It’s easy to take for granted that we live in a great city with a healthy economy. However, going to another city can make you realize the rest of the country still has a ways to go. I was in Denver this last weekend and although they are one of the top growth areas in the US, there was still a lot of empty store fronts and signs that the economy has not fully recovered. Denver’s unemployment rate is 7.2%, even with 40,000+ jobs created this year. What is different?
Over the last year we have covered and promoted the success of the Texas economy and its effects on home sales and real estate in the local metros. It can be easy to forget that the rest of the country has not fully recovered and only seven states are at prerecession employment numbers. Overall, the national economy is improving, but we are a long ways from normal.
When we review the numbers for housing we look at four key national housing indicators: construction starts (source: Census Bureau), existing home sales (National Association of Realtors), mortgage delinquency (Lender Processing Services First Look) and foreclosure rates (RealtyTrac). For each indicator, we are comparing this month’s national data to how bad the numbers got at the height of the meltdown, and their pre-recession levels.
In July 2013, all three measures improved: construction starts and existing home sales rose, while the delinquency/foreclosure rate notched downward.
Construction starts have increased but still have a long way to go. Starts were at a 923,000 seasonally adjusted annualized rate – up 2.7% increase from June but slightly below the average rate from the first six months of 2013. Year to date, single-family and multi-family starts rose 20% and 33%, respectively, above last year’s levels. Construction starts are 41% of the way back to prerecession normal. The need to get back to the normal is paramount, as new home construction is a huge driver of economic growth.
Existing home sales nationwide slipped after reaching their second-highest level in six years in June. Sales in July were a seasonally adjusted annualized rate of 5.39 million – that’s up 17% year-over-year, and up 31% year-over-year when foreclosures and short sales are excluded. For the sixth straight month, inventory expanded, even after taking seasonality into account. Overall, existing home sales are 94% back to normal. Sales of new single-family homes is another story and potentially a greater impact. Sales dropped 13.4 percent to an annual rate of 394,000 units (at the top of the market, it was close to 1.9 million), this is the lowest level in nine months, casting some concern over the country’s housing recovery. There could be a couple of reasons for this.
First, the number of vacant developed lots (VDL) is nonexistent in most of the major metros, particularly in those areas that have good job creation as evidenced by the chart below (source: Metrostudy).
Quality developed lots will continue to be a challenge in most of the top markets nationally.
A normal level in that market is closer to 30-36 months. Those markets with high development hurdles (longer entitlement process; San Diego, suburban Maryland, Austin, Northern California) will continue to be tight on lots for at least another 3+ years.
The Texas markets figure prominently on this list. Texas has led the way throughout this recovery, with consistently strong demand. Texas didn’t have a bubble in the same way that Arizona and Florida had a bubble, so that state’s housing market didn’t have as much inventory overhang to start out with putting pressure on development of new lots.
Second, entry level home buyers have less share of the market due to harsher lending standards as well as rising interest rates which has caused their numbers to fall to less than 28% of the market, when it traditionally has been closer to 40%. That is close to 2500+ more home sales in markets like Austin and SA.
Foreclosures and delinquency rates have continued to fall. The share of mortgages nationally that are in delinquency or foreclosure continue to drop. In July , 9.23% of the national market was troubled residential real estate. This is the second lowest level in the last 5 years. If you look at the combined delinquency and foreclosure rates the market is 64% back to pre recession numbers, compared to just 36% one year ago.
So what factors differentiate Central Texas from the rest of the country?
First, job creation in Texas has far outpaced the national average. The number of jobs in Texas has grown by an impressive 31.5% since 1995, compared with 12% nationwide, according to Bureau of Labor Statistics data. Texas has also had more job creation than California, an important economic rival and the only state with a larger population. The Texas employment situation after the financial crisis was far less 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.
Included in that job creation is the number of small companies that are started. California, New York, and Texas are the usual front runners. One tracking data base is the National Establishment Time-Series (NETS) Database, which provides detailed information on job creation and loss for firms headquartered in each state. NETS data is divided into two periods—the first from 1995 to 2002, the second from 2002 to 2009. During the 2002–09 period, small businesses of fewer than ten employees were the Texas employment engine, adding nearly 800,000 new jobs; of those, about three-quarters were in firms with two to nine employees. Also since last November, and the passing of Tax Proposition 30 in California, which was aimed indirectly at successful smaller businesses in that state, the state has seen a dramatic increase in the number of inquiries that want to move to a state whose historic embracement of job creation and corporate expansion is well known. There is a reason why there are more Fortune 500 companies headquarters in Texas than any other state.
One critique of Texas is that jobs created in Texas are low-skill, low wage jobs. In reality Texas has done comparatively well. Of the industries paying over 150% of the average American wage (like oil and tech) Texas has added 216,000+ extra jobs; the rest of the country added 495,000. Another way to look at it is Texas, 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 natural resource extraction (in fact, the state gained 80 percent of all new jobs in the country in that field) and professional, scientific, and technical positions. Both job categories boast average wages far higher than the national overall average. As happens whenever an economy grows, Texas also added hundreds of thousands of positions in food services, health care, and other lower-paid fields, in addition to the more lucrative jobs. 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.
Realize that most states have only have one or two large metros that are creating jobs and attracting residents. Texas really has four: Dallas / Ft Worth, Houston, San Antonio and Austin. 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. Meanwhile, of all metropolitan areas in the country with more than 1 million residents, the fastest-growing from 2010 to 2011 was Austin. And all of these are conservatively projected to double in size the next twenty years.
Austin’s strong performance from the information-technology sector and government-related work (the city is Texas’s state capital) helped propel it to a 15.3 percent growth from 2002 through 2009. The number of jobs in McAllen, which benefits from increased trade with Mexico under the North American Free Trade Agreement, grew 3.7 percent. Job growth in economically diverse Houston has matched or exceeded the state rate since 1995. The Eagle Ford shale phenomena had a $61 billion impact in 2012 and supported 116,000 jobs across a 20-county swath of South Texas – a once sleepy high unemployment region increasingly newly defined by an oil and gas boom. The job creation helped keep the state moving forward in almost all categories, leading the nation in job creation.
The strength of the Texas economy, which has outperformed the rest of the country not only over the last 20 years, but during the Great Recession, has been led by a pro-business climate which has unquestionably been a substantial advantage in the expansion of American and international businesses. 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).
Texas’s low cost of living in all likelihood has also been a major attraction, particularly to the Millennial Generation who are priced out of other major markets. In 2011, the U.S. Bureau of Economic Analysis put Texas’s “regional price parity,” (a measurement of the price level of goods in an area), at 97.1, a bit lower than the national level of 100 and far lower than the California level of 114.8. Adjusted for cost of living, Texas’s per-capita income is higher than California’s and nearly as high as New York’s. Factor in state and local taxes, and Texas pulls ahead of the majority of states.
When you compare to our major state competition, California, more than three-quarters of the cost-of-living difference can be explained by housing costs. As most of us know, Texas 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 up California housing prices . The affordable housing attracts both people and businesses. Since 2000, 1 million more people have moved to Texas from other states than have left.
When other states begin to look at what economic model has had success, Texas needs to be at the top of their list. If you look at the national market, and take all needs into consideration, I would suggest that Texas is poised for further growth.