Enjoy low interest rates – for now

In September, the Federal Open Markets Committee, the Fed’s policy setting arm, decided not to raise its benchmark rate, which has been near zero for seven years. The benchmark rate is what a central bank issues which other interest rates are calculated against. Also called base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security.

Ahead of the meeting and even after, there had been little certainty about what the Fed would do, but a good number of analysts believed that the economy had improved enough to compel the Fed to raise rates. It turns out that rates are not going up anytime soon. Why?

In a word, September’s employment numbers were ugly. Only 142,000 jobs were added, which is well below the average for the year (approximately 200,000), plus we lost more than 59,000 jobs in revisions to past months. Historically, August sees the biggest upward revisions of any month on the numbers reported, so the report was extremely disappointing. Additionally, 350,000 workers left the labor force and wages dropped during the month. I think this ends any possibility of the Fed raising rates later this month or potentially this year.

The most depressing statistic in the report is that labor force participation rate — the fraction of all Americans over 16 who are working (as opposed to unemployed or simply not looking for work) — is the lowest it’s been since 1977. The falling participation rate is a long-term trend during the last 10 years. Some of it is due to slow business growth. And some is simply due to Baby Boomer retirement and young adults staying in school longer. But the bigger factor is the lack of strong well paying job prospects. As stated before, the lack of wage improvement over the last ten years is nonexistent.

At the same time, though, there are still a higher-than-normal percentage of people who are underemployed — an indication that the US still needs millions more jobs.

What does this mean to you and your clients? At this point it looks like rates won’t be raised until mid-2016 at the earliest, so now is a great time to buy to lock in low interest rates.

Regionally, commercial and residential property sectors continue to perform well, particularly in our Texas metros. This extended period of low interest rates probably won’t be seen again in our lifetime. The good news is that low rates and high demand continue to drive property appreciation. If anything it puts more pressure on finding the right opportunity for clients with the knowledge that values and rates will rise over the next year.

Regional job growth continues, generating new commercial space demand that dramatically outpaces construction levels, and vacancy in the primary property segments remains on track to decline this year and support additional rent gains across the region. Apartment construction has slowed in our metros, but favorable demographic trends and challenging conditions for first-time homebuyers will continue to sustain extremely low vacancy in the multifamily sector.

The potential move away from zero interest rate policy, for short-term rates, is a harbinger of higher mortgage rates ahead and the beginning of the end of this seven-year era of incredibly low mortgage rates and corresponding high affordability. It will be a shock to many homebuyers under the age of 35. Forecasts for mortgage rates vary, but indicate a potential increase of 50 basis points over the next 12 months.

A 50 basis point ( ½ point) increase in the effective mortgage rate could result in the following outcomes:

  • A 6% increase in monthly payments on new mortgages.Nationally the average 30-year fixed mortgage was $231,000, with a monthly principal and interest payment of $1,107 at the average interest rate of 4.03%. When rates reach 4.53%, that same loan amount would result in a monthly payment of $1,175, an increase of 6%.
  • As much as 7% rejection of mortgage applications. The increase in the monthly debt burden as a result of higher rates will stress the upper limits of loan- and debt-to-income ratios for new loan applicants.
  • Average debt-to-income ratio to increase by 4%.The average debt-to-income ratio for mortgages in the first half of 2015 was 35.5%. With an increase of mortgage rates by 50 basis points and keeping all other factors equal, the average debt-to-income ratio increases by 4% to 37%.
  • Popularity of loan types will likely shift with rate increases.In the first half of this year, conventional mortgages were most popular, capturing 50% of the market, followed by 31% FHA, and 12% VA. Under the modeled higher rate scenario, conventional and jumbo mortgages were most likely to hit an upper limit on debt-to-income ratios, and VA and FHA loans were least likely to hit an upper limit.
  • All of this is based on values remaining stable. In this region we have been blessed with continued appreciation. So the buyer that waits loses potential appreciation.
  • Conclusion: today’s buyer can afford ~6% more home than when rates do rise.

The effect on demand won’t be so much on volume as on housing type. If and when there is a rate hike, the most common response from buyers will be to lower their price range. So don’t expect to see a big impact on demand, but that demand will be slightly redirected toward lower priced homes.

Secondly, as stated above Texas has great opportunity with continued demand for investment properties that show strong return. With rates this low and healthy demand, opportunity for better returns in our region versus other parts of the country is obvious.

The good news in this region is we have not had over stimulated appreciation as other parts of the country have had or what the market saw before the financial meltdown. Sure, Texas has had a good run for the last few years with 8.12% appreciation last year, but only 25.99% over the last 5 years or 139% since 1991.

When you compare the Texas region to the rest of the country over time, you can see that regional appreciation has been slower than much of the country. At times in the last ten years, the Texas Region has been the lowest in annual appreciation.

The point is that metros in Texas continue to be attractive compared to the rest of the nation. The healthy slower appreciation coupled with lower rates present tremendous opportunity for those comparing risks for real estate and financing in other parts of the country.

If you are thinking about buying, you have been given a reprieve for another six months or so as rates stay at the second lowest they have been in the last hundred years. Most buyers believe rates will rise soon, and today’s low rates are a key driver motivating people in the market to buy now.



2015 Texas Midyear Review, Part II

We are continuing our review of the major metro real estate markets in Texas. This week we will spotlight Dallas / Fort Worth.

Five Texas cities were among the top 10 U.S. cities in population growth between July 1, 2013, and July 1, 2014 — Houston, Austin, San Antonio, Dallas and Fort Worth, with each adding between 18,000 to almost 36,000 people in that 12 month period.

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Texas continues to attract transplants from other states due to stellar job creation. In 2014, Dallas / Fort Worth added 112,100 jobs, and in 2015 we should see a 3.6 percent increase. Over the past 12 months, the Metroplex has created jobs at a 3.3 percent rate, second only to Austin, which grew 3.6 percent.

The economy in the Metroplex flourished in the first five months of 2015 and added more than 100,000 jobs year over year through May to outpace the rate of growth for the entire state. Statistically, one new job can support 2.6 new residents, so DFW is still on the course of continued population growth.

In June, the unemployment rate fell to 3.7 percent in Dallas and held steady at 3.9 percent in Fort Worth, while edging down to 4.2 percent in Texas. All three figures are lower than the U.S. rate of 5.3 percent. Unemployment in both Dallas and Fort Worth is below its prerecession low of 4.1 percent. Remember that 4% unemployment is considered near full employment, because there will always be some number of peole in between and looking for jobs.


Five years ago there was an abundance of vacant office space due to the recession. The good news is that professional and business services payrolls, for example, are 18 percent larger than the pre-recession peak through year-end 2014, while financial services staffs expanded by a similar amount. Since those previous thresholds were reached, office inventory has grown only 6 percent. This has obviously put a strain on finding office space, which is good news for landlords and developers.

Further gains in employment in these major office-using sectors will continue to help alleviate the supply imbalances that will arise in the months ahead. Developers will finish 7.5 million square feet of office space this year, featuring headquarters space for State Farm, Raytheon and FedEx. To put that in perspective, last year roughly 3.6 million square feet was finished and absorbed. Supply will grow and should outstrip demand temporarily, moving vacancy closer to 20% for the 12 county area. That said, most of north Dallas and the northern counties will continue to be challenged as office space is at a premium. There have been close to 20 million sq. ft of expansions and relocations in 2014 -15 announced, with more certainly coming.


Apartment developers will complete 20,000 units in the Metroplex in 2015, increasing inventory nearly 3 percent. This year deliveries are up from the 15,600 units completed in 2014 and will be the largest addition to inventory in more than a decade. As in the office channel, apartment supply will outstrip demand. However 94% occupancy is a healthy market as evidenced by continued rent increases. The good news is that more deliveries that were scheduled for 2015 /16 have been delayed, keeping the market healthy for developers and equity.


Developers will complete 3.0 million square feet of retail space in the Metroplex this year, of which more than 90 percent is pre-leased. Last year, developers brought 2.9 million square feet of space online. Rents will continue to rise, advancing 2.6 percent year over year. This is down slightly from the 2.8 percent growth in rents realized in 2014.

Single family residential

With resale inventory at 2.2 months of supply, the Dallas area leads the country in home price gains presently. Median home sales prices are more than 10 percent higher this summer than a year ago. In some neighborhoods the price hikes this year are two to three times that rate. Prices for homes are up 30 percent in Oak Cliff, 29 percent in Fairview, and 22 percent in North Dallas in the first six months of 2015. Additionally, prices were up 15 percent or more in a dozen other Dallas-area neighborhoods, according to a midyear analysis of the North Texas home market based on data from the Real Estate Center at Texas A&M University. Those areas seeing strong appreciation are in inner city locations where new construction is beginning to replace older homes.

Single-family home construction has continued to increase in the Metroplex. Year to date through May, single-family permits are up 30.5 percent in 2015 over the same period last year. The ability for employees to be able to afford a home compared to most areas in the nation may be the single biggest cause for this push. New home construction is around 30,000 to 35,000 homes a year. While this places DFW among the nation’s most robust building markets, it is still less than 50% of the number of new homes being built before the recession.

DFW median home prices are at an all-time high of $220,000, and homes are selling for about 60 percent more than they were at the worst of the recession in early 2010. Overall, Dallas / Fort Worth and its suburbs have a well based multi-industry growth that should maintain its strength over the next 4 to 5 years.



2015 points to slower growth ahead

Last year, the U.S. job market had its best year of gains since 1999.  Economic activity hit a whopping 5% in the third quarter, the best quarter since 2003. On the other hand, employment is still relatively weak with only 2% of the nation’s counties recovered to prerecession unemployment, GDP, and real estate values.

Unemployment is better and hiring remains strong, but most experts are starting to scale back their growth forecasts. The Federal Reserve has kept rates near zero since 2008 and bought $3.5 trillion in bonds to pull the economy from a recession that had sent joblessness as high as 10%. The good news is that unemployment has now been cut almost in half from the recession, and runs near estimates of full employment, and monthly job growth has averaged 194,000 this year. It has been many years since we have achieved the magical 300,000 jobs per month needed for a healthy economy.

During 2014, jobs grew at a healthy 3.6% and over 409,000 jobs were created with the unemployment rate dropping to the lowest rate since May 2008. While inflation is below target in 2015, oil prices are off their lows of 2014, and the soaring dollar has come down from peaks scaled in March, which should support U.S. prices.

With the slower economy this year, phrases like “secular stagnation” and “new normal” have resurfaced to describe an economy doomed for years of slow growth. The economy is a heck of a lot better now than it was six years ago. But it is definitely not booming.

Federal Reserve chair Janet Yellen summed it up well in a speech March 27 of this year, “If underlying conditions had truly returned to normal, the economy should be booming.” The chairman has said that the economy is better and that unemployment should fall to near 5 percent by the end of the year. She cited the fact that more are quitting their jobs as evidence that people have “greater confidence in their ability to find a new job.” Still, Yellen said continued low wage growth shows that the labor market is “not fully healed” despite unemployment approaching its long-run level.

“Higher wages raise costs for employers of costs, but they also boost the spending and confidence of consumers, and would signal a strengthening of the recovery that would ultimately be good for business,” she explained, adding “nationally there are at least some encouraging signs of a pick up so far this year.”

Economists say there are two main problems. Workers’ wages aren’t growing much, if at all. As a result, Americans aren’t going out and spending much. On top of that, many foreign economies are slowing down, which puts pressure on the American economy. Wall Street and the U.S. government will tell you the economy is doing well, but it won’t feel like it. In fact, according to a national survey, 70% of Americans believe the U.S. economy is permanently damaged, while 84% do not believe the economy has improved since the recession ended in 2009.


Texas has experienced a great run of economic strength when compared to the rest of the US and world. Texas metros were some of the first out of the recession. But many analysts, including myself, see a slower economy in the coming year. For starters, in March of this year the state ended its 53 month run of job creation, when for the first time it reported job losses on a monthly basis.

At the beginning of the year, the Dallas Federal Reserve warned that with oil prices falling 50% since July 2014, there would be a slowing factor regionally, while nationally oil prices would benefit the national economy as a whole.

Texas added a meager 1,200 jobs in April — better than the 25,200 job losses in March but still weak compared to the past five years, according to data released by the Texas Workforce Commission. Over the past 12 months, Texas has added 287,000 seasonally adjusted jobs. The state’s oil and gas industry lost 8,300 jobs in April, construction lost 5,400, and manufacturing lost 4,300 jobs. The state’s unemployment rate was unchanged at 4.2 percent in April, compared to a nationwide average of 5.4 percent. The job losses in construction and manufacturing this year are tied to the oil slump, causing less need for equipment and buildings. On the plus side, the leisure and hospitality industry gained 6,900 positions and the information services industry gained 3,400 jobs in April.

After a robust growth for the last couple of years, Texas employment slowed in January and February of this year with losses in March. To quote Mine Yucel, Senior Vice president of the Federal Reserve of Dallas, “headwinds for the Texas economy continue to be low oil prices, a strong dollar, and weaker growth in Europe and Asia. The Dallas Federal reserve expects regional employment growth between .5% to 1.5% in 2015 which would amount to 60,000 to 175,000 new jobs.”


Houston has seen the energy sector consolidate in response to the tightening of the global oil market. Drilling, engineering and service companies are reducing operating budgets and reducing staff by thousands. Not only will the energy sector feel this, but everything from automobile and home sales to shipping activity will be affected. The Houston metro area added an average of 9,000 net new jobs per month through 2014. In January 2015 we saw job losses of 3,700. February then saw a gain of 7,000 and then 4,400 were lost in March of this year. Projections are that Houston will see great job losses this year as the energy industry continues to consolidate.

What does 2015 hold for Houston? The explosive growth of the last few years will slow. Future layoffs within the energy sector will depend on oil prices. Presently wage growth, real estate, and personal income growth will ease through the remainder of the year and into 2016 based on current oil price of around $60/barrel.

Dallas / Ft Worth

Dallas and Fort Worth had strong job growth from last October through January of this year. Through 2014, the D/FW area was adding 11,000 jobs a month. However in January only 2,800 jobs were added to the area. March saw 10,200 lost jobs for the first time since November 2010. This loss was the largest monthly decline since 2009. From my view, one month of bad data does not make a trend. With current real estate development, corporate relocation and consolidation causing value increases north of D/FW in the Plano, Frisco, McKinney areas the remainder of the year should continue to be strong barring a catastrophic economic event. Companies looking for a midcontinent location are finding north Texas very attractive.

Major companies like State Farm, Toyota, Hisun Motors, and FedEx Office have made deals to relocate to the area. Additional companies are also considering the Metroplex as a new place to call home. Tax incentives, a low cost of living, and an abundance of prime building area holds quite an appeal. Raytheon, a major defense contractor already with a heavy North Texas presence, last year moved its Space and Airborne Systems national headquarters from California to the McKinney facility off U.S. Highway 380. Also last year, Emerson Process Management opened its new Regulator Technologies global headquarters at the Gateway site off U.S. Highway 75, where the Sheraton McKinney Hotel is set to open in February.

San Antonio

San Antonio’s real estate market has been buoyed by strong job and income growth. As in other metros within the Texas market, housing inventories are tight. The San Antonio area saw the highest quarterly year over year job growth (3.7%) in nearly a decade in the first quarter of this year.

It is too early to declare that the forces of supply and demand have established equilibrium in oil values, but if prices stay stable or better than $60/barrel then the local economy will find a comfort zone to continue exploration and drilling in the Eagle Ford shale fields.

As in the other markets, the local job market growth may slow slightly. Real estate sales and values will remain positive, but will grow at a slower pace.


Austin has been a great success story with over 162,000 new jobs since the end of the Great Recession that ended in June 2009. As a result the unemployment rate has declined to 3.3% unemployment, best among the large Texas metros. There has been an average of 27,000 jobs gained annually.

Fueled by strong job growth, the population and income growth in the area has outpaced the national average since 2009. Most of the jobs created (5,200) this last year came in the educational and health services industry, followed closely by trade, transportation and utilities (4,500). Like the other Texas metros, due to the slowing of the national economy, job growth should moderate through 2015 with strength gaining in 2016. Home sales will continue to improve, but at a slower pace.

After all this good news, (I’m joking) should the nation and the Texas region be concerned? Caution is warranted, but realize that over the past 30 years national GDP growth has averaged 1.9% in during the year’s first quarter, and 3.0% in the rest of the year. This suggests there is about a percentage point downward bias in the 1st quarter of every year. So, don’t fret about low first quarter growth – it takes much longer than a quarter to establish a trend.

Non-residential construction will be heavy this year in Texas. Home sales will slow, but be strong compared to the rest of the nation, depending on the impact of oil prices and the strength of healthcare, technology, and education growth in 2015. Obviously Houston, Midland, and a few smaller cities will be more vulnerable to oil values. Home values should continue to appreciate 4 to 8% due to lack of inventory for sale and for rent. Employment growth will be more like the rest of the US, with growth in the 2 to 3% range. This changes with the fortunes of the global oil market.


Texas housing markets (still) aren’t overvalued

The Austin Board of Realtors reported that the March 2015 median price for single family homes was $255,000, a 10% year-over-year increase. This is a record high for Austin homes, so it isn’t surprising that some are saying our market is overvalued or in a bubble.

Still, you can’t just look at appreciation and say the market is overvalued without looking at the reasons for the rise in prices. In relation to the other desirable cities that are creating 30,000+ jobs annually, our values are on the inexpensive side.

Texas has never led the nation in real estate appreciation. For the last forty years our state has averaged just under 4% annual according to Texas A&M Real Estate Center. Last year we saw 7.12% annual appreciation in Texas, according to FHFA House Price Index (HPI). During the housing bubble, Texas was at the bottom of real estate appreciation of all states, as you can see on this interactive map.

We’ve had a couple of good years in Texas after recovering faster than the rest of the nation. Speculation is hard in Texas, because the annual returns are not as great as in other markets. The speculation that many investors look for is not available in Texas; namely, those investors betting on appreciation rather than the fundamentals of income producing properties and/or historical sales prices. As long as job growth remains strong, Texas’s housing market likely won’t tank. Folks betting on appreciation might get hurt, but others will be fine.

It’s all about jobs

Again, job creation is driving demand and home values. From March 2014 to March 2015, Texas total nonfarm employment increased by 327,500 jobs, or 2.8%. The Texas unemployment rate was 4.2% for March 2015, down from 5.3% in March 2014. The Texas unemployment rate has been at or below the national rate for 99 consecutive months. Over the same period, Dallas had 4% job growth, ranking 5th nationally. The other major Texas metros missed the top 10: San Antonio grew by 3.4% (14th), Houston grew by 2.9% (22nd), Fort Worth grew by 2.6% (28th), and Austin by 2.5% (29th).

Whether the stronger home price appreciation in some Texas markets will lead to a bubble will depend on whether the employment growth here is sustainable in the long term. Most analysts think so. A continued drop in oil prices, or even a tech bubble burst, could curb demand for housing in hot Texas markets, and take some of the air out of the steady increase in values. Texas was among the first states to emerge from the 2007-09 Great Recession, surpassing its pre-recession employment peak in late 2011. Since 2000, change in Texas employment is up 24.9%, while the rest of the country is up 4.7%. Since 2000, Texas has created 2 million jobs, while the rest of the country combined has produced 5 million. As a whole, 29% of all new jobs since 2000 were created in Texas.

Remember the financial meltdown in the US was caused in part by not following the fundamentals of real estate. For every three jobs there should be one home start. Texas and its metros continue to be right in line with that. Those states where appreciation was in the mid 40% annually were pure speculation. It was a strong run, but based on non-sustainable fundamentals. Texas continues to have the fundamentals in building and consuming the shelter available presently.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, emphasizes Texas’s comparatively rapid rate of job creation. Over the last twenty-three years, the number of jobs has increased twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita. However if you consider cost of living, the Texas wages are better than most.

According to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

This means that Texas has been creating or attracting middle and high wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

That’s a big deal. During the last decade, the country as a whole experienced zero net job creation, and the decline in middle-class jobs is arguably the largest single threat to the national economy’s viability. Only 65 counties out of just over 3,000 have fully recovered real estate values, employment, and GDP to prerecession numbers. Nationally the country continues to struggle. Much of these statistics come from an article from the Federal Reserve Bank of Dallas, 1Q14.

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Appreciation isn’t the only factor in determining if a market is overvalued. Here are some other metrics to watch:

  • Job creation vs. home starts (a ratio of three jobs to one home start is balanced)
  • Resale housing inventory: less than six months is considered a sellers’ market
  • Less than 24 months supply of new home starts
  • Less than 24 months supply of lot inventory
  • Rental occupancy residentially above 90% with no concessions
  • Double digit appreciation for more than three years

When there has been job creation but an absence of developing and building there will be a need for more inventory as the market plays catch up. That is where our Texas metros are; playing catch up, not overvalued or undervalued. With true demand from population and employment growth the metro markets have a ways to go to catch up.

Those of us who have been watching and analyzing Texas real estate will be the first to tell you that we don’t know the future. History has taught us differently. Even if Texas metros are a good market now doesn’t mean in 18 months or 5 years that it still will be a good market. But by reviewing past regional history against national metrics, we can say confidently that the regional market will be strong for at least the next three years based on jobs, population, affordability, and demographics.

The speculative building that we saw regionally in the 80’s here in Texas and the same in the sand states (California, Nevada, Arizona and Florida) in the early 2000’s is not present today. Double digit appreciation as a region is not present. Are these things that bear watching? Absolutely. Remember that although the headline of “x market is overvalued” gets attention, to most long term analysts and economists appreciation is just one of many statistics, and all the fundamentals need to be reviewed to make a true assessment.


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 national economy

In our last edition of the Voice, we discussed the potential effects of the decline in oil prices on the Texas region. The fall in energy prices has the potential to cost the Texas economy 125,000 to 150,000 jobs. This week, we’ll look how declining oil prices could affect the national economy.

Most of us are saving $20 to $30 dollars per tank, which means consumers have more money to spend elsewhere. In addition, most of the country north of Texas depends on heating oil or natural gas for heat. Most homes will use $900 to $2400 per year for heating, taking into consideration all types of heating sources. So again any cost savings in oil save these homeowners even more.

It is estimated that there’s an additional $13 billion more in consumers’ pockets since the oil downturn. So where did the savings go? U.S. consumers actually used a big chunk to drive more, go to the movies more, and eat out more. All that explains why holiday season sales improved when holiday sales started slowly. Cheap gas helped retailers salvage a season that started off slowly.

Consumer Growth Partners, a retail industry consulting firm, used Department of Commerce to estimate where the $13 billion in gas savings were spent.

• $4.9 billion more was spent on simply using more gas, so the oil companies actually saw higher consumption at the pump

• $1.8 billion more went to entertainment and services, such as movies, theme parks, content downloads, and smart phone subscription/service fees

• $1.3 billion more was spent at restaurants, fast food, and bars

• $1 billion more went to things like tobacco, beer, and other “sin” products

• $4 billion more went to retailers, broken down as follows;

o Food and beverage stores: $1.5 billion

o Home improvement: $1 billion

o Clothing: $1 billion (this is a key category for department stores like J.C. Penney and Macy’s)

o Consumer electronics: $500 million

U.S. shoppers had $1 billion more in disposable income than last year from other factors, and that helped areas like toys and sports.

There’s also a psychological by-product to the rise and fall of the price of gas. We watch the neighborhood gas station prices like a stock ticker, and we assume that falling prices will translate to better economic times ahead, at least in terms of our personal budgets. Drops in gas prices of even a penny can improve consumer confidence. The consumer confidence indicator is currently at its highest level in almost eight years. I think many of us see the savings almost like a tax rebate. It’s not much, we really don’t plan for it long term, but we welcome the savings.

But as the United States has shifted from being overwhelmingly a consumer of oil to increasingly a producer, the collapse in the price of oil, now below $50/barrel, will have unpredictable side effects for large and diverse sectors of the economy. This includes not just the oil and gas industry, but also finance, manufacturing, and more. The US gained ground in its production from using higher cost methods of producing oil (fracking). These methods of extraction cease to be profitable below $70/barrel.

In the first week of January alone, the number of active drilling rigs in America fell by 61. Each rig employs 50 to 60 people. That’s more than 3,000 potential job losses right there. Oil rig employment peaked in late September 2014, and 180+ rigs have gone idle since, taking with them 9,500 to 11,000 jobs, and that’s just the jobs that are directly tied to the process of drilling.

By the way, those are well-paying jobs. In North Dakota, for instance, the average salary in the oil and gas industry was $111,000 in 2013, more than double the state average, which itself was goosed higher by those high oil and gas wages. They are the kinds of jobs America desperately needs.
Many analysts and economists have been overjoyed at the headline unemployment numbers improving. Our economy added 252,000 jobs in December, and unemployment fell to a 6½-year low. But when you look hard at the numbers, guess what? Nearly 60% of the jobs were in low paying industries such as auto parts salesman, home health assistants, and hospitality. 17.5% of America’s new hires were in food service – waiters, cooks and bartenders.

So, while you and I saved $20+ per fill up, that ‘windfall’ means America is losing six figure per year jobs in the oil patch for less than $10.00 an hour jobs with little to no benefits. Not a good trade.

Once these jobs are lost, you cannot just ‘turn the spigot’ back on. The longer term affect of losing too much investment or stimulating demand could create a price shock in future years as necessary supply growth cannot return quickly once curtailed.

So what are the benefits and negatives of oil values softening?

The positive

Financial experts are excited for when and where consumers spend the money saved on fuel. More dispensable income means more cash spent at malls, movie theatres, and restaurants. This influx of spending holds down inflation and boosts both local economies and the stock market. Energy spending constitutes a bigger part of the budget for lower-income families, lower oil prices help counter some forces that have worsened the inequality of income, wealth, and opportunities.

Dropping prices also help industries not reliant on oil. The automobile industry may benefit from dropping oil prices. Last year was the automobile industry’s best since 2006, according to the National Automobile Dealers Association, with almost 17 million cars and trucks sold. A surge in jobs and more income from lower gas prices gives Americans the ability to buy a new car, perhaps for the first time in a decade.

Lower oil prices will benefit farmers and will eventually benefit consumers as food prices drop. Agriculture is very energy intensive – a dollar of farm output takes 4 to 5 times more energy to produce than a dollar of manufacturing output. That cost savings is then passed on to the consumer in less money spent for groceries.

Lower fuel prices means consumers will be able to travel more. Consumers haven’t seen a drop in airline prices yet. This is because airlines contract to buy fuel in advance, so there is a lag in savings when oil prices drop. But with demand for flying high and the fall in oil prices keeping costs low, airlines are in a profit sweet spot. Nearly all major airlines hit record profit margins during the June through September quarter. Historically the industry has shown in a strong demand environment that they don’t plan to proactively cut fares.

All in all consumers should have more money to spend. This in itself sounds good after the harshness of the recession. However, only 65 counties out of 3,144 are at prerecession numbers or better. That is just over 2% of America’s counties that have recovered. Yes, the national economy is recovering, but we are still over 55% short of prerecession economic numbers with few parts of the country participating. You take away oil production, that number gets divided by more than 50%.

So while low energy prices are immediately good for the consumer, oil is responsible for a lot of jobs and economic activity.

The negative

The obvious impact is oil companies downsizing. Not just big oil, but all those small companies that make their livelihood from the extraction and sale of oil will get hurt from the plummet in oil prices. Not just those directly or secondarily involved in the industry, but the mom and pop stores, diners, and locally owned stores in these areas. Although the lower oil prices are almost certainly temporary, the economic aftershocks will take longer to overcome.

Anything associated to steel and metals suddenly has to revaluate their strategies, and invariably that includes downsizing or closing. This has a definitive long term effect on the rust belt as it tries to recover. Most of this is outside our Texas region.

The nation’s recovering GDP will also suffer, since the energy companies have been doing most of the ‘heavy lifting’ of large capital investment at a time where other sectors have chosen not to or are unable to invest long term in their future.

Falling oil prices are bad for the environment because cheaper oil means fewer incentives to develop alternative and less carbon-intensive sources of energy. Most of these alternatives make sense when oil is above $70/barrel. The falling prices reduce the incentive to develop new oil and gas fields and make it less urgent to create alternative energy sources. That hurts companies in those areas and, because it makes energy less plentiful, means higher costs and fewer energy alternatives once global demand revives.

As prices decline even more, segments of the economy that enable drilling, like the companies that build pipelines, pumps, and drilling rigs, will curb their own investments. In the worst case, even existing equipment would be left idle, further reducing industrial activity. These pullbacks would reverberate well beyond the oil industry itself, into areas such as steel, cement, and other fields that supply the oil industry. This affects much more than our Texas region, reaching into almost all industry and regional sectors as capital investment sits idle.

To increase state and government revenues for new road infrastructure, many support an increase in fuel taxes. America’s fuel taxes are some of the lowest in the world. Also remember most expect these values to be temporary. Taxes based on long term low values is not a popular nor a prudent decision unless we want to be buying $5.00 gas long term. Setting long-term policy in response to volatile oil prices can create unintended consequences. Five years from now, some countries will face much lower prices. Others will be paying more. That may alter global trade and development in ways we can’t predict today.

This is not a plea for the high values we have seen up to last year. Most analysts feel that was unsustainable. But realize that the oil values of today are caused by speculation. Speculation is not a predictable factor for basing long term policy or predicting economic impact.

As stated before, $50/barrel for the Texas region for 90 days is bruising. 180 days or more could have dire effects on the economy. How does this affect you and I? The next six months will tell.

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.

National economy still recovering

In Texas, 2013 was the year we felt the economy turn a corner. Although the recession “officially ended” in June of 2010, most consumers and businesses point to last year as the year they felt and saw the economy turn. In the real estate industry, we saw stronger home value and real estate appreciation. Here in Texas all four metros and most Texas cities and towns had near record years for home resales. Regionally almost all of commercial real estate not only saw increased interest, but saw occupancies and values improve dramatically. Whether it was office, retail, or industrial almost all commercial saw occupancies in the 90% range.

The main thing about 2013 was we saw a significant change in consumers psychology. The fear of job losses decreased dramatically. We saw seven years of pent up demand for homes and commercial expansion come to fruition. Consumers and investors were no longer in fear of declining home and real estate prices. All this positive economic news coupled with low interest rates created ‘positive leverage’ in most consumers minds. The return of positive leverage brought back speculators as well as the consumer. Above all, consumers started buying consumer products.

In short, consumer confidence improved. A rating of 100 on the index is when consumers begin spending historically. Nationally it has improved dramatically, as you can we in the chart below. In January 2009, the consumer confidence index was at a historical low of 37.7. Nationally we have recovered over 50 points. While this is a move in the right direction, that is only 10 points a year, not exactly a rousing endorsement of confidence from the nation’s consumers. The good news is that you live in Texas where jobs are being created and consumer confidence is dramatically better than the rest of the nation as evidenced by the chart below.

consumer confidence

Still, we are a long way away from full recovery. 2013 was a great year, but it was far from typical. It was that type of year that comes along every 10 to 15 years. Great demand and not enough inventory allowed good value appreciation in almost all economic channels. However, comparing 2014 to 2013 is not a fair comparison. Look at the last 5+ years on your comparison, which gives you a truer picture of overall values as well as what an exceptional year last year was. The demand, value appreciation, etc. needs to be tempered moving forward.

Home starts

Here are the plain facts. Building starts for new homes provide one of the most sensitive indicators of housing demand. The number of single-family housing starts reveal the stark reality of the recent boom and bust. Single-family starts ran at an annualized rate of about one million starts for many years, rose to a rate of almost 1.8 million starts at its peak in 2005, and then collapsed at the bottom to a rate of slightly less than 400,000 starts. Now, the number of single-family starts has risen. The good news is that housing starts have increased significantly since the bottom. The bad news is that the normal rate of starts prior to the housing boom was around one million annually, and we certainly have not returned to that level of construction.

newh home sales

After plunging in June of this year, housing starts and housing permits recovered in July, with a 1,093,000 and a 1,052,000 projected annual pace, respectively. The good news is that this is a 15.7% gain in starts and permits. The bad news is that almost all of those gains from June to July in starts and permits are in multifamily rental housing. To some that is the beginning of the housing recovery. However the majority are not buying homes. Here in the Lone Star state we see demand strong for apartments (95+/-% occupancy in most Texas metros. That’s not the sign of a housing recovery. That’s the sign of a shift from an ownership mentality to a rental mentality for a myriad of reasons. Most national surveys show that the vast majority (70+%) of people of almost all age groups want to own. Home starts should be at a 1.5+ million pace annual. There is still room for improvement as well as ‘catch-up’ demand for the previous 7+ years.

Job growth

The good is that job growth is gaining traction. Job growth averaged 272,000 jobs nationally for the last four months. This is a dramatic increase on monthly gains after the last 5+ years of anemic growth below 150,000 new jobs monthly. All the gains took place in the private sector. Government employment fell slightly over the year. A healthy economy in the US should create around 300,000 to 350,000 new jobs a month. It sounds like a lot, until you divide it by 51, to get the total number of jobs created in each state and district. The last unemployment report employers reported 142,000 new jobs, the smallest number so far this year; it was the first time since January 2014 that monthly job creation fell below the 200,000 level.

The positive growth psychology is undermined by less than acceptable numbers comparatively. It is hard to be bullish about the economy when it keeps sending conflicting messages. We were told at the first of the summer that the rise in housing starts was an encouraging sign, and the recovery in construction activity was getting back on track. National, regional and local homebuilder confidence seems to point to their confidence in better future times, and further gains to come. But, over the last few months we’ve seen a moderate slowing residential sales. Every time there is an uptick in housing starts, pending sales, and mortgage applications the media says the market is recovering, yet when it does not continue to increase monthly, the media and consumer start mentioning reasons such as weather, or the development of a bubble.

It’s never blamed on a tepid economy that home starts regionally are at about 45% of the previous highs. It’s never, ever blamed on the tepid economy and the part-time job market and lower wage growth that’s been the new norm. Wage growth won’t happen until employers feel comfortable and then the jobs will return, and the last couple of monthly jobs reports heralded in the media have been heavy on the part time and low income jobs, and light on full time and middle class. Nationally the higher paying wage jobs have not been created, which in turn with housing costs increasing 40% to 60% over the last ten years in just Texas has focused construction on apartment construction, not home building. So, again yes we are recovering but it is going to take a while to get to full recovery and an improved economy.

According to the latest Federal Reserve beige book, the last two months saw the U.S. economy grow at a modest to moderate pace. The good news is that it remains positive. All growth was described as “modest” in the 12 districts encompassing the nation. Its hard to get excited about ‘modest growth’. Although it is positive news, it is hard to lead cheerleading on ‘modest’ growth.

So where are we? Recovered or not?

First, one of the first things many are doing is comparing this year to last year. Last year, was an ‘outlier’ year. A year that comes along every 10-15 years. We had demand, not enough inventory, banks not lending, etc. A perfect storm for sellers!

Secondly, we have not seen a collapse of values. Demand is still there, are the realtors capturing all of it? No, builders have been able to build inventory. Demand is still greater than what is being delivered to the market.

So, what is happening? Last year there was little inventory in all price points. This year we have seen inventory increase dramatically in many areas, as sellers want to sell after waiting a number of years. Particularly in the $300k to $700k channels. Pricing is paramount if the seller wants activity. If the home is on the market over 30 days, it is not priced correctly.

In comparison, when brokers talk to their clients they need to compare for 5 to 10 years. They do need to look back more than one year as we have shown, to see what inventory has done over the last year in their neighborhoods. A fair comparison on values and looking at whether it is a bubble is to look at the last 5 to 10 years. If you have had double digit appreciation for 5 or 10 years, the historical possibility of a bubble is great. Austin and the Texas metros have never experienced that.

I would refer them to the March 29, 2013 edition of the Independence Voice. Five things have to be available for a housing bubble: tight supply, demand, regulation, and easy financial terms, and speculation. We are lacking in the last two.

I am optimistic about our continued recovery, particularly in our region. Here are the strengths as I see them.

Home starts, jobs, and corporate profits

After several years, the labor market added 230,000 net new jobs on average for the first 7 months of the year. On the negative side, household formation still remains slow, with the Census Bureau reporting that over the last 12 months that net household formations were just over 1/3 of normal. 458,000+/- household formations vs. the 1.2 million to 1.5 million per year of a healthy national economy.

The number of persons per household has increased by 2.6 percent over the last 10 years since 2005, from 2.69 to 2.76 people per household. This amounts to 3 million additional households that will begin to show up over the next few years. That is close to 60,000 households per state. They will require shelter, whether in apartments or homes. Eventually over 60% will end up in home ownership.

To say that young people should buy now is an understatement. The monthly mortgage payment-to-rent ratio for the U.S. is near the lowest it has been in more than 60+ years. There has never been a more affordable time to buy! So even with some increase in house prices and interest rates, the ratio will remain relatively low. One challenge for households seeking to transition from tenancy to ownership is amassing the funds for the down payment and closing costs. A stronger economy should provide a growing number of households the savings necessary for ownership in the future.

Most economic forecasts for the remainder of the year and 2015 have economic growth averaging 3.3 percent in 2015 and the unemployment rate continuing to decline. In this scenario, household formations should pick up and housing starts are projected to increase 28 percent over 2014’s pace to 1.3 million starts in 2015.

Profit margins are strong. Regional corporate profits have grown rapidly through cost-cutting, employment growth, some new products, and a touch of revenue growth. Most analysts see margins moving closer to normal levels, particularly as revenue increases. This means slower earnings growth but not a reduction in earnings, eventually helping job growth here locally and regionally.

Shift to full time workers

Nationally as well as locally, employment growth lagged behind the economic recovery. Texas metros have been blessed with lower than average unemployment as well as stronger than national or regional hiring. Most businesses have been cautious in hiring, showing a preference for temporary workers. In talking to some HR groups, the mix changed the last two years and will continue to focus more on more full time employees versus the last five years.

One of the recurring themes I read from economist projections is many things will become ‘closer to normal’. That’s not saying that problems will disappear. We can still discuss the negative issues surrounding banking, real estate, unemployment, demise of UT’s football team, etc. Most problems cannot and will not be solved in a single stroke. Improvement comes gradually, not overnight.

Bank lending is more optimistic. Banks nationally as well as regionally have been very cautious, rebuilding capital, and keeping credit standards stringent due to all the national issues and new lending guidelines. Although it hasn’t been immediate or dramatic, there are many indications that lending regionally has become more aggressive and credit availability is increasing. That said, we are a long way from ‘how it was’ a couple of years ago. Looking back to the last seven years, the change is much more noticeable with positive results showing most regional metro economies in a expansion mode. With all the issues in the lending industry still, most don’t want a return to the ‘way it was.’

Regional consumer confidence is a key strength

Texas is lucky in that whether it is our ‘attitude’ or just that we were not hit as hard as the rest of the nation, consumer confidence in our South and West region is higher than the national average. This healthy regional consumer confidence shows itself in regional and local retail spending. Restaurants and stores are having much better years than the previous seven years, but not near the record years of the previous decade.

Corporate investment

Nationally, regionally, and locally business executives have been cautious. As we continue to look at 10-K annual reports (a comprehensive summary of a public company’s performance) as well as potential venture funding, it will continues to get closer to a perceived ‘normal’. There is plenty of cash on corporate balance sheets and 2015-16 will see increased investment and hiring.

The conclusion is that there is more to be optimistic about than pessimistic. Should we question the strength of the economy? Absolutely. But realize, nationally there is a long ways to go. Regionally, Texas has been blessed and seems to be able to continue along a positive path. The anemic national economy is curtailing the positive economic growth and strength of our state.

Remember this, sold values have not retreated. Absorption is still there. Economic growth is still there.

Has the market caught up to itself? Not in my opinion. All economic channels seem to be taking a short breather before continuing positive growth. If there is a need to sell or buy, do so now. As a seller or buyer do your homework and value it correctly (if on the market over 30 to 60 days it is not valued correctly). If buying, the same standards apply. Limited inventory, and a little less demand. Watch your neighborhoods and understand that whatever real estate channel you are in the market still has room for growth.

How long will the high last?

We have gotten many inquiries about how long our economic high in Texas will last. I know that I have written about this a couple of times during the summer, yet the questions continue to focus on the negative rather than the positive.

Remember I am just an analyst, with no crystal balls or otherworldly skills that we are aware of. That said, I think the housing market (regionally as well as nationally) will continue its growth short term as well as long term.

Here are some basic facts that hopefully will show you the upside of real estate and the economy coming out of the worst recession in memory.

Population growth and household formation

The most boring economic statistical trend is U.S. population. It grows by one percent each year, a gain of about 2 to 3 million. The trend arises from about 4 million live births and about 2 million deaths in the U.S. each year. Legal immigration makes up the remainder.

More people should mean more housing demand. But that is not always the case. What really matters is household formation. One household can be one person living in a city apartment, or six people living in a two bedroom apartment. One household can also mean a family of six living in a suburban home. Population growth therefore can be accompanied at times by no growth in households if a young adult moves in with their parents. Currently, there are a record number of such cases here in our Texas metros. Such crowded living arrangements do not create housing demand.

Historically, there were about 1.2 to 1.4 million net new household formations each year in the U.S. The figure is typically low during an economic recession and downturn and typically bounces higher as better economic times return. Household formation has been running at half the normal rate for two years and slower the last seven straight years. The graph below tells the story. The Census Bureau reported that over the past four quarters, net household formations totaled only 458,000, compared with long-term projections by the Joint Center for Housing Studies of 1.2 to 1.3 million per year.

This is improving; the number of persons per household has increased by 2.6 percent since 2005, going from 2.69 to 2.76 persons per household. In projecting, if the persons per household had held steady over that period there would be an additional 3 million households today.

voice graph 8-29

Source: US Census

It seems nearly impossible for household formation to remain as slow as it has been. Remember the largest single age group in the US is 23 year olds. They have just begun to think about shelter outside of Mom and Dad, much less a home purchase. Therefore household formations are bound to increase. That in turn will create demand for both rental and ownership housing. Home sales and housing starts will therefore mostly rise in the coming years. Those in turn cause a rise in construction which again helps the economy, construction, and housing.

Now a crucial thing here is that while the 20-to-24 cohort is the largest now, in a few years, they will be prime-age workers: 25-to-29, the age at which people really begin to earn better money and buy homes and cars. The demographics are very favorable to apartment renting. And so of course these days, the multi-family housing sector has been strong. You hear all these stories about how people aren’t into homeownership anymore. But the demographics that are currently favorable to apartments will turn into demographics favorable to homeownership, as the cohort gets older, moves into higher paying jobs, and wants more space for those new babies.


Everyone needs shelter. The U.S. rental market has been strong in 2014, with rents increasing at an annual clip approaching 4 percent, builder confidence soaring, and vacancy rates below 5 percent in big cities and at a 17-year low nationally. Over the long run, you should expect demand for multifamily units to be stronger than prerecession levels due to a lack of accessible credit and age demographics. As the economy continues to improve and pent-up demand releases, demographic trends will be disproportionately favorable for the multifamily sector due to the young adults comprising a large share of suppressed household formation. When you look in our Texas metros, they fall right in line with this.

Homeowner and rental vacancy rates suggest that the number of houses and rentals available is shrinking. Vacancy rates simply refer to the percentage of properties which are unoccupied. A look at the data from the U.S. Census Bureau demonstrates that rental vacancy rates are falling sharply, while homeowner vacancy rates remain low. The lower the number, the fewer properties there are available to rent or buy. Look at your own community, how many homes are for lease or sale? Not many. Those that do come on the market have multiple offers, whether for sale or lease.


There is not enough land to address the needs of the population moving here. The development community, banks and equity, and municipalities are playing catch up to deliver enough lots and land for all the homes, offices, and retail that pent up demand from the last seven years has caused. That need is particularly acute in the Texas region, where three out of the four metros are two to three years behind on lot supply. Demand has stayed ahead of supply, another positive when looking at the longer economic needs of the local markets.


The labor market finally seems to be getting traction. Texas has been blessed through the recession, with Texas accounting for the majority of US job growth over the last five years. After several years of weakness we are starting to see the labor market pick up steam, having added 230,000 net new jobs on average for the first seven months of this year. Current economic projections show growth realistically averaging 3.3 percent in 2015, and the unemployment rate continuing to gradually decline. In this scenario, household formations should pick up and housing starts are projected to increase 28 percent over 2014’s pace to 1.3 million starts in 2015. Again, Texas has lead the country in having lower unemployment the rest of the country the last 7.5+ years.

Interest rates and affordability

Despite the talk that rising mortgage rates will slow demand, housing still remains relatively affordable because home values are still relatively low and rates are still historically low. The monthly mortgage payment-to-rent ratio for the U.S. is near the lowest it has been in more than 35 years. Thus, even with some increase in house prices and interest rates, the ratio will remain relatively low. Remember rates are the 2nd lowest they have been in years. Historically as rates increase, home sales slow, then the consumer realizes that rates will not retreat and they jump back into the market hoping not to lose any more traction on affordability. For every 1% increase in interest rates, the buyer loses 12% buying power. Present conditions make now one of the best times to buy ever. We are not going to hit the lows of 2009 through 2012. The market has healed and is getting stronger. The ability to find discounted inventory has passed.

The affordability index, (which measures the percentage of all households that can afford to purchase a median-priced single-family home) fell in the second half of 2013, but on a historical basis, it’s still supportive of good growth in the housing market, regionally as well as national. Readers can see that, according to the NAHB / Wells Fargo index, housing is more affordable than it was for most of the 1992-2009 period, when the bubble was happening.

voice graph 8-29 2

Home ownership still desirable

Lastly, In the U.S., owning a home is still more popular than renting. According to 2013 U.S. Census Bureau data, 33 percent of Americans rented and 67 percent owned homes. FNMA housing survey of May 2014 reported 76% of younger renters think buying a home makes more sense because it protects you from housing cost increases and owning is a good investment over the long term.

There may be a point at which renters decide that paying, say, $1,600 per month for a 500-square-foot studio apartment is too costly, especially when they could potentially pay less for a mortgage and get an entire house. For example in Austin over the last 10 years rents have gone up over 58%, home appreciation 38%, and wages 10%. The consumer realizes they have a better economic option in purchasing and controlling their housing destiny. While expensive rents are one thing, renters would also have to feel secure in the economy before making the leap to buy a home.

Currently in our regional markets, there have not been enough apartments to fulfill demand, which helps prompt would-be renters to look for a home. Many of our markets are near a tipping point on new apartment communities, which could cause concessions and a slowdown of escalating rents. This could slow those renter being pushed towards ownership.

Why am I optimistic? The housing market has been making a slow and steady recovery since the crash that led to rapidly declining home prices, record numbers of foreclosures, and an $8 trillion dollar loss of household wealth. The recovery continues to be driven by a combination of positive elements including home inventories (supply), slowing foreclosure rates, mortgage rates, availability of credit, institutional investing, and factors within the broader economy.

We are getting closer to a more normalized economy, and now we are expecting to see housing driven by fundamentals, and in fact, are seeing this in our Texas markets. The economic growth and labor market gains we saw in the second quarter of 2014 are projected to continue, strengthening household formations and the housing sector. A recovering housing sector will sustain the rally in homebuilding and construction despite likely increases in long-term interest rates. Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand. The result is an economy that gradually recovers back to a new normal. Nowhere is that more true than in Texas.

Investment in education will keep Texas on top

A couple weeks ago, I wrote about concerns of the national employment market compared to Texas. The U.S. economy finally recovered all the jobs lost in the 2007-2009 recession in May of this year.

To say it’s been an uneven recovery nationally would be an understatement, with over two-thirds of the nation’s states still short of their peak for total payrolls. The good news is that eighteen states plus the District of Columbia (government growth is good for local economies) had more jobs in May than their peaks before or during the recession. Three states are doing much better than the rest of the nation – Texas, California, and Florida. Seasonally adjusted total nonfarm payrolls are still below their previous peaks in 33 states plus, according to figures released mid July by the Labor Department.

Realize that although we have had a great surge of employment nationally, and the last two months have yielded 200,000 jobs per month, the US is still short about 150,000 jobs a month to keep pace with population growth. We consistently need 300,000 jobs a month to gain ground. Secondly, wage growth has been sadly lacking for the last decade. And this is where this country really needs focus as we see a larger portion of the market left without the benefit of home ownership due to affordability, including in our state. This is an opportunity for equity and landlords, because everyone needs shelter. And presently not much stands in the way of population and employment growth in the state.

The Texas economy has recovered more quickly for several reasons. First, the region lost a smaller portion of its employment during the recession. Second, Texas’s core industries – oil, gas, and technology have boomed for the last 7 years. And third, the region continues to draw residents from other states. This draw pushes Texas’s needs and demand for consumer goods and services, creating jobs and opportunities along the way. Texas added around 5.6 million people since 2000, more than any other state between the Census counts of 2000 and 2014. What’s drawing people to Texas? The region’s low cost of living, low level of regulation on most business, moderately priced housing, mild climate, and growing economy.

After a slow start in 2014, the regional economy picked up pace in the second quarter, with payroll employment growing at a faster rate than in the first quarter. The Texas Business Outlook Surveys by the Federal Reserve show the optimism and point to an uptick in activity in June and July. The years 2nd quarter July Beige Book continued to note healthy growth and optimism in business and consumer outlooks. The energy sector continued strong activity in commercial real estate, and lower economic uncertainty as well as an aggressive group of economic leaders in the region all seem to be helping Texas.

Texas continues to add jobs at a faster clip than the U.S. Texas employment growth accelerated to 4.3 percent in the second quarter, up from 2.4 percent in the first. This is the strongest growth the state has seen since third quarter 2005 and is above the robust 3.9 percent growth seen in first quarter 2012.

In the first half of 2014, the regional job creation was broad based, with the state’s lead over U.S. job growth extending to all major sectors except construction, manufacturing and miscellaneous services. Although manufacturing employment growth has been sluggish year to date, job creation in chemical manufacturing—tied to the booming energy sector—has bucked the trend. The state’s unemployment rate held steady at 5.1 percent in June, the lowest since August 2008 and again better than the national rate for over 7.5 years. Why is this important? We have not seen all channels of regional employment kick in. Even in this state there is still a number of unemployed (656,177+/-) and under employed. Imagine if they begin to contribute to our regional economy.

The point is that Texas and the nation are healthier, yet have plenty of room and opportunity to improve. Whether you look at the Federal Reserve reports or any economic analysis, it is obvious there is a need for skilled workers in high demand sectors such as energy and construction. There are also reports of modest employment needs in airlines, high tech, fabricated metals, primary metals and transportation and equipment manufacturing for the second half of 2014.

With all the positive news, what does Texas need to do to continue to build on our growth? The “good news” is that Texas scores high on overall tax burden, low business regulation, employment in high-tech industries, venture capital, initial public offerings, low unionization, unrestrictive minimum wages, exports, foreign direct investment and percent of population born abroad who come to work.

The bad news: Texas ranks near the bottom in most human capital measures. Texas is dead last in the percent of the adult population that graduated from high school, 37th in percent of population enrolled in degree-granting institutions, 35th in academic research and development, and 41st in science and engineering degrees awarded. Higher education and higher wages leads to a better standard of living.

Besides our primary education, there is a need for more tier one universities. To get a better sense of this, look at the membership list for the Association of American Universities (AAU), which is regarded by most scholars as the definition of the cream of the crop of research universities. The AAU consists of 60 U.S. and two Canadian universities. These 60 U.S. schools garner over 50% of all federal R&D dollars to colleges and universities; they are home to 87% of all elected members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine—the highest recognition in each of those fields. Since 1901, 35% of all Nobel Prizes have gone to individuals affiliated with AAU universities. California has nine AAU members. The New York area also has nine. And Texas? We have three: Rice, UT–Austin, and Texas A&M.

According to the U.S. News & World Report college rankings, Massachusetts has 10 schools ranked in the top 100 universities. The New York area has 11 and California has 13. Texas has only six: Rice, ranked 18th, UT–Austin (52nd), Texas A&M (69th), SMU (60nd), Baylor (75th), and TCU (82nd). We all understand where the focus needs to be. We all admire the Rice Owls, their academic standing and their great band, but we should be embarrassed by having them as the sole university in the nation’s top 20. Texas should have several! The world of today and tomorrow is driven by education. Technology is great, but California and other states continue to lead in the education race for those needs. With the opening of Latin America to business, what state has the most potential? Texas, but only if we stay ahead of the of the competition―not just from other states, but from the world― which will only happen if we are able to nurture and harness Texas brains.

We must begin to focus in each of our cities and schools on the future of growth and its impact. Growth is tied to the ability to stay ahead of the curve and compete in tomorrow’s global marketplace. To do this, Texas must better educate its population. Think about the next school bond election, think about where this state should focus.

Who will drive the economy after the baby boomers are gone? According to the US Census there are more 23 year olds than any other age group in the US. The education of this and future generations is paramount. Compare the lifetime earnings of those with college degrees to those without. $82,720 is the average earnings of full-time, year-round workers 18 and older with an advanced degree (bachelor’s degree or higher) in 2012. Workers whose highest degree was a bachelor’s had mean earnings of $70,432. Mean earnings for full-time, year-round workers with a high school diploma (includes GED certificate) was $41,248, while workers with less than a ninth grade education had $26,679 average earnings. Education has a huge economic impact!

The coming month will be huge for retail – it’s the back to school shopping season. The U.S. Census Bureau estimated that $8.6 billion was spent at family clothing stores in August 2013. Sales at bookstores in August 2013 were estimated at $1.6 billion. The number of children and adults enrolled in school throughout the country in October 2012 was 78 million out of 330+ million. If just less than 24% of our population buys school supplies presently, and we continue to focus on educational improvement, it will help our economy and give those other states less to talk about when they want to diminish the accomplishments of our state.

If you have children, good luck shopping this weekend. If you don’t, you have been warned!

Three things driving the Texas economy today

Most of you who are reading this know that Texas has been on a roll as far as optimistic news and job growth the last couple of years.

That said, what are the big economic stories for Texas through the rest of 2014?


As the U.S. has becoming increasingly energy independent, changes in U.S. energy production are impacting jobs, income growth and the quality of life – key determinants of real estate value and successful investment. The mix of energy types produced – crude oil, natural gas, and alternatives such as wind and solar energy – provide investment opportunity and risks. Nowhere is this more apparent than in Texas.

Still recovering from the recession, weakness in manufacturing and cuts in federal spending (85,000+ jobs lost in civil defense last year in Texas) contributed to the state’s job growth slowdown after leading the nation for a number of years. Still, the economy continued to expand broadly, with employment in oil and business services, and construction growing strongly. Even with slower job expansion, Texas remained the third fastest growing state in 2013, trailing only North Dakota and Florida.

Texas has continued to add jobs faster than the 47 other states in the nation so far this year. The energy industry led the state’s job growth for the 12 months that ended in March with a 5.8 percent increase in jobs. Energy activity continues to be strong and drilling activity continues to increase, according to the Federal Reserve Bank’s Beige Book from late February through early April. The oil and gas rig count was 894 as of April 25, a level not seen in nearly two years. Texas accounted for 60 percent of the increased U.S. drilling. That said, energy job growth should be plateauing this year.

In the Lone Star state, energy is the number one issue affecting real estate. The Texas economy in 2014-15 is well positioned to continue expanding and will likely remain among the nation’s fastest growing. Employment grew 2.5 percent in 2013, down from 3.3 percent in 2012, but 0.7 percentage points above the national average. By 2014, the state of Texas is expected to jump ahead of the oil-producing heavyweights Venezuela, Mexico, Kuwait, and Iraq to become the ninth-largest oil producer in the world. According to one study, the industry has directly created well over half a million new jobs since the start of this energy cycle.

New oil and gas reservoirs continue to be discovered in the Lone Star State. Texas leads the nation in crude oil and natural gas reserves, accounting for 24.2 percent of the nation’s oil reserves and 29.5 percent of the nation’s natural gas reserves. Three big oil-producing areas in the U.S. are “on fire” right now, and two of them are in Texas. First is the Permian Basis in West Texas. A recent forecast on production by Simmons & Company shows a near doubling by 2015 to around 2 million barrels a day. The other is Eagle Ford in South Texas, where production is now up 65 percent. In just the last 12 months, U.S. midstream companies have invested $29 billion for oil and gas infrastructure. That capital investment is going to drive significant job growth in Texas.

Energy is impacting local economies as energy companies are projected to spend $100 billion over a number of years on drilling operations in the Eagle Ford Shale, an oil and gas rich geological formation that scoops through south Texas in normally low income areas surrounding Austin and San Antonio, with San Antonio receiving the lion’s share of spending due to location. The Eagle Ford Shale production surpasses every other oil operation currently operating in the world. This opportunity would not have been made available if it weren’t for the innovations in fracking and horizontal drilling that led to the boom in Texas and around the world lead by a Texan named George Mitchell. At the time, many thought his obsession with finding a new way to access fossil fuels trapped underground was frivolous, but his advances have radically changed the American economy and nobody seems to be questioning the success of it now.

The positive effects of the latest Texas oil boom on communities in south Texas – a historically under-served and poverty-stricken corner of the state – is best illustrated through the town of Cotulla, the county seat of LaSalle County. LaSalle county was one of the poorest counties in the state per capita before oil was found. Former president Lyndon Johnson used to write about the ‘deeply generational poverty’ of the area. Now Cotulla falls within the second largest oil-producing region of the United States. The oil boom has increased sales tax collections in Cotulla over six times, from $445,000 in 2009 to more than $3 million, and in the past two years the town’s population has tripled. Between 2008 and 2012, the property tax base went from $52 million to $137 million—$4.7 billion countywide. That bonanza has transformed the community, providing money for housing, new retail, education and more.

Energy continues to influence positively the fortunes of this state, not just in the large metros, but also in many smaller communities across the state. Barring a catastrophic event, that growth should continue for a while.

Job growth

Besides the strength of the energy industry, other industries will continue to keep the job market to remain strong in Texas in 2014-15. The Texas economy gained 375,300 nonagricultural jobs from May 2013 to May 2014, an annual growth rate of 3.4 percent compared with 1.8 percent for the United States. Strong job creation has had and is expected to continue to have a positive impact on residential real estate in almost all Texas metros and cities. The types of jobs being offered should move up the quality scale, raising average wages and boosting purchasing power for consumers as well as the ability of landlords to extract rents. Demand for office space continues to increase as many employers continue to review per-employee space requirements, carefully considering space needs because of changing technology and noting the younger workforce’s preference for living in cities and working in open format workspaces.

Even while the state is adding a disproportionate share of jobs, its record of robust employment growth has been clouded by questions concerning the quality of the new positions, echoing what appears to be a common percep¬tion of just creating low paying jobs. Average wages have historically been lower in Texas, along with median household income. The state also has a large share of workers earning the federal minimum wage. According to the Bureau of Labor Statistics, 7.5 percent of hourly workers in Texas in 2012 were paid at or below the federal minimum wage, compared with 4.9 percent nationally. Texas’s share was second only to Idaho’s, at 7.7 percent. However, due to Texas’s third lowest cost of living in the US, even those low pay checks afford a better quality of life than in other states. Most Texas economic sectors contributed to the expanding numbers of higher paying jobs since 2000. Employment growth in sectors paying above the me¬dian wage reflects the state’s expanding population and need for more schools and hospitals, the recent strength of the energy sector, and the diversification of the Texas economy.

Let’s look at all jobs being created in Texas. More high paying jobs have been created in Texas than low paying. An example is since 2000, 42% of all jobs in Texas have been created in education and health with the net new high-wage jobs due to growing demand for teach¬ers, doctors, nurses and other positions requiring a college degree.

The energy industry, which in Texas consists mainly of oil and gas extraction and support activities, also contributed strongly (15 percent) to expansion in the top half of the wage distribution between 2000 and 2013. Payroll employment in oil and gas extraction and support activities for mining in Texas more than doubled between 2000 and 2013, according to the Bureau of Labor Statistics Current Employment Statistics. Interestingly, the oil and gas sector pays above-average wages although many oil and gas jobs do not require a college degree.

Critics of Texas job growth often contend that Texas’s exceptional job growth has not produced a high standard of living for its residents due to the low quality of the new positions. However, Texas’s job growth since 2000 has been much more proportional in all levels of employment growth than in the rest of the nation, where net new jobs have been concentrated at the bottom and top of the wage distribution and the middle has shrunk further. Yes, Texas still has a high share of mini¬mum wage jobs, partly due to the state’s relatively low minimum wage (set equal to the federal minimum wage). A low minimum wage and plenty of low-skilled workers ensure that Texas will have a high share of minimum wage jobs. On the other hand, a relatively low cost of living in Texas ensures that workers earnings here will go further than in other large states.

Millennial population growth

With that job growth, Texas has caught the attention of the Millennial generation, those born after 1980, second largest generational cohort after the Baby Boomers. They represent 27+/-% of the U.S. adult population and their influence is far reaching. This group is the first to fully embrace new technology, including the Internet, e-commerce, mobile communications, and social media. Their practices are poised to change the way society interacts, receives information, shops, and lives. Millennials show a strong preference for urban living and working, value mass transit, and “work, live, play” communities. They carry high levels of student loan debt, drive fewer cars, marry later, and often choose smaller living spaces than the typical homes in the suburbs that appealed to their parents a generation ago. Their preferences are already having an effect on both city and suburban residential, multifamily, office, and retail sectors.

Just by the description they would seem destined for the west and east coast metros, right? The good news for us in Texas is our metros rank among the best places for millennials to live. Recent college graduates have a lot to consider when thinking about their next steps. In addition to career paths, they must weigh quality-of-life factors in the cities they may soon call home.

Niche.com has taken out some of the guesswork in its recent list of the top cities and neighborhoods for millennials, and three of the 25 metro areas (with populations of at least 1 million) are in Texas. Austin ranked No. 2, just behind New York City. Dallas earned a respectable No. 8 slot, and Houston landed at No. 21.

To determine the winners, Niche.com looked at data from the U.S. Census American Community Survey and FBI Uniform Crime Reports, plus it surveyed more than 500,000 college students and recent graduates. While the former provided obvious statistics like percentage of population between 25 and 34 years old, median rent and income, racial diversity, and unemployment rate, the surveys helped Niche.com take into account factors such as sports, shopping, nightlife, accessibility and cultural attractions. Do Texas metros offer those things? Obviously, most graduates think so!

In the 50’s, this age group looked to California and other western states to expand. In 2014, Texas has become the ‘land of opportunity’ for many of these young graduates as evidenced by the migration of these age groups out of other states to the Lone Star state.

All three of these will continue to be the big economic strengths of 2014-15. There are many other industries and opportunities helping the state, something we may discuss in future posts. But today these three economic impacts stand above the others in helping the growth of Texas this year and into the future.

Houston and DFW midyear review

Last week we started our midyear review of Texas markets with a look at San Antonio and Austin. This week we will be looking at DFW and Houston. As stated last week, the majority of our state has enjoyed tremendous job growth and all the benefits it brings.

Over the last twenty-three years, the number of jobs has increased almost twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita. According to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

Texas has been creating or attracting middle- and high-wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

That’s a big deal. From 2000 through 2010, the country as a whole experienced zero net job creation, and the continuing decline in middle-class jobs is arguably the largest single threat to the economy’s viability. The first and most obvious question to ask about the Texas boom in jobs is how much it simply reflects the boom in Texas oil and gas production. Texas boosters say the answer is very little, and play up how much the Texas economy has diversified since the 1970s. And indeed, Texas has more high-tech, knowledge-economy jobs than it did forty years ago. But so does the rest of America, and the stubborn truth is that, despite there being more computer programmers and medical specialists in Texas than a generation ago, oil and gas account for a rapidly rising, not declining, share of the Texas economy.

Thanks to fracking and other new drilling techniques, plus historically high world oil prices, Texas oil production increased by 126 percent just between 2010 and 2013. Only a few years ago, Texas’s oil production had dwindled to just 15 percent of U.S. output; by May of 2013 production had jumped to 34.5 percent, as new drilling methods opened up vast new plays in once-forgotten corners of south and west Texas with names like Eagle Ford, Spraberry Trend, and Wolfcamp. Thanks to the increase in drilling, Texas already produces more oil than major oil producing countries such as Venezuela, and is headed to become the ninth-largest producer of oil in the world, ahead of Kuwait, Mexico, and Iraq.

The economic effect of the energy play on cities and metros is apparent in traditional oil towns such as Midland/Odessa, Houston, and Fort Worth, which have unemployment rates lower than Texas’s and the rest of the country in April 2014. In addition non-oil Texas cities and metros such as Lubbock, San Antonio-New Braunfels, San Angelo, and Longview have seen their unemployment numbers bolstered by the strength of the energy play.


To say growth in Houston has been fueled by the strength in oil and gas exploration and the supporting technologies would be an understatement. The shale gas exploration in particular is creating jobs in multiple areas. It’s led to 10,500 jobs in professional and scientific services, while administrative, machinery, and manufacturing industries have also seen job gains. Job growth is the seventh strongest in the country over the last five years, largely because Houston’s energy infrastructure is only getting more developed. Multiple companies are building export terminals, fractionaters, and ethane crackers. Because of this growth Houston has seen a huge increase in engineering and construction jobs as a result.

Houston saw little to no slowing during the recession compared to the rest of the US. More than 100,000 new jobs will be created in 2014 for the Houston MSA, drawing thousands of new residents. Despite an increase in multifamily completions this year and last, housing supply and demand will remain well aligned. Since hiring resumed four years ago, more than 12 jobs were created for every apartment brought online over the same period. The ratio of jobs to completions will decrease in 2014, but should remain highly favorable, supporting a little decline in vacancy of residential rental.

Bayou City home sales saw sales volume fall for the first time since May 2011. The lack of housing inventory resulted in the market’s first home sales decline in three years in May. Thirty-four consecutive months of positive sales ended in April with flat year-over-year sales. However, sales activity for homes over $500,000 outpaced last May 2013, and coupled with low inventory levels, drove the average sales price to a new record

Houston’s office channel continues to improve as booming energy markets support expansion of top industry players and their campuses. The second half of 2013 and the first half of 2014 was characterized by several major leases, with Bechtel, ConocoPhillips, Statoil, and ExxonMobil each committing to more than 400,000 square feet. This year, ExxonMobil will also complete its 3 million-square foot campus in The Woodlands/Spring area, where Southwestern Energy’s 515,000-square foot headquarters is slated for delivery. Numerous other build-to-suit projects have broken ground in the metro, including BHP’s office tower in Uptown, Phillips 66’s campus in Westchase, and Noble Energy’s headquarters in the Northwest submarket. Downtown, Chevron’s plans to expand its presence with a 1.7 million-square foot tower were recently delayed. The project, which was initially slated to break ground in 2014, could bring 1,700 jobs to the area. In the Class B sector, construction is limited, which will support occupancy gains among existing properties.

Houston remains on many equity and investors ‘needs’ lists this year as local job growth reaches well beyond the national rate. The metro’s surging economy recaptured the attention of REITs and institutions, which accounted for nearly 70 percent of dollar volume in 2013, up dramatically from the previous year. This influx of capital has heightened competition for best-of-class deals, driving cap rates for high-credit assets in strong locations into the mid 6 to 7 percent range. Activity in the metro’s Class B sector has also picked up, thanks in part to the return of private out-of-state buyers who have focused almost exclusively on core submarkets.

Houston retail has benefitted also, with retail vacancy slipping to its lowest level in years and should continue to improve in 2014 amid the strong economic growth and resurgent homebuilding. The Woodlands, Katy and Energy Corridor submarkets, in particular, stand to benefit tremendously from healthcare-sector growth and expanding energy firms.

We have talked a lot about the resurgence of the energy industry and its effect on the metro. Remember that Houston is also home to one the largest medical centers in the world. The innovation and leadership generated from Houston leads most of the country and world in the industry. This area will continue to be one of the major employers and leaders for the Texas economy. As the Dallas Federal Reserve has pointed out, 40+% of jobs created the last 15 years were in the health and education channels.

As in the other real estate channels, above-average economic expansion and growth prospects in the Houston area continue to attract retail investors to the area, supporting property values escalating and encouraging more owners to sell. Because of that demand in closer-in submarkets, land constraints and rising costs have relegated much of the new retail space to mixed-use projects.

The opening of Mexico to oil exploration for the first time in 25+ years, and the value of lower priced, yet high occupancy real estate should continue to help Houston be one of the healthiest economic metros not only in the state and region, but the nation also.


In Dallas/Fort Worth the housing market has not been as robust as the rest of Texas. 2013 showed a burst of activity that slowed with the start of 2014. Gains in home values and sales early last year have slowed. A year ago, sales of pre-owned homes were up 23 percent and prices were rising at double-digit rates from the previous year. However this last month, home sales in the area fell 1 percent from a year earlier. Prices rose, but by 6 percent from May 2013. The slowdown in the pre-owned home market growth is likely to continue in the months ahead because of a tight supply and consumer push-back against huge price increases.

The feeling among builders and realtors is that consumers in the D/FW market are waiting for better economic signs before taking a leap to buy in many cases, which continues to keep the market sluggish and adds to the time it will take the market to heal. Adding to the sluggishness is the delays in completing homes during the quarter due to a shortage with many trades. The extended construction timeline negatively impacted the number of closings for the quarter, leading to only a 14% increase in closings compared to a year earlier. The tight supply is extending the construction cycle and driving up construction costs, lot costs, and ultimately home prices.

The DFW metro area continues to have one of the most diverse economies in the US, with strong establishments in tech, aerospace, telecom, and financial services. Employers will create 113,900 jobs in 2014, more than any other metro in Texas, raising payrolls 3.6 percent. In 2013, 112,700 positions were added. Population growth is strong, housing sales are, and employment at corporate headquarters increased by more than 4,000 works over the last five years.

Toyota Motor Corp.’s relocation of its U.S. headquarters to Plano has been a welcome addition and may bring $7.2 billion of economic activity over 10 years. The figure includes $4.2 billion from payroll, along with direct and indirect spending, and sales and property tax revenue, according to the analysis by Grant Thornton LLP, a Chicago-based audit, tax and advisory company. The report was released May 12 when the city, a Dallas suburb, approved incentives for the company.

The central location of DFW and the abundance of large contiguous space will continue to attract corporations as they look to expand.

The push back from home buyer bodes well for DFW landlords. These buyers who are waiting for values to change, combined with rising interest rates and tight underwriting, will preclude them from purchasing a home, a positive trend that will further support apartment operations this year and next. Almost all submarkets will post gains in occupancy and rents during 2014, and construction will reach the highest level since 2000, lifting competition and encouraging greater concessions in some areas

The DFW office market continues to be healthy with major office leases being shopped. The lack of aggressive concessions from landlords is a testament to the strengthening of the market. Another year of strong economic growth in the Metroplex will reinforce investor optimism through 2014. REITs and institutional investors, which accounted for more than half of last year’s dollar volume, will again dominate the market for high-credit Class A deals. Landlords continue to see small rent improvements strengthened by corporate inquiries.

Texas is extremely business-friendly with a low tax, low regulation environment that makes it attractive to out-of-state firms. All of the tech hustle and bustle has led to an influx of young professionals, which has led to a boom in construction in all metros. To consider that the state has put its focus on too few industries for a strong future is a weak argument, when looking at the facts. Again realize that we are lucky, blessed to be living in Texas, at one of the best times in history. Austin, San Antonio, Houston, and DFW will be the recipients of over 25 million new Texans over the next 20 years. To put that in perspective, few if any states will see that type of growth over the next 20 years. That type of growth has been likened to what happened to California in the 60s by some economists.

As in all Texas markets, the number of jobs and lack of inventory has gotten most buyers off the fence and helped new and resales through the first of the year. Developers are scrambling to put lots on the ground to address the lack of inventory. Comparatively all real estate channels have stayed healthy also. Not as robust as previous years, but good. Values have remained stable with a little appreciation. Developed lots are just above equilibrium, with expansion in the pipeline for the first time in all metros, however most markets will continue to be tight through the end of 20114.

Texas jobs: more than just energy

Texas has been creating jobs. A lot of jobs. Still, Texas’s enviable economic performance is not without its detractors. There are two common critiques of the Texas economy. The first is that Texas is creating primarily low-paying jobs. The second critique is that all the new jobs are energy related. Hopefully this newsletter and this Dallas Federal Reserve paper will help dispel those doubters on Texas job growth.

• The common theme is that the majority of jobs are created in Texas are energy related. Incorrect! Education and health services contributed 42% of net new high wage jobs the last 13 years.
• Oil and gas activities jobs doubled between 2000-2013.
• Texas job growth since 2000 has been much more in proportion to the rest of the nation. Nationally, net new jobs have been concentrated at the bottom and top of the wage distribution, while the middle has shrunk.
• Average wages have traditionally been lower in Texas. However, cost of living is dramatically cheaper than the majority of the US.
• Texas created more high wage than low wage jobs over the last 13 years.
• Texas experienced stronger job growth than the rest of the nation in all wage quartiles over the last 13 years.
• In Texas the top two income level quartiles grew at 28% and 36% over the last 13 years
o These two income level quartiles were responsible for 55% of net new jobs. The rest of the nation lost traction in these income levels over the same period

Energy jobs

Historically (last 80+ years), any negative change in energy prices had a devastating effect on the Texas economy. For example in the late 80’s many things caused the crash, but the main one was when oil went from $80 to $10 a barrel in one year. There was an oversupply, lack of demand, and changes in tax law, and the failure of a whole portion of the financial market (Savings & Loans) that also contributed to the Texas region recession in the early 90’s. That has changed over the last 20 years with the urbanization of China, India and other countries. The amount of oil and energy supply is almost even with demand presently.

Secondly, Texas has a much broader based economy today. Medicine, technology, cloud computing farms, etc. are as much a portion of the regional economy as oil. Texas is not as dependent on energy as they once were.

Remember, it’s always about supply and demand, and the fears of future disruptions and/or gains to the supply plus expectations of future increases or lack thereof in the demand, particularly in the energy field.

After OPEC enforced a rise in oil prices in the 1970s, oil prices hit a then all-time high of $110.53 a barrel in 1980 (adjusted for inflation – this remained the peak until July of 2008, when oil hit $138.73). This caused for the first time improved conservation measures in the U.S., including a mandated increase in CAFE, the average gas mileage in U.S. car production. The U.S. was still driving worldwide demand for oil in those days, and importing to meet needs, so any measures we took had a disproportionate effect on demand. Companies also tried to increase supplies by new drilling and new resources.

With lowered demand and increased supply, oil prices eventually dropped. The reverse conditions hold today. U.S. demand has steadily risen. The growth of low gas mileage SUVs – which don’t count in CAFE ratings because they are treated as trucks – along with the growth of light trucks themselves mean that the vehicle fleet requires far more gas than future expectations once thought, especially since small and efficient cars sell even more poorly than anticipated.

Refining capacity has not increased because the tougher EPA standards and the potential of low oil prices of the 1980s-90s era I am referring to meant that oil companies then did not have the huge profits of today to sink into expansion.

And the energy appetites of China, along with India, have changed the worldwide demand equation. Japan was once supposed to do this, but the implosion of the Japanese economy – which took down much of the rest of Southeast Asia with it – meant that the demand increase never materialized. This fooled the shortsighted and the extremely large and quick Chinese ramp-up caught them by surprise.

Today oil demand is running at nearly the same level as oil supply, as least for reasonable expectations of what can be pumped and refined. That means that oil futures – which are the price per barrel numbers that are featured on the evening news – are driven by fears of any possible disruption. Many of the major sources of oil – Iran, Iraq, Nigeria, and Venezuela – are iffy in near future terms. Almost anything could disrupt supply from them. Katrina put a hurt on domestic refinery and pipeline infrastructure that we are still recovering from. SUV sales are down, true, but the vehicle fleet is still biased heavily toward gas guzzlers and will require years to change in any appreciable fashion. Commuting times continue to increase nationwide, causing more gas consumption with stop and go traffic. Experts can probably name a hundred more problems with supply and demand.

As good as the job market is in Texas, it could really benefit if oil restrictions that were put in place in the 80’s were lifted. The United States can export coal, gasoline, and (sometimes) natural gas. But, for the most part, U.S. companies aren’t really allowed to export crude oil. That’s the law. The relevant laws here date back to the 1975 Energy Policy and Conservation Act, which directed the president to ban crude oil exports except in select circumstances. The export ban was put in place back in the 1970s to “protect U.S. consumers from volatility and price spikes.” The discussion of lifting this ban would have huge positive economic news for Texas.

The point of this long answer is that economically the Texas oil regions are in a much better place now. They have the benefit of being resource rich, in addition to a low tax burden (46th in the country), cheap land and development costs, and a talented workforce.

Is Texas’s growth sustainable?

Texas needs an additional 10.5 million housing units by 2050 to accommodate our growing population. Considering that the majority of growth will take place in Houston, DFW, San Antonio, and Austin, this is equivalent to adding 70,945 housing units per year, per metro.

“Texas is projected to add around 30 million residents, an increase of nearly 120%, over the next four decades,” said Dr. Jim Gaines, research economist with the Real Estate Center in the Mays Business School at Texas A&M University. For you that are not familiar with Dr. Gaines or the Texas A&M real estate center, they are the top real estate data source in Texas and one of the top in the nation. They are not paid by the industry, but are academics, which in my eyes lends a lot of credence to their findings.

This finding begs the question: is this growth sustainable? Can this strong economy last that long? After 35+ years of watching the Texas economy, I would say the answer is yes.

First, let’s start with the ‘can do’ attitude of the state. Many Texans through the oil and real estate recession of the late 80’s and 90’s. Oil and real estate within months lost 90% of their values and caused a large economic shock to the region, which took a decade to recover from. This may be one reason that Texas businesses were more conservative about expansion than the rest of the country during the last boom. Instead, state, municipal, and business leaders got together to map out strategies to make our state more economically diverse and less dependent on single industries.

In Austin after the 2000 tech bust, the private-public partnership ‘Opportunity Austin’ was created to make the city’s economy more diversified and less dependent on one industry. Austin has been recognized as being highly successful with their wider economic base of recruitment, to the envy of other metros and states. Houston which has long been the “energy city” has a much broader base outside of energy, driving the area’s growth. A diverse economy helps to insulate the state from recessions.

Texas led all states over the last ten years with an increase of 427,000 people, according to census estimates released last December. Eight of the 15 fastest-growing U.S. cities and towns for the year ending July 1, 2012, were in the Lone Star State, according to population estimates released by the U.S. Census Bureau earlier this year. Half of the top ten metros were in Texas, No. 2 Houston, No. 4 San Antonio, No. 5 Austin, No. 7 Dallas, and No. 10 Fort Worth.

The number of Texans more than doubled from 1970 to 2010 (to 25.1 million) and is approaching 27 million. Depending on the assumed rate of people moving into the state, by 2050 this number could well double again.

The Texas triangle of Dallas-Fort Worth, Houston, and the Austin-San Antonio corridor have seen the majority of the growth, but the fracking boom has helped Midland-Odessa and south Texas to grow as well..

The country is well aware of Austin’s growth, which added 25,395 people this year, increasing the population to 842,592, and moving the city from the 13th to the 11th most-populous city. When you look at the growth numbers, there’s no indication growth in Texas is slowing down.

Look at the potential explosive growth in pure numbers of the larger metros:

•The Dallas-Fort Worth Consolidated Metropolitan Statistical Area is expected to grow to nearly 16.8 million in 2050, an increase of 163% from 2010.
•The Houston-Sugar Land-Baytown San Marcos MSA is projected to expand to more than 14.9 million, a growth rate of more than 143%.
•Expectations have Austin-Round Rock-San Marcos MSA more than tripling to over 5.3 million residents by 2050, while the San Antonio-New Braunfels MSA’s population will hit 2.4 million, double the number in 2010.

Among all small US cities with over 50,000 people, San Marcos grew the fastest, at 4.9 percent during the year. The home to Texas State University made the list by the thinnest of margins — its population estimate was 50,001. Following it in quick succession in the top 15 fastest growers were Midland (3), Cedar Park (4), Georgetown (7), Conroe (10), McKinney (11), Frisco (12) and Odessa (13). To put this in perspective, consider that no other state had more than one city on the list.

Now that I’ve wowed you with population figures, what exactly is the case that Texas will be able to sustain this growth? Obviously, we can’t see the future, but we know what drives growth: jobs. And over the past year, Texas added jobs in 10 of the 11 major industries, including professional and business services, leisure and hospitality, trade, transportation and utilities, education and health services, construction, government, financial activities, mining and logging, other services, and information.

Management, scientific and technical consulting services – This channel is expected to have 83% growth over the next 10 years. Whether it is the financial, energy or tech industry, all of these have a strong foothold in Texas, with all metros have their separate strengths in each channel.

Services in the health industry – Health services are expected to grow 74% nationally. Again Texas looks good, with the number of baby boomers coming of age in this state and the continued immigration of those from other states due to our lower cost of living. This includes medical, health services, elder care, etc.

I had knee replacement in the last year and know many people who will need similar care soon. The projected growth is great. It starts in Houston with its world-renowned medical center. But the other Texas metros are stepping up quickly, with new medical facilities and teaching schools opening. Remember Texas is projected to have a 40% shortfall of general practitioners within 20 years.

Technology – With the successful run of Dell, Rackspace, Texas Instruments, and other high tech companies, the continued projected growth of that industry (data processing, cloud computing) all have strengths in their respective metros, and all are projected to have over 50% growth in the next ten years.

Energy – The shale play has caused a 32% increase in jobs in the last 12 months. Based on current projections the growth in jobs will slow, but there is a strong projected growth of 35%+ over the next ten years in the energy sector.

We have the jobs, and we have the people. Even with all this demand, one major factor is holding down growth in real estate – the lack of developed lots. Austin is projected to have a shortage for the next 3-4 years. Houston and San Antonio are similar, and DFW is not far behind. All are in the top ten markets in the nation in housing starts while also being in the top ten for lots needed.

In the August national builders 2013 survey, 59 percent of builders reported that the supply of lots in their markets was low or very low—up from 43 percent September of last year, and the largest low supply percentage seen since they began conducting surveys in 1997. The same survey found that lot shortages tended to be especially acute in the most desirable locations. Thirty-four percent of builders said that the supply of A lots was very low, compared to 18 percent for lots in B and 12 percent for lots in C locations. The shortages have also translated into higher prices for builders who are able to obtain developed lots to build on.

Builders have been unable to respond to the high demand for housing due to these lot shortages. Additional barriers include a shortage of labor in carpentry and other key building trades, tighter lending requirements, and a recent uptick in interest rates. There is not a lot of land in the pipeline ready to go, so land developers are working to meet the demand from home builders, but it takes time to obtain all the entitlements -so this could still be an issue in 2014-15 particularly in those markets where the entitlement process is longer.

The growth has not been without cost to rural Texas. In 2010, more than 64% of the Texas population lived in one of the four major metros. However, by 2050, nearly 75% of all Texans will reside within those major areas.
As these metros continue to expand, growing pains will arise, primarily those linked to water and transportation. But do I think it is sustainable? I think there is a strong case for optimism over the next 10 to 40 years. Barring a catastrophic event, It is hard to imagine why you would not want to invest in Texas and its growth.

Don’t take Texas for granted

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).

yellow graph

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.

Texas real estate: no sign of slowing down

Texas continues to lead the national economic recovery. Home prices are on the rise, businesses are relocating here, and jobs are being created. I wanted to revisit the major Texas metros and examine all channels of real estate to really show how well we are doing.

First, understand that the median price for homes in the state of Texas hit another all-time high in the second quarter of 2013 as demand for homes in the Lone Star state continues to rise as supply struggles to keep up. On a statewide basis, 79,760 single-family homes were sold in the second quarter of 2013, up 17.78% from the same quarter of last year. This also represents the most homes sold in a single-quarter since the Texas Association of Realtors began this report in 2009. Austin had their best month ever since records were started in the early 1960’s, with 3,135 single-family homes sold in the Austin area, which is 35% more than July 2012.

To put that in perspective, realize that there were only 6,100 listings, so a little over 50% of all listings sold in central Texas. San Antonio had a record month with 2430 listings sold, over a 24% increase in sale over a year ago. Dallas had a record month with close to 9,400 home sales in July. Houston also had a record month. In Texas, demand in the state was strong as ever, with 43 out of the 47 markets included in the report showing an increase in sales year-over-year.

More homes are selling, and for higher prices. The median price in Q2 2013 was up 9.98% from the prior year, reaching $177,300. The average price rose 10.44% from the prior year to $235,075. According to the Texas Association of Realtors, those are the highest figures for median and average price ever seen in Texas real estate. All of us living in one of the Texas metros sees or hears about the strength of the residential market, with home values increasing at around 10% this year.

The economy is booming with job and population growth. And, for the first time perhaps ever, home values are appreciating at double digit rates. We don’t believe this will last forever. But for a limited time, we have the opportunity to experience what the rest of the country has had in appreciation in the last boom and now.

Houston’s economy continues to remain well positioned with over 99,000+ jobs created this year. This continued increase in employment will feed housing, office, and retail absorption. The rapidly expanding energy and medical sector are the major economic catalysts for Houston. New and resale residential properties are doing well, with the lowest supply of homes on the market since December 1999. Houston is leading the nation in home starts, adding pressure to an all ready tight market. 2013 should bring in excess of 27,000 starts. This is still far below the boom days of 2006, when home starts neared 50,000, but a strong recovery compared to other cities. Rental rates are also way up — in office towers, in apartments, warehouses and even for people who are leasing single-family homes.

Metro wide, over 9,200 apartment units are under construction with another 20,000+/- planned. While new apartment supply continues to increase, demand is outstripping development, putting pressure on rents, particularly in class A complexes. With the potential of overbuilding, and with average Class A vacancies below 7% and rents spiking, developers have been hustling to be first in line to bring new multifamily product out of the ground and to the Houston inner loop market. Apartment absorption has caught up with new construction, shown by the 92% occupancy citywide, even though there was a 77% increase in construction the last twelve months rental rates have increased 5%. With the continued strength of the market, we see sales continuing to improve particularly in the B and C class with apartment communities that have less than 100 units.

Over five million square feet of new office space will be delivered this year. That said, vacancy rates stayed stable with not a dramatic increase in the 85% occupancy even though over twice the amount of space as last year was brought to market and rents continue to increase. With the strength of the energy sector and all its support industries, CBD and the energy corridor have put pressure on raising rents. That has been offset by slower interest in non-core areas such as Greenspoint where office leasing continues to be a challenge. Because of the strength of employment, many institutional investors continue to show high interest in core office space. Sales velocity increased more than 50% over the previous 12 months.

With over two times the national employment growth, retail continues to buck the national trend. Retail rents and sales continue to improve with a conservative (220,000 sq ft in 2012 and 240,000 in 2013) amount of space coming on the market. There has been a flight to quality on the loops and areas of high housing growth which should continue into 2013.

San Antonio

San Antonio employment grew this year by 32,000 jobs, or a 3.6% increase. San Antonio’s future continues to look bright, thanks in part to the strength of oil and gas production in the Eagle Ford Shale, which continues to strengthen renter demand in south SA and counties south of the city. In the northwest and west, Nationwide’s new campus along with expansion in the growing bioscience sector will continue to drive the market.

Apartment leasing is still strong at just under 95% occupancy and rents and sales are still rising, even with over 4,000 units coming on line this year, another sign of a good market. Rising construction costs, particularly framing and lumber may slow down development with lower paying industries adding jobs primarily. There is some chance of higher vacancies with the amount of units coming on this year.

Office continues to be a bit challenged compared to other Texas metros, with 85% occupancy and the hardest hit classes being b and c class properties. This is due primarily to corporate relocations and owner-occupied and/or build-to-suit properties. That said, rents are stable with a little rise, due to the Eagle Ford Shale play south of SA. Corporate relocations to owner occupied and build-to-suit have caused office vacancies to increase over last year. However, the strength of the Eagle Ford Shale play and stronger housing market conditions are working to revive previously stalled developments.

Eagle Ford drilling has had a dramatic effect on boosting retail in San Antonio. San Antonio experienced a spike in buyer demand as in Class A properties, which in turn has encouraged more sellers to enter the market. Rents continue to rise despite the fact that occupancy dropped just over 1% due to over 400,000 sqft coming to market. Retail should continue to improve with modest increases this year, as continued job growth in most sectors has allowed San Antonio families an increase in spending in San Antonio. Most tenants are concentrating in areas with high home sales and job growth, causing retail space demand to exceed supply this year, gearing the market toward healthy vacancy improvements and modest rent growth.

Dallas / Fort Worth

The DFW economy has turned the corner with over 96,000 jobs created last year, a 3.2% increase. Of all four major metros, D/FW has lagged behind the others in returning to prerecession employment. However it is doing better than most of the country at 99% recovery. The economic slowdown and hesitancy to build is apparent in the tightness of the market.

With apartment occupancy at 94%, and a limited number of new apartment communities coming on line (13,500+/-), rents should continue to rise and lease negotiation should remain firmly on the sides of the landlords. While this is sizeable increase from 2012, when just fewer than 7,500 units were delivered, the market remains 25+% under the metros cyclical peak in 2009. Construction was slower than other Texas metros till 2012 because of the competition from the large amount of foreclosures. Now that these have largely disappeared, the market is prime for growth.

The DFW office market continues to post improvements in occupancy as new supply continues to stay current with demand. Over 2.6 million sq. ft. will come online this year, more than doubling last year’s output of 1.2 million square feet. DFW vacancy is still challenged at 80 to 85% occupancy. However, with 80% absorption of new product this year, rents are still improving for lessors. Dallas offices include the homes of 24 Fortune 500 companies. Demand for retail continues to tighten the market. Over 2.1 million square feet of new retail space is planned to be finished by the end of 2012, a 100% increase over last year. Occupancy is good at 90% and should continue to improve with the uptick in housing demand in the outlying suburbs. Commercial real estate in rural Texas towns has also improved from demand in the energy sector as evidenced by the strength of rents south of San Antonio and in the energy counties around Midland/Odessa. Barring a catastrophic event in the Texas economy, we should continue to see strength in most portions of the commercial market in our state. With an improving market, office sales have improved 40+% with over 50% of the transactions being under 50K sq. feet.

With improved employment, over 800,000 sq ft of retail space will be delivered to the market, and another 4 million planned. Rents are slowly improving even though vacancy has grown to 12.8%. Buyers are pursuing high quality, triple net in prime locations. The trend should continue till saturated, and the attention will turn to the lower rated tenants and locations.


Austin continues to be an economic success story in the face of nationwide uncertainty, with employment at an estimated 4% annual growth rate and the addition of 33,700+/- jobs annually. Austin is coming off of their best home resale market since the records started in the 1960’s. Austin has an extremely limited supply of resale homes – 2.6 months of inventory, which is a 40% decline from a year ago. Residential and commercial rents continue to rise due to lack of supply.

Austin apartment owners are in an enviable position with 94+% occupancy, even with 9,000 new units coming on line. Almost all channels of Austin’s economy are comfortable at or above prerecession values and income. Apartment sales continue to improve with almost a 40% increase in sales from 2012. Median prices have improved to $86,500. Compared to a cyclical low in 2010, the median price per unit has increased approximately 80%. With the good fortune of job creation, drawing over 60,000 people per year to the Austin area, the market should continue to hold its values and strength. Asking rents will continue to rise 5% or more, which means the housing affordability gap has closed for class ‘A’ renters with upward pressure on ‘B’ and ‘C’ renters.

With employment improving 4+% annually, office space continues to see rents and sales improve even as occupancy drops to 88%. Of the 520,000 sq. ft. being delivered this year, over 45% is medical. Medium sized transactions of 50,000 sq feet or less accounted for the majority of the activity this year and the potential of continued strong values in sales and rents over the next few years seems probable.

Retail continues to be challenged nationally as evidenced by the downsizing of most retailers, except grocery and medical. That said, local retail is doing ok with approximately 120,000 sq feet brought on line this year. Rents and sales should continue to rise with some concessions.

The bottom line is that our metros offer the amenities and economic stability that so many investors are looking for. Texas real estate will continue to grow as individuals and businesses move here. The bottom line is the same across all channels: the property you look at today is going to be more expensive or gone tomorrow.

San Antonio Rising

If you think that San Antonio’s economy is a bit slower than the rest of the state, then you need to look again. If you have been in Texas for a while, you probably think of military bases, manufacturing, and a slower lifestyle when you picture San Antonio. Now, you should also include big oil, the future of computing, and a strong wealth of high tech industries.

Growing up in Texas, once you got south of San Antonio, it was a long boring drive to Port Aransas, or hunting around Kingsville. All that has changed with ‘fracking’ and the Eagle Ford Shale boom.

We covered the strength of San Antonio’s economy in our February 1st edition of the Independence Voice. Since then, I have had the good fortune attend the March 2013 economic update of the Eagle Ford shale. The findings were surprising, and for those fortunate enough, life altering. San Antonio’s economic future looks strong, for a while.

Since the first Eagle Ford Shale well was drilled in 2008, there has been increased demand for labor, housing, and qualified personnel in the cities and counties affected by the oil fields and related businesses. Below is a map of the 14 counties (green) where the fracking environment has had the biggest economic impact. The field is approximately 50 mile wide and 400 miles long. Its economic impact is felt not only in those counties where activity is actually happening but in the surrounding counties as you can see below. There has been a flurry of increasing drilling activity in the area, with 26 well completions in 2008, 1649 in 2011, and 2983 in 2012.


This tremendous economic development affects not only San Antonio, but all of South Texas and the rest of the state. The Institute of Economic Development at UTSA has determined the following financial impacts:

• Almost doubling to over $46 billion in total economic output (up from nearly $20 billion in 2011)
• Oil and related businesses supported 116,000 jobs (up from 38,000 in 2011)
• $3.25 billion in salaries and benefits paid to workers (up from $2.6 billion in 2011)
• Over $22.8 billion in gross regional product (up from $10.9 billion in 2011)
• More than $1 billion in state revenues (up from $312 million in 2011)
• More than $828 million in local government revenues (up from $211 million in 2011)

Thankfully, one of the most significant effects from the boom may be seen in the state’s income. Like so many states in 2008 – 2009, the state ran in the red on their budget due to the recession. Taxes on oil and gas production have soared past estimates from the state’s comptroller’s office for fiscal 2012. And with production expected to continue to rise over the next several years, the economic benefits will continue.

The history of the Eagle Ford’s development, which started in late 2008, was temporarily interrupted by the recession and at the same time a sharp decline in energy prices. In Texas, domestic drilling collapsed in 2008–09 with the economic crisis, and the rig count fell more than 50 percent. It was back on track a year later by 2010, and has continued growing at a rapid pace. Texas produced more oil in 2012 than Alaska, North Dakota, and California combined, the next three highest oil producers in the U.S.

During this time, the value of land in the formation has increased exponentially, making some people very rich in a very short period of time. In turn, some of this new wealth is cycled back into the economy in the form of increased consumer spending. If only 5% of the new wealth makes it back into the local economy, it will still be an increase of $400+ million annually. Many South Texas ranchers saw new income from lease payments. Previously the only income was from whatever livestock could survive on the desert plants. This all changed with the income from oil leases. Lease payments are made to reserve the mineral rights on a specific property, usually stated as a fixed amount per acre, giving the leasing company the right to test, explore or produce oil and gas. The state estimates that over 4.6 million acres have been leased in Eagle Ford counties at $1,200+ per acre. There are reports of lease rates as high as $20,000 per acre in the hottest-producing areas, but the average of 23 counties is difficult to estimate. However lease rates vary not just by location, but also by when they were signed. Conservative estimates of $1,500 per acre and 5 million acres produces a remarkable $7.5 billion in compensation since 2007.

As stated above, most of the 23 Eagle Ford counties are rural, with a history of cattle ranching, hunt¬ing and some traditional oil and gas drilling. However for the five counties where the job growth rate has been the strongest—McMullen, Dim¬mit, La Salle, Live Oak, and Lee, retail sales grew at an annual rate of 55.1 percent, or $100.9 million, from first quarter 2010 to third quarter 2011. For the entire 23 county area, seasonally adjusted retail sales increased at a 15.4 percent annual rate, or $580.7 million. During this period, comparable retail sales rose 7.2 percent in the U.S. and 6 percent in Texas.

All this activity in South Texas has allowed San Antonio to come through the recession stronger than most. Besides the 4,000+ jobs created annually in Bexar county by the oil play, the city has had the geographic fortune of being the metro where the crossroads of two of the largest commerce highways. Interstate 35 is the main north-south artery through the US, as well as a major hub for entry into Mexico and Latin America, and Interstate 10, giving easy access to the processing and shipping facilities in Houston.

The geography helps draw major manufacturers, such as Toyota. In addition there is an expanding medical complex and university scene, and a downtown kept lively by tourists, convention-goers, and service members from the city’s three military bases. Joint Base San Antonio is the largest base organization in the Department of Defense, comprised of three primary locations -Fort Sam Houston, Lackland, and Randolph. It employs more than 92,000 military and civilians, is home to nation’s largest military hospital, and has an economic impact on the local community of $27 billion.

USAA, one of the largest financial services and insurance companies, is San Antonio’s biggest private employer. They just leased about 128,000 more square feet of office space to accommodate up to 1,000 more workers. You also have fast growing companies including Rackspace, Petco and SunEdison that have all added local jobs.
I mention Rackspace, a billion-dollar hosting and cloud-computing company that has found San Antonio’s low risk of natural disasters or disruptive weather perfectly suit the requirements of gigantic data centers. Rackspace is to San Antonio what Dell Computer was to Austin in the early 90’s. Rackspace’s economic footprint and continued corporate expansion as well as corporate spinoffs expansion has made San Antonio a magnet for high tech jobs. Austin is often considered to be the “tech hub” of the state, but the San Antonio area was ranked at 13th for growth in high-tech jobs from 2006 through 2011. During this period, the area saw growth of 23.6 percent in that sector while the nationwide rate was 1.4 percent during the same period.

Rackspace in turn has spawned the co-workspace and start-up incubator Geekdom. This group was started by Rackspaces entrepreneur CEO Graham Weston. It is basically a business incubator for those individuals wanting to get more involved with the IT field. It provides a place for individuals to sort their ideas out before they are established enough to purchase their own location for business and bring on more individuals to be a part of it. This co-creation of evolving IT jobs is not only stimulating the economy of San Antonio, but its corporate location in the CBD may have the same affect that the tech firms had on downtown Austin.

This high tech cooperative encourages budding entrepreneurs and startup companies in the area, which in turn allows the founders to lead their community to generate even more local jobs. Reports show that for each high tech job that is created, an additional four jobs are created which in turn continues helps boost the economy in the San Antonio region.

Taking it a step beyond the entrepreneurial level, local efforts are targeting education at high schools and middle schools to ensure they are offering the appropriate curriculum and technology training to develop the future high-tech workforce. With the increased national spotlight on science, technology, engineering and mathematics (STEM), the local business and technology community is already increasing their focus on these areas.

San Antonio’s strong STEM movement forces the local economy to move into new areas. This focus is hoping to get children interested in these respective areas from a young age and let them know that these are the most promising topics to focus on when choosing continuing education and working towards a successful, financially rewarding career.

The potential strength of the new San Antonio economy will be something to watch. In the arenas this analyst normally watches, real estate and finance, I believe they are where Austin was in the early 90’s. The lower cost of living, wages, and real estate will continue to attract many corporations. San Antonio also has limited residential, office and other real estate offerings, much like Houston and Austin had 3 years ago. The opportunity for improved values in the San Antonio market seem remarkably healthy for a while.
If you have not looked at San Antonio for investment or relocation, this may be the time.

Unemployment numbers – what do they really mean?

Last Friday’s national payroll gain of 88,000 jobs seemed to be one of the lowest we’ve seen since Fall 2010.

The drop in the official ‘headline’ unemployment rate from 7.7% to 7.6% was entirely driven by a further decline in the labor force participation rate, to a 35-year low of 63.3%. The portion of the population that is employed actually dropped again, from 58.6% to 58.5%. The last time we saw the participation rate of the unemployment survey this low was during the Carter administration.

It is interesting that the actual number of people employed can decline, yet the headline rate suggests that unemployment improved. I looked up the historical numbers and came across this chart.


This chart shows employment numbers since January 2000 and plots the change from the first to third estimate for each month through January 2013. The y-axis represents percent change. During this timeframe there were 91 upward revisions and 63 downward revisions. The absolute mean (average) revision was 46 thousand, which breaks down as 48K for the upward adjustments and 44K for the downward adjustments. Interestingly enough, the direction of revisions was upward during the brief recession of 2001, but downward during the nasty recession from December 2007 to June 2009.The message is clear: Don’t take the initial monthly employment jobs data too seriously.

Still, it’s clear the economy is not back to full health, not with unemployment at 7.7% and with 3 million fewer jobs than when the recession began. Another weak economic sign emerged Thursday. Applications for unemployment aid rose last week by 28,000 to a seasonally adjusted 385,000 according to numbers published by the Bureau of Labor Statistics. That’s the highest level since late November. The gain pushed the four-week average, a less volatile measure, to 354,250, and pounded home a lesson about the economy. The much slower pace of job gains in March may foreshadow a slowdown in payroll growth over the next few months as fiscal contraction at the federal level begins to bite. Employment gains reported in the household survey show an even bleaker picture of the job market. The number of adults in the household survey who report holding a job fell 206,000 in March, capping a 5-month period in which reported employment losses have averaged 34,000 a month.

As we discussed a month ago, jobs aren’t roaring back. But after five painful years, the American economy is nearly back to where it started when the recession began. Although the recession officially began in December 2007 and officially ended in June 2009, the lingering effects can still be felt. I thought it would be advantageous to look at ways in which the economy has returned to pre-recession levels and ways it hasn’t, and what this analyst sees the effects locally.

Household wealth

Americans lost $16 trillion in wealth during the recession, mainly because home values and stock prices sank. Those losses have now been reversed. Household “net worth” reached $66.1 trillion in the final three months of 2012, according to the Federal Reserve. This is over 98% of pre-recession household wealth, surely a good sign of a healing economy.

Household wealth, or net worth, reflects the value of assets like homes, stocks and bank accounts minus debts like mortgages and credit cards. National home prices have continued their gains this year in most markets. And the Standard & Poor’s 500 index, a broad gauge of the stock market, has surged 8% so far this year. Some economists and analysts caution that the recovered wealth might spur less consumer spending than it did before the recession. Since the housing bust, when home values fell broadly for the first time in decades, many homeowners are skeptical that higher prices will last. Americans are now less likely to use the equity in their homes to fuel spending. The value of home equity Americans are cashing out has fallen 90% in six years. The question is, will the gains help support the economy, and will they lead to further spending and growth?

Here in the Texas region it seems so – car sales, homes sales, and appliance sales have all improved as shown by the Texas comptroller’s numbers. If anything, the national news continues to be a concern as so many consumers move from other markets and are forced to delay buying decisions because of a stagnant economy from where they moved from.

Retail sales continue to improve – there was a slowdown in March as lack of progress in the labor market affected consumer’s confidence and made it difficult for Americans to continue spending. Economists and analysts point to the lagging consumer confidence index over the last few months. After improving for a number of months, it is down again below 70 (90 to 100 is sign of a good economy).

Even with that, national retail sales totaled $421.4 billion in February. Adjusted for inflation, that was nearly 18% above the recession low.

In January 2013, employers cut 1.5 million jobs — the lowest monthly total in 12 years. That explains why the number of people seeking first-time unemployment benefits each week plummeted. That number reached 667,000 one week in March 2009, the most in nearly 25 years. The number of workers in Texas who lost their job in mass layoffs rose slightly in 2012 after declining in the previous two years, according to data to be released later today by the U.S. Bureau of Labor Statistics.

In 2012, Texas employers laid off 69,068, up slightly from 68,500 people in 2011. However, the number of laid-off workers in 2012 remained well below the recent peak of 108,452 in 2009 during the recession.

2013 has started with concern over sequester and defense budget cuts in Texas. Over the next ten years they will be well over a billion dollars in budget cuts, a major concern for those bases and cities in Texas. Texas presently has the largest share of the budget cuts, focused primarily on Fort Bliss in El Paso and Fort Hood in Killeen. The potential good news is that Texas happens to be one of the brightest spots in the nation for employment.


Foreclosure rates since the start of 2013 have sunk back to pre-recession levels. Banks repossessed 45,000 homes nationally in February 2013, according to RealtyTrac. That was the fewest since September 2007, and was down from a peak of 102,000 in March 2010.

Foreclosures in the Texas region through the recession were less than 2% of sales, compared to Georgia: 43% of all residential sales, Nevada: 43%, California: 40%, Michigan: 35%, Arizona: 33%, Illinois: 27%, New Hampshire: 24%, Colorado: 22%, Wisconsin: 22%, Minnesota: 22%, Oregon: 21%, Florida: 21%. Those states have foreclosure problems.


Late in 2007, the U.S. economy produced at an annualized rate of $13.3 trillion in goods and services, a record high. In the final three months of 2012, GDP was $13.7 trillion. The US economy didn’t contract in the fourth quarter after all, but the bigger picture remains the same: It’s still slower than needed, but improved. Most economists feel that the economy needs to grow around 3% a year to bring unemployment down by one percentage point. The national unemployment rate is 7.6%, while the Texas unemployment rate was 6.3% for January 2013. The Texas unemployment rate has been at or below the national rate for 73 consecutive months.

The good news is that GDP seems to be back on track nationally, with 2.5% growth forecast through 2013.

Auto sales

Auto sales have lagged for the past five years. Before the recession, sales of new autos and trucks were at an annual rate of nearly 16 million in December 2007. Sales plunged to 10.4 million in 2009. In March of 2013, the annual sales pace was 15.3 million.

Another good sign was truck sales improvement, which is typically a harbinger of small business improvement. And yes, auto and truck sales in Texas have led the rest of the nation.

What’s still struggling? – Jobs

This discussion started with inquiries about last week’s apparent improvement of unemployment rates. Realize the recession eliminated 8.7+ million jobs. There are now 11.7 million unemployed workers, based on the BLS monthly survey of businesses. However, as we have noted before, BLS figures do not reflect real unemployment.

The BLS counts only those workers who are actively looking for employment, which can vary fairly widely month-to-month due to workers voluntarily removing themselves from the labor force. The BLS also does not include in the civilian labor force “marginally attached workers” (currently 2.3 million workers) who, while wanting and available for jobs, have not searched for work in the past four weeks but have searched for work in the past 12 months. Included among marginally attached workers are 0.8 million “discouraged workers” who did not look for work specifically because “they believe there are no jobs available or none for which they would qualify.”

In addition, the BLS does not include among unemployed workers the 10 million workers who are of “part-time-of-necessity” – the “underemployed” who are unable to find full-time jobs or who’ve had their hours cut back, now 7.6 million workers

When the recession began, the ‘headline’ unemployment rate was 5%, now, it’s 7.6%. The unemployment rate is well below the recession’s peak of 10% in October 2009, but far above the 5-6% range associated with a healthy economy. A truer picture of the labor market is the BLS U6 number, which In March 2013:

Texas total nonfarm employment increased by 10,400 jobs during January 2013. Between January 2012 and January 2013, Texas total nonfarm employment increased by 2.9%.

The Texas unemployment rate was 6.3% for January 2013. The Texas unemployment rate has been at or below the national rate for 73 consecutive months.

Housing continues to improve, but has a ways to go

Resale homes sold in February at a seasonally adjusted annual rate of about 4.98 million. An annual rate of about 5.5 million would be healthy. In the recession, sales had bottomed at 3.8 million. Lack of inventory continues to be the biggest obstacle with current inventory being burned through quicker than replacement can come on the market. In Texas, particularly in high demand areas, it is very apparent and highly competitive with little to no inventory and tremendous uptick in buyers. However, it is still far away from the top of the market in 2005-06 in all four Texas metros.

New homes continue to see improvement. Last month builders began work on a seasonally adjusted annualized rate of 917,000 homes. That’s way up from a recession low of 478,000. But it’s still far from a healthy annual rate of roughly 1.5 million, or the top of the market at 1.9 million. Prices have risen nearly 9% since bottoming in March 2012, according to the Standard & Poor’s/Case-Shiller index, but they remain 29% below their pre-recession peak. The demand for new homes in turn has helped the construction industry, which has been one of the nation’s foundations of a true economic recovery. The good news is the four major Texas metros, plus a couple other cities, continue to lead the nation in new home production.

It’s important to follow the national unemployment number, but ultimately, it is what is happening in your own market and submarket that makes a difference. The main numbers we should be interested in is our local metros, which continue to be stellar compared to the rest of the nation. I follow U6 BLS numbers more closely than the headline rates. This is available to you at the BLS website, or you can ask us. Local, metro, state, and regional statistics are more indicative of what is happening in your local economy – and it continues to look good for Texas.

2012: A Year in Review – San Antonio, Houston, and DFW

Last week we talked about the major 2012 happenings in Austin real estate. This week we wanted to focus on the other Texas metros and the strength of their markets.

San Antonio

Over the last year, San Antonians have shown more confidence as the city’s economic base expands – signs of an improving metro economy and of higher wages in a city that has long been known as a low-wage town.

Sales tax revenues jumped 12.2% in the six months from April through September compared to the same period in 2011, a pace of growth that was the highest since 2006, when the metro area showed robust expansion. On a percent basis, the bump in sales tax revenues in San Antonio was greater than in Houston, Austin, Dallas and Fort Worth in the same six-month period.

And the good news didn’t stop there. 2013 census data will show that San Antonio incomes are rising. With new jobs in fields like medical technology, personal income prospects go up, and that attracts better possibilities for retail activity and a whole range of services. The San Antonio economy stands to record better job creation over the next year as drilling in the Eagle Ford Shale intensifies, development accelerates, and the local leisure and hospitality sector continues to post strong growth.

Year to date through the third quarter, businesses in San Antonio added 18,400 jobs. While employment in most major metros remain shy of pre-recession levels, San Antonio has surpassed their late 2007 pre-recession number by over 25,000 jobs.

That growth continues to attract investors from across the continent. 2012 payrolls in San Antonio rose 3% with the addition of over 26,000 jobs. This is a dramatic improvement over 2011, when metro wide growth increased just .5%.

If present growth trends for new jobs continue through 2013-14, the city would add about 20,000 positions by late spring, even after accounting for losses in city, county and state government positions. That would take the area closer to the record 31,000 jobs created during the boom year of 2006.

That improvement is evident when looking at real estate. Single family permits year to year are up 20% from 2011, while multifamily permits are ahead by 18%. San Antonio’s population grew by approximately 47,000 people, which includes about 26,500 prime renters in the 20 to 34 age range. With only 1,000 units are being constructed this year, up from 400 last year, demand should outstrip construction.

Downtown SA revitalization efforts are beginning to show strength along the Broadway corridor with over a 1,000 apartment units coming on line in the next couple of years with continued strong absorption.

Regional office, industrial, and retail properties posted an expansion of 2.3 percent in square footage. This is impressive due to the amount of large office space vacated over the last couple of years. The city’s industrial properties showed strong growth in rental revenue of 6.8 percent in the six-month period, largely as a result of the Eagle Ford Shale.

The tourism sector continues to be a strong performer. Combined room demand and rental revenues showed a growth rate of 7.3 percent in the April-September period. Although still healthy, it was slower than the 9.2 percent for the same period in 2011.

Christus Santa Rosa, a health care group, purchased 50 acres within the 2,400-acre Word-Borchers ranch along the Guadalupe River, which will be turned into a master-planned development over the next 15 to 20 years. The health system plans to develop a short stay surgical hospital, emergency center, and medical offices to supply the growing retirees’ boom in the area.

Expansion of the Texas Biomedical Research Institute will solidify San Antonio’s place in the biomedical industry and help create strong demand for office, retail and residential in Western SA. Activity in the Eagle Ford Shale made a $25 billion dollar impact on South Texas economy, which in turn made San Antonio’s south submarket one of the tightest in residential, office and industrial absorption.

San Antonio is the last of the Texas Triangle markets to enter the economic recovery. This means most of the markets in the SA metro area are just at their tipping points, which in turn is attractive to investors as they look to getting in on the upside of the market. Buyers looking for distressed or value-add opportunities will look to SA in an effort to locate opportunity that has become scarcer in the other Texas metros.
San Antonio’s west side saw the doubling of SeaWorld San Antonio, which aided surrounding retail and hospitality. The expansion of the Port San Antonio East Kelly Railport should continue to attract suppliers for the shale boom south of SA and in turn help all channels of real estate and finance in the area.

All in all San Antonio’s economic forecast for 2013-14 will continue to improve.


Houston has one of the strongest economies in the nation, accounting for one out of every ten jobs created in the US. Analysts expect continued job growth for the next two years. The greater Houston area added 98,000 jobs in 2012, almost a 4% growth from the previous year. Conservative estimates forecast 72,400 jobs in 2013 and 74,400 jobs in 2014. Residential and commercial real estate sectors are poised for growth as a result.

Growth is similar to the experiences in the early 80’s, but with a better balanced economy with energy making a smaller percent of employment growth. Houston’s employment options and affordable cost of living have made it an attractive destination for people from all over the country.

Existing home sales increased by 7.5 percent this year and are forecasted to rise to 8.1 percent in 2013. Houston currently has the highest home prices it has ever had. The metro market cannot have this strong job growth and some of the strongest rent increases in the nation on multifamily rental rates and not have home prices rise in the next 12 to 24 months.

Since construction debt remained non-existent through the first of 2011, most developers were not ready for the post-recession renter surge. As of the end of this year, over 14,000 rental units were under construction with much of the focus on the 1960 corridor, yet absorption has kept pace, forcing interest from equity sources for more apartment building through 2013. West inner core, class ‘A’ apartments continue to be the most desired, leading a thirteen year high on rent rates.

The foreclosure problem in Houston has improved dramatically. For every two existing home listings in Houston, there is one home destined for foreclosure that makes up a set of shadow inventory. This is much improved from 2007, when there was one existing home listing for every four to five Houston foreclosures.

How did the recession and downturn in the national housing market affect the prices of homes in the Houston area? The Houston housing market has fared much better than the national housing market. Prices in Houston started declining in July of 2007 and fell approximately 7% (based on incomplete data for 2012). Mid-year we began to see values stabilizing. You should keep in mind that this figure is for the overall market, not for individual areas.

Above average job creation and limited new office supply will continue to support Houston’s market recovery through 2013, although area wide vacancy will end up over pre-recession levels. That said, Houston will be one of the tightest office markets in the nation. The continued expansion of energy and technology support the increased space demands of office and industrial. With just 450,000 square feet delivered in 2012 (a fifteen year low) several large projects have been announced, and the planning pipeline continues to expand.

Phillips 66 split from ConocoPhillips, and will look for a new headquarters in the Houston area, most likely in the Katy energy corridor area. ExxonMobil continued staff consolidation will bring 2,000 more employees to the Woodlands campus from Virginia. These expansions, with supporting industry, have pushed the planning pipeline to over 13 million square feet of competitive office space in the future. The market continues to be tight presently, but should continue to be monitored as these many projects come on line.

The medical center continues to expand with over a million square feet having come on line this year. However, absorption continues to be good with little contiguous space left over 50,000 square feet.

Houston’s strength of job creation and the worl’ds continued need for energy will allow all channels of real estate to be good through 2014.

Dallas / Fort Worth

D/FW real estate has been slower than the rest of the Texas metros, but finally turned to near pre-recession levels by mid-2012. Because of the lack of new development, inventory fell and has put positive pressure, finally causing appreciation in most channels.

The DFW region has experienced a 32% jump in starts the third quarter of 2012, and new home inventory is at a twenty year low with little development in the pipeline. Lot inventory is challenged with less than an 18 month supply in most desirable areas (24 months being equilibrium). 21,000 of those lots had little to no activity this last year, so it shows the need for new residential development.

Couple that with some of the tightest rental conditions since 2001 and its clear that all residential should see values rise, including rents. Apartment and office deliveries accelerated this year but fell short of historical norms. 9,600 apartment units were delivered this year with 15,000 under construction and over 35,000 in the planning pipeline. That said, rents and values should continue to improve for the next couple of years. Even though housing is on the rebound, the bounce back is stronger in more affluent neighborhoods, like in the loop areas.

With over 75,000 jobs created this year, apartment developers continue to focus on close in locations in northwest and central Dallas. Fort Worth saw strength in the southeast quadrant, north Arlington, and Grapevine. Since peaking in 2009, vacancy has almost been halved to less than 6%.

Office continues to be challenged with an overdeveloped office market still not recovered, particularly in the outer rim areas. The overall market vacancy still hovers around the 20% mark, higher than the other Texas metros.

2013 should be stronger for retail, particularly with grocery retailers expanding with 5 percent sales growth in the metro area. Overbuilding of retail in other portions of the DFW market will continue to be a challenge through 2014, but an opportunity for investors.

Two important finance and real estate figures live and work in Dallas – Richard Fisher, President of the Federal Reserve Bank of Dallas, and Harvey Rosenblum, the Director of Research. These men are some of my favorite financial writers and mentors. They both want to see the big banks broken up. Me, I’d shatter them into itty bitty pieces.

Still, it’s not a bad idea to listen to one of the big banks – J.P. Morgan CEO Jamie Dimon – when it comes to real estate. He says housing is positively flashing green. Now, if we could only get federal regulators to loosen up the banking and mortgage rules.

As you can see, Texas metros continue to be the bright spot in the nation’s economy, but come with their challenges. Each metro continues to have challenged sub markets that may take years to fully recover, but all in all Texas real estate continues to improve and grow.