Economic outlook positive for 2015

The strength of the Lone Star State’s economy has led our national economy through the general gloom of the slowest national economic recovery in modern history. Now, with the price of West Texas Intermediate (WTI) crude oil hovering around $45/barrel, and unleaded gasoline selling for as little as $1.89 a gallon, some worry that the energy dependent Texas economy will lapse into recession. Texas has diversified its economy significantly in the last twenty years, but energy is still king. So when oil prices plunge, it has a ripple effect on the state’s economy.

Texas is America’s second most populous state and the world’s 14th largest economy with a GPD of about $1.5 trillion, representing about one tenth of our national output. Since 2009, the Texas GDP has grown 4.4% per year, about twice the national average. In the same time, Texas has been creating approximately one out of every fou new jobs in the nation. A lot of this energy growth is because of the development of fracking to a level where Texas produces more than one-third of the nation’s oil and has seen its oil production double in three years.

This past year, Texas outpaced U.S. economic growth and led the nation in job growth, setting a state record with 421,900 jobs added for the 12 months through October. In 2015, economists expect Texas’s economic and job growth to slow slightly because of lower oil prices, labor shortages in certain industries, and weaker exports. The Federal Reserve Bank of Dallas expects the Texas economy to grow 3.5% in 2015, down from an estimated 4.5% this year. It expects the state’s employment growth to be 2.5 to 3% percent in 2015 vs. 3.5% in 2014.

With the fall in oil prices, which have plunged nearly 47 percent since last June, there have been concerns about the health of the Texas economy. Texas oil production, which has more than doubled in the last three years, drives much of the state’s economic growth — about 12 percent. And while energy accounts for less than 3 percent of Texas employment, energy employment jumped 11 percent for the 12 months through October, more than any other industry.

Lower oil prices can be a double-edged sword for the economy. A price drop generally benefits the U.S. economy: consumers save money on gas and home heating bills, consumer spending rises, and some businesses benefit from lower transportation and shipping costs. But capital investments could suffer, causing a trickle-down effect on other businesses.

Falling crude oil prices will cost Texas 50,000 to 125,000 jobs by the end of 2015, according to the Dallas Fed. Texas produces 36% of the crude oil in the United States, so Texas will be harder hit than other states. The states of North Dakota, Oklahoma and Louisiana also would be hit hard.

In Texas, it’s unlikely that low oil prices will cause a crisis as they did in the late 1980s, because the state’s economy has diversified so much since then. Still, some fear that a prolonged downturn will hurt energy companies and could spread to other businesses such as real estate, restaurants, and retail that have benefited from the increased energy hiring.

The big question is what oil prices will do in 2015. Oil prices are unsustainably low right now – many high-cost oil producers and oil-producing regions are currently operating in the red. That may work in the short-term, but over the medium and long-term, companies will be forced out of the market, precipitating a price rise. The big question is when they will rise, and by how much.

In the waning days of 2014, the U.S. consumed gasoline at the highest daily rate since 2007. Low prices could spark higher demand, which in turn could send oil prices back up. That said, our large metros have seen little slowdown in demand. Businesses are still cautious, but trying to keep up with demand. Low unemployment and improving wages in Texas are a great example of this. Texas has a broad based economy, but the potential loss of 125,000 jobs this year will have a dampening effect on the regional economy.

For those of us of a certain vintage (Baby Boomers), these are not numbers to brag about. Most of us of that vintage remember the boom and bust cycles of the energy industry. The oil depression era of the late 80’s and early 90’s still brings painful memories when oil brought many industries to their knees and buried one arm of the financial industry. The damage in Texas was immense. In those years, more than 700 banks failed, the savings and loan industry went away, nine out of the top ten national builders went away, and most real estate was worth ten cents on the dollar. In Houston alone there was over 88 million square feet of speculative office space and 400,000+ new homes sitting. The result was economically catastrophic in the region with widespread joblessness, empty buildings of all types, and life changing events for many families.

The Texas economic engine is likely to move at a slower speed in 2015, even as the U.S. economy picks up steam. But it still will be one of the leading states for job formation. Why?

First, Texas today has a high level of intellectual capital. The state’s strong annual employment growth over the last few years is because of the jobs added to professional categories, from architects to technology, from banking to health. Whether it is the numerous startups that become global in Austin, or the undisputed capital of energy Houston, the expertise founded here has worldwide economic effects.

Because of that, Texas currently gains more out-of-state residents than any other state and is a leader in home sales from international buyers. National census reports showed that that more than 584,000 people moved to Texas from out of state in 2013. This is more than any other state. This has lead to growth driven by strong demand for Texas real estate, not speculation. The demand is being driven by the thousands of people who move to the Lone Star State for new jobs or the opportunity to start a business. Job growth in almost all economic channels is apparent, even with the slowing of oil hiring.

Secondly, Texas continues to be one of the top states in median household income growth and new home sales, with the median household income of Texas homebuyers increasing 5.9% year-over-year to $97,500, the 2015 Texas Homebuyers and Sellers Report said. This is more than four times the increase in median household income among homebuyers nationally, which rose 1.4% to $84,500 during the same time frame. Additionally, 28% of Texas homes purchased between July 2013 and June 2014 were new homes, a 1% decrease from the previous time period, yet still nearly double the share of new homes among U.S. home sales during the same time period. Nationally, the share of new home sales remained constant at 16% of all U.S. home purchases

Thirdly, Texas banks and their bankers burned by the freewheeling days of the 80’s are downright conservative and state lending rules reflect those concerns. Home equity as well as development loans are considered harsher in the Texas lending environment than most states.

Texas still struggles in some areas due to increased restrictions in lending standards and rising home prices in certain local markets, which stifles the growth of first-time homebuyers in Texas. The percentage of first-time homebuyers in Texas decreased 4% to 29% of all Texas homebuyers between July 2013 and June 2014. Nationally, the percentage of first-time homebuyers decreased 5% to 33% of all U.S. homebuyers during the same time frame.

Lastly, Texas would be a strong economic leader even without energy. The state continues to thrive because it keeps a tight rein on the size of government, emphasizing smart regulation with a minimum of red tape. This is why so many companies like Occidental, Toyota, and Exxon have located in Texas. Low taxes and cost of living are a welcome relief to the costs of other strong job creation states.
Sure, the world price of oil effects Texas. That is why so many of us follow daily the cost of WTI barrel. But everything else considered, the business friendly public policies and job creation should continue to allow 2015-16 to be great years for our Texas economy.

Low oil prices and the Texas economy

For the last few weeks there has been great interest in the decline in oil prices. I wanted to address the many questions I have received about how this will impact the Texas economy. I am not an expert on oil futures, but living in Texas for the last half century has given me a healthy respect for its economic impact.

In recent years, America’s energy boom has added $300–$400 billion annually to the nation’s economy – without this contribution, our national GDP growth would have been negative and the nation would have continued to be in a recession.

GDP Annual Growth Rate in the United States averaged 3.24 percent from 1948 until 2014, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -4.10 percent in the second quarter of 2009. The United States has the world’s largest economy, and greatly influences the global economy. In the last two decades, like in the case of many other developed nations, the US GDP growth rates have been declining. In the 50’s and 60’s the average growth rate was above 4 percent, and in the 70’s and 80’s it dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent, and since the second quarter of 2000 has never reached the 5 percent level until late last year. So the energy industry improvement has had a sizable long term economic impact on the nation and subsequently the world.

America’s energy (fracking) revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses (the majority with headquarters in Texas and North Dakota), not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people. Many of us don’t think of the oil business as the place where small businesses are created, but for those of us who have been around the oil patch, we all know that it is. That tendency is becoming even more pronounced as the drilling process becomes more complicated and the need for specialists keeps rising.

Fracking, or the shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs throughout the economy, from construction to services to information technology. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry. Oil & gas jobs are widely geographically dispersed and have had a significant impact in more than a dozen states.

Oil is off its high of $112/barrel in June of this year. Today, WTI crude oil opened at just $48/barrel. According to the Texas A&M Real Estate Center, as well as University of Texas, economists, oil under $70/barrel begins to affect profitability in the Eagle Ford Shale region in South Texas.

The Texas Railroad Commission is definitely seeing a slowdown in activity as the price of crude oil nosedives. Late in 2014, the state agency issued 1,508 original permits to drill compared to 3,046 permits in October. The slowdown in new permits is a precursor to layoffs to come. The Dallas Federal Reserve currently projects that Texas could lose up to 125,000 jobs related to the falling price of oil by mid 2015.

Global players

Let’s start by looking at the ‘breakeven’ oil price for the world’s drilling projects. This is the level at which the price of oil covers the cost of extracting the oil.

A simpler way to look at when the biggest oil players will start feeling the squeeze from lower prices is the “cash cost.”

Without OPEC action, an outage, or other response, cash cost is the only true floor. Cash cost is basically what it takes to keep oil production going, not what it takes to make oil production profitable or for a government to hit its budget projection. If you drop below your cash cost on a project, you’ve got to turn out the lights.

Below is a chart from Morgan Stanley analysts of operating costs with and without royalty effects currently.


As you can see on the far right, the Canadian oil sands and the US shale basins are very expensive to tap. Meanwhile in the Middle East, producers basically stick a straw in the ground, and oil comes out.
It’s worth mentioning that oil values can change faster than the fundamentals of supply and demand. In a recent 30-day period the price of oil fell by 20 percent. There was no change in the demand or supply over that month to justify such a large change. What happened is that commodity traders look at expected future prices, based on long-term supply and long-term demand. When the traders’ expectations change, they buy or sell and the price changes.

The fundamentals of supply and demand are straightforward. Demand moves up or down as the global economy moves up or down, but with a pronounced trend toward less energy use per dollar of economic production.

Economists and analysts have been slowly lowering their projections for global economic growth in the coming years, triggering lower expectations for oil demand, triggering lower values (OPEC leaders have also shown reluctance to keep values high).

Very few of these OPEC’s members interests were served by the OPEC decision not to limit production and let the price of oil continue to drop. For example:

• Iran and Iraq are reportedly pleading with Saudi Arabia to stabilize the price and have cut back on their government budgets
• Venezuela, which is basically funded by oil production, is so broke that parts of Caracas are having blackouts.
• Libya has not regained any traction and needs oil to stay high (for this, continued civil war, and many other reasons)
• There’s a huge threat of civil unrest in Nigeria during the upcoming national elections, heightened by falling oil prices. Meanwhile, the Saudis are sitting back, letting prices fall, and trying to starve out American producers — because they can. That said, it does seem that smaller Gulf states like Kuwait and the UAE are on board with this plan.

As you can see there is very little solidarity on where OPEC values should be from the OPEC members. Many of the counties mentioned are not only in economic and political turmoil.

Presently the strongest OPEC member, Saudi Arabia, is trying to reduce US production, particularly as the world moves toward emissions caps and more energy-efficient technologies. But long-term strategy is a luxury of those who can afford the losses.

Oil could go lower. In my lifetime I have seen it hit $10/barrel from a high of $85 in the same year. But keeping it low will crush many of the world’s economies, including Russia. It is hard to tell how long the Saudis want a free market.

Oil price weakness is a function of excess supply, rather than a problem with demand (recession, for example). It is true that much of the developed world is struggling with growth, and the emerging economy’s growth profile is contracting. But global GDP is still growing, and demand for oil is still rising – just not as rapidly as supply.

Regional impacts

How does this affect Texas? The good news is that our state and metro economies are not as single industry based on oil as they were in the late 80’s. Houston, the energy capital of the world, has energy as 20-25% of their total GDP, compared to over 40% in the late 80’s. D/FW is not strongly energy based, so the effect will be minimal presently. San Antonio will have greater exposure, due to their good luck of being close to Eagle Ford shale. Austin will see some impact because of our state and university funds coming from oil.

Texas had tremendous growth from 2010 to 2012, but this ‘mini oil boom” has definitively ended. In the short to intermediate term, the Texas oil patch is more about making the most productive use of existing assets than finding new ones.

If oil stays below $50/barrel long term, it will affect regional banks lending as they call oil loans to protect their cash reserves, which in turn affects all the other outstanding regional loans. So oil prices staying below $60-70/barrel will have a negative effect on our economy, including real estate. The Dallas Federal Reserve estimates if oil stays below $60/barrel the state could lose 125,000 jobs. Texas produces 36 percent of the crude oil in the United States so Texas will be harder hit than other states.

Impact on real estate

Metrostudy’s Scott Davis wrote on the Houston housing blog earlier this year that, “…there is a “sweet spot” between $55 and $90/bbl that produces the highest demand for housing in the Houston market. Above $90 it appears that high energy prices dampen demand for housing because of the squeeze on consumer budgets for housing and, in a market the size of Houston, transportation. Below $55 it appears that demand is lessened because of weaker job growth.”

The chart below came from a research report published earlier this year by the Manhattan Institute, entitled “The Power and Growth Initiative Report”. The author Mark Mills highlighted the importance of oil in employment growth:


The important takeaway is that, without new energy production, post-recession US growth would have looked more like Europe’s – much weaker, to say the least. Job growth would have barely budged over the last five years.

Further, energy is not just a Texas and North Dakota play. The benefits have been widespread throughout the country. “For every person working directly in the oil and gas ecosystem, three are employed in related businesses,” says the report.

The next chart is from the Dallas Federal Reserve, and it’s fascinating. It shows total payroll employment in each of the 12 Federal Reserve districts. No surprise, Texas (the Dallas Fed district) shows the largest growth (there are around 1.8 million oil-related jobs in Texas, according to the Manhattan Institute). Next largest is the Minneapolis Fed district, which includes North Dakota and the Bakken oil play. Note in the chart below that four districts have not gotten back to where they were in 2007, and another four have seen very little growth even after eight years.


New oil well permits collapsed 40% in November. Since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs. As stated earlier, the decline will have a dampening effect on the regional and national economy if values stay depressed long term. Low oil prices aren’t good for everyone.

Realize that although oil and energy have played a large part in economic growth, thanks to booms in the Eagle Ford Shale and the Permian Basin, oil production in Texas has soared to more than 3 million barrels per day. Energy has accounted for 11.9 percent of Texas’ nongovernment gross domestic product in 2012, according to the Federal Bureau of Economic Analysis. In numbers the state could lose an estimated 212,000 jobs and $13.5 billion in total earnings. In turn, the Austin metro area could see a loss of 4,200 jobs and $210 million in earnings.

Currently the oil and gas sector, which includes a dozen related industries, accounts for over 400,000+ jobs throughout Texas, about 3.2 percent of jobs statewide. The core oil and gas extraction industry on its own accounted for 111,422 jobs, about 0.9 percent of Texas payrolls.

Positive effects of the decline

The strength of the Texas housing market could be helped by the decline in energy employment. This decline in energy employment could be shifted to the construction industry, reducing the cost of labor, one of the housing market’s key constraints.
In addition, lower gas prices help favor the more remote markets in our metros, opening up lower land costs and encouraging development in the most underserved portion of our regional housing market, entry level homes under $250k.

The real test of the resilience in Texas will come when/if economic indicators go from stable to declining or from sustained out-performance to sustained under-performance relative to the rest of the U.S. However, there is no reason to believe yet that such a decline is either imminent or inevitable as a result of declines in the oil patch. The oil-rig count has already begun to drop as previously mentioned, and it will continue to drop as long as oil stays below $60. That said, however, there is the real possibility that oil production in the United States will actually rise in 2015 because of projects already in the works. If you have already spent (or committed to spend) 30 or 40% of the cost of a well, you’re probably going to go ahead and finish that well. There’s enough work in the pipeline that drilling and production are not going to fall off a cliff next quarter. But by the close of 2015 we could see a significant reduction in drilling.

Employment associated with energy production should fall over the course of next year. It’s not all bad news, though. Employment that benefits from lower energy prices is likely to remain stable or even rise. Think chemical or manufacturing companies that use natural gas as an input as an example. In addition the lower energy costs and potential softness in office will allow more out of state companies to compete.

However, there really aren’t any industries that could replace the jobs and GDP growth that the energy industry has recently created. Certainly, reduced production is going to impact capital expenditures. This all leads me to think that the US economy will be slower in 2015.

One last thought

A decline in the price of gasoline induces people to drive more and not be as energy efficient, increasing the demand for oil.

A decline in the price of oil negatively impacts the economics of drilling, reducing additions to supply.

A decline in the price of oil causes producers to cut production, quit exploring new ways to drill, and will ultimately leave oil in the ground to be sold later at higher prices.

In other words, lower oil prices — in and of themselves — eventually make for higher oil prices.

What factors are important when looking at real estate?

If being in the real estate industry was easy, well, then everyone would be doing it.

However, the truth is that no matter how wise or smart you are, no matter how many connections you make, no matter how hard you work, no matter how much you read and learn, there are certain factors you simply can’t control when it comes to the real estate market. Here are some things to consider when evaluating real estate, whether it is buying a home or an investment.

When selling a home, or investment real estate, there are many factors which affect market value and the eventual sale price of a home, such as location, condition, size, amenities, features, improvements and upgrades, local economic conditions, the current real estate market and mortgage interest rates, among others. Some of these factors are within the control of the owner, and others are beyond the control of the owner. Real estate ownership has been blessed with appreciation in values, but that appreciation is not always in a straight line. Real estate values are not static. Over the long term, an investment in real estate is generally considered the most valuable type of investment, one with the best financial returns.

Reality check

All owners would like to get the price they feel they should get for their home when they choose to sell. The reality is their home is worth what a buyer is willing to pay. First remember economics 101 – supply and demand. Lower supply greater demand than higher value. If supply outstrips demand, values drop appropriately. Most of Texas is in a seller’s market, where demand is outstripping supply. Also, remember a buyer will not pay more for a home than what they would have to pay for another home with similar features and amenities in a similar location, something called the “Principle of Substitution”. Put simply, what else is on the market that is similar to this price?

The price paid for a home one year ago, three years ago, five or ten years ago has nothing to do with what the home is worth today. Real estate values exist at a fixed point in time. A home may have been purchased for $300,000 three years ago, and may be worth $315,000 today. Someone else may have bought a substantially similar home for $250,000 five years ago and it is worth $315,000 today. That is a drastic difference in equity in a relatively short period of time. You cannot take the annual appreciation of one year and plan to use it as a constant portion of the equation. Real estate fluctuates in value almost every year, usually on the positive side. One year it can be less than 1% another, the following year 12%, all depending on supply and demand. That appreciation is not always in a straight line.

As stated before, all real estate is local, therefore values appreciate differently within the same local. A sale in one part of a city has little to no effect on properties in other portions of the city. The good news is that for most real estate is the one asset that maintains and appreciates in value in the long term. While it is true that that the condition of a home has a definite affect on its market value, and that a well maintained home will sell for more than a home in need of updating and repair, the actual cost of making repairs and improvements may not be equal to the increase in market value. Why? Cost does not necessarily equal value in real estate. Repairs and improvements are two different things.

Depending on the market conditions when the home was purchased, some owners were fortunate and purchased their home in a buyer’s market before the increases in real estate values like we witnessed after the tech crash between 2001 and early 2006. Others may have bought at the end of a strong real market and were forced to pay top dollar in a highly competitive sellers market, as many owners in other parts of the country are experiencing now who purchased their home in 2006. It is economic market conditions, the economy, employment, mortgage rates and supply and demand that create changes in the real estate market and cause real estate values to increase, remain stable, or perhaps drop at different periods of time. These are the factors that are beyond a seller’s control.

Real estate is typically a long hold period compared to many assets. To look to invest in real estate as a short term investment usually has harsher consequences. A great example of short term real estate investment is flipping, which entails buying the investment underneath market norms and selling around the middle of the surrounding market values. It has the risks of any other speculative investment. It can be high risk because it is a short term investment play. If the investor can hold long enough, most markets will increase in value due to the lack of inventory and demand outstripping supply. Decisions to sell may be more difficult for owners with short term ownership especially when real estate values have not increased or have dropped since the home was purchased. Home owners with short term ownership may have mortgage balances higher than the value of the home and a sale would require bringing cash to the closing to pay off the mortgage balance. Home owners with long term ownership and substantial equity can make selling decisions easier than owners selling their home without the benefit of real estate appreciation. In either case, the real estate market is the real estate market, regardless of when the home was purchased, and the home is worth what is worth.

There are many factors that affect the value and acquisition of buying and selling real estate on a national scale.

Economic factors

Like it or not, it seems like every real estate downturn gets blamed on the economy. There is a reason for this. The state of the economy plays a huge part in the amount of money that is available for people to buy homes. This is generally measured by economic indicators such as the employment data, manufacturing activity, the prices of goods, etc. Broadly speaking, when the economy is sluggish, so is real estate. However, the cyclicality of the economy can have varying effects on different types of real estate. For example, if a REIT has a larger percentage of its investments in hotels, they would typically be more affected by an economic downturn than an REIT that had invested in office buildings. Hotels are a form of property that is very sensitive to economic activity due to the type of lease structure inherent in the business. Renting a hotel room can be thought of as a form of short-term lease that can be easily avoided by hotel customers should the economy be doing poorly. On the other hand, office tenants generally have longer-term leases that can’t be changed in the middle of an economic downturn. Thus, although you should be aware of the part of the cycle the economy is in, you should also be cognizant of the real estate property’s sensitivity to the economic cycle.

The economy obviously pays a huge impact on how banks and equity or lending institutions will lend. If lenders are recovering from bad loans, the opportunity is not as great. Factors such as politics, both on a local as well as a national stage, can restrict or open financing for real estate. We need not look farther than the recent real estate and financial bust to see the effect of liberal then conservative lending parameters and its effect on not only the economy but real estate in general.

Interest rates

Politics, banks, and the global economy can all influence the real estate market when it comes to interest rates. The real estate and financial crash proved the global impact of the real estate market and increased awareness of how interest rates and loans are used in home buying. If things aren’t looking good abroad, it might affect your ability to sell homes domestically. Keep an eye on what’s happening in the global market and with foreign investment as these play large roles into the expectations of the local market as well.

Remember, banks are in business to lend, and today unlike their troubled counterparts in other parts of the world, they have good balance sheets and plenty of money available. So what’s with the apparent reluctance to open the money spigot? Remove your negative emotions towards these much maligned and penalized institutions for a moment and look from their side of the ledger. In today’s world of low interest rates and a flat yield curve a bank has less than a 3 percent net interest margin, which is the amount between what it pays depositors and what it makes on loan rates. The very best possible outcome on a loan for our forever criticized, highly regulated bank is to get paid back all its principal and make a small spread on the interest. Get paid back 95% of every loan and it goes broke. Careful scrutiny of any type of loan is judicious business practice and necessary to remain solvent. A top quality financial lending institution can be lucky to earn is 1 to 1.5 percent on assets historically.

Certain factors have the greatest impact on what lending rate a consumer will receive. Start with the general level of interest rates in the national economy, which is influenced by actions of the U.S. Federal Reserve Bank, levels of inflation, demand for borrowing money, the stock market, and a number of other factors.

Then you get to the factors for your home loan, the lending rate is influenced by the amount borrowed, what kind of loan you get, and whether you put up collateral or not. For instance, the interest rates on a home equity loan (where you use your home as collateral) are generally less than for unsecured credit. The term of the loan — how long you take to pay the money back. Even a small difference in your interest rate can have a big impact on the amount you eventually pay, so it’s worth understanding how interest rates are determined and what you can do to lower yours.

While lenders control who gets approved for a loan and on what terms, actual mortgage interest rates are largely determined on the secondary market, where mortgages are bought and sold. As with the stock market, interest rates in the secondary market tend to move up and down. When the economy is on an upswing, investors demand higher yields, forcing lenders to raise mortgage rates. In a market downturn, rates tend to drop for consumers because of increased investor demand.

While home or real estate sellers hope to get top dollar for their property – and some have an inflated idea of what to expect – establishing value can be a complex, multifaceted process.


Most consumers know that the three rules of real estate are “location, location, and location”. Location includes factors such as the price and availability of recent nearby transactions and inventory, the quality and desirability of local schools, and whether the area has the lifestyle and community buyer’s seek.

What does location mean, it is more than closeness to the center of the community; does it have the qualities of a dwindling asset? Location encompasses many other considerations. Waterfront of most types is limited in any scenario, but particularly in our Texas metros. Those that have it, will demand and get a higher value / return than similar properties not on the water. What type of view? What’s it next to? Is it near retail establishments? Or a highway?

With location comes school district. The Voice covered this almost a year ago Oct. 18, 2013 with “The effect of school performance on local home prices.” The school district or even a specific school within a district can drive demand for a particular area. Ask any real estate agent you know and they will confirm that having strong schools and an overall strong district can affect home prices by as much as 10 percent over a neighboring district.

Your family doesn’t have kids of school age? Buying a home in a good school district is still smart. When the schools are desirable, homes tend to hold their value better in down markets and appreciate more in good times. A 1 percent, 2 percent, or even 3 percent difference in a home’s value can be thousands of dollars. I educate people all the time, ‘You need to look at supporting and maintaining a good school district much like you would the maintenance of the roof or siding on your house.’ Why? Both will significantly affect the value of your home. Whenever a school tax increase comes up for a vote, my thought process is it seems like a pretty small price to protect the value of your investment.

This just scratches the surface of the factors affecting real estate values. Understand that in our Texas markets, the home you look at today will be gone tomorrow. Investment property in the Texas region, particularly in any of our metros if priced correctly will sell quickly. Educate yourself with your financial planner and real estate professional on what you are looking for and the history of the neighborhood. If you think you will have plenty of time to do this after the purchase, guess again. It is a sellers market, meaning the seller decides many of the terms of purchase, which may not allow the buyer much time to analyze after the purchase.

What’s the best investment? Start with sitting down with a financial planner, real estate professional, and if financing is needed, a mortgage professional. Actually I would probably reverse the order in today’s harsher lending environment. The size and scale of the current and historical real estate market make it an attractive and lucrative market for many investors. Investors can invest directly in physical real estate (this analysts preferred method) or choose to invest indirectly through managed funds. Investing directly in real estate involves purchasing the residential or commercial property to use as an income-producing property or for resale at a future time. Indirect ways to invest in the real estate market include investing in real estate investment trusts (REITs), real estate exchange traded funds (ETFs), commingled real estate funds (CREFs), and infrastructure funds. Again this is a decision you and your family and your real estate and financial experts need to make together.

There are many factors that play a significant role in moving the real estate market, but there are also more complex parts that come in to play. And although some of these aforementioned factors suggest a clear-cut relationship between the factor and the market, in practice, the results can be very different. However, understanding the key factors that drive the real estate market is essential to performing a comprehensive analysis of a potential investment.

If you have the assets and capabilities, there is not a better time to invest than now. Lending rates are the second lowest they have been in the last 100 to 5000 years. Seriously. Values have maintained in Texas during the worst recession in my memory. Six years is the longest positive market we have had in Texas over the last 50 years. We are 2.5 year into this positive run. Other than a catastrophic economic event, your investment in Texas real estate should have a good run for 10 years are more.