jobs created over the last 5 to 7 years have paid well. Indeed, Texas did comparatively better than the rest of the United States from 2002 through 2011. For industries paying over 150 percent of the average American wage, Texas could claim 216,000 extra jobs; the rest of the country added 495,000. In other words, the Lone Star State, with 8 percent of the U.S. population, created nearly a third of the country’s highest-paying positions. Texas also added 49,000 positions paying 125 percent to 150 percent of the U.S. average; the rest of the country lost 174,000 jobs in that category. Two sectors in which Texas employment did particularly well during the same period were energy and its related fields, in fact, the state gained 80 percent of all new jobs in the country in that field, and professional, scientific, and technical positions. As happens whenever an economy grows, Texas also added hundreds of thousands of positions in food services and other lower-paid fields. Texas did lose 10,000 construction jobs, but that was a modest downturn, in light of the massive national slowdown in building caused by the crisis of 2008.
This employment growth in Texas has people moving to its cities in droves. In 2011, Houston surpassed Philadelphia in population and became the country’s fifth-biggest metropolitan region, with 6.1 million people. Dallas–Fort Worth, with 6.5 million, was already the country’s fourth-biggest. The two cities trail only New York City, Los Angeles, and Chicago, marking the first time that a single state has had two metros in the country’s top five since the Census Bureau began designating these areas a century ago.
But many small business owners will tell you that the business friendly environment means that they don’t have to deal with new regulation every year. As one 4th generation Californian business owner said to me, “I don’t have a target on my chest every year as in my previous municipality”’ Business leader after business leader have said the same when we talk to them.
This pro-business climate has unquestionably been a substantial advantage. In its annual ranking of business environments, Chief Executive has named Texas the most growth-friendly state for eight years in a row (California has been last for the same eight years). The reasons included low taxes and sensible regulations, a high-quality workforce (Texas ranked second only to Utah in that category in 2012), and a pleasant living environment (an eighth-place finish, slightly below sixth-place Florida but, perhaps surprisingly, far better than 28th-place California).
More than three quarters of the cost of living difference between Texas and California can be explained by housing costs. Texas mostly dodged the real-estate bubble of the 2000s: the affordability of houses in large metro areas spiked in America as a whole but rose only modestly in Texas. A major reason that Texas real estate is so affordable is that the state lacks the land-use restrictions that drive California and other states housing prices up. Texas banking laws and memories of the crash of the late 80’s also helped curb real estate enthusiasm.
So, we started questioning the cost and the ability to have affordable housing. This analyst would argue that what many other states consider affordable housing attracts both people and businesses to Texas. Since 2000, 1 million more people have moved to Texas from other states than have left.
If there is a concern, the regulations of municipalities continue to drive up costs of developing and building. Yet these same municipalities are high on the concern list of affordable housing. Hard costs aren’t going to go down in a recovering economy. If you want to help with affordable housing, then perhaps the economic impact of regulation by governing authorities should be looked at.
All this said, if you are thinking of moving to one of our Texas metros, I think you are in for a pleasant surprise. Not just in housing costs, but across the board. Most will find that housing costs in the Texas region are affordable compared to where they are moving from. We Texans need to get used to the higher costs.