Beware! Wire Fraud is at an All Time High.

You’ve done it!  You took a Buyer from shopping for a house, to a contract on a house, to the closing table and you couldn’t be more ecstatic for them.  Then… in total shock you find out your Buyers have wired thousands of dollars to a thief!  You discover the “I could never be a victim to wire fraud, it’d never happen to me” has actually happened to you!  It’s becoming more and more common in our industry and way more sneaky and sophisticated than you may think.

Unfortunately, we are seeing attempts to divert wires to imposters’ accounts on a weekly basis, leaving the Buyer, Seller, Realtor and Title Company at risk.  More often than not, the fraudster hacks into the Realtor’s email account (yes YOUR email account) or creates a close duplicate email account along with your exact signature, and then posing as the Realtor gives bogus instructions trying to divert the funds of one of the parties involved.  It’s happening and it could very well happen to you!  As a Realtor, the video below is a great tool to send to your Buyers & Sellers warning them of the risk.  NAR’s General Counsel, Katie Johnson, has made this video to help you educate your clients on how to avoid being in a wire fraud scam.

Here at Independence Title, we have put many policies and procedures in place to combat this growing issue.  This document is a great tool to send to clients during the contract process.  We send this out to all parties with a commitment and/or contract.  It is critical that you take the time to educate your Buyers and Sellers and warn them of this risk.

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.

Is Texas overvalued?

Last week, the media picked up an article by one of the major real estate media outlets on the ‘overvalued’ Texas metros real estate.

The real estate and financial collapse of the last decade — a once-in-a-century financial crisis and recession — is not something most folks are excited to see repeated. Many parameters since the crash have been put in place to discourage another bubble and crash. Mortgage lending is tremendously harsher than it was 10 years ago, potentially excluding 3 to 7% of the total market from qualifying for home mortgages.

The housing market nationally is at about 40 to 50% of production / sales of where it was pre-recession. The last couple of years have been healthier, with Texas real estate in 2012-13 really showing strength.

Yet, after the real estate bubble, when any ‘hard asset’ market shows strength, the naysayers seem to take delight in looking for the next bubble collapse, whether it is in gold, stocks, Bitcoin, real estate, etc. I am not well versed in many of these, but know well the history, demand, and forecast of the Texas economy, having watched and participated in it over the last fifty years.

After a number of years of declining or stagnating housing prices, the market turned around big time in 2012-13, making some analysts and naysayers worry that we’re seeing the beginnings of Housing Bubble 2.0. The concern for housing bubbles is real, wherever you live.

However, there is a long way to go before the regional market begins to show those signs. Here in Texas we are not seeing this based on economics 101 – supply and demand. Are we overvalued? No. I am sure that if you delve deep enough into all the regional properties available, there are some that are overvalued. But as an overall market this is not true.

For those who are not familiar with the Texas’s history during the recession, it came out fairly unscathed with real estate values and employment leading the nation. During the bubble years when the sand states (California, Nevada, Arizona, and Florida) were leading the nation in appreciation (40+% annual), Texas was near dead last in home price appreciation, with less than 3% annual appreciation for a number of years. Texas was 50th in appreciation for a couple of years. We may have climbed up to 47th or so, but the runaway real estate speculation of the bubble states was just not available here to those looking for a ‘quick buck’.


So to the point I am addressing, one of the major real estate media sources has named a number of our Texas region metros as ‘bubble markets’ to watch. Their basis is on tracking home prices across the country to see which markets are over and undervalued. In a forthcoming “Bubble Watch” report, they find that while most of the U.S. real estate market remains significantly undervalued, there are certain markets that feel are straying into bubble territory.

Realize that they are a media source, not a real estate broker. They are a very knowledgeable source but they make their money on advertising rather than real estate investment. We have a great deal of respect for the chief economist and his findings, but to call Austin and the other regional markets overvalued? Compared to what? You cannot compare to history, Texas and Austin appreciation has been one of the lowest in the country over the last 10 years. Check with the national sources such as OFHEO, FHFA, or Corelogic index.

Their methodology looks at whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer they feel we are to a housing bubble – and the bigger the risk of a future price crash. By their own admission, ‘Recent price changes, by themselves, cannot tell us whether this is a housing bubble; neither can a simple comparison of nominal price levels today to where they were in the past.“

They then combine these various measures of value rather than relying on a single factor, because no one measure is perfect. In doing that markets in California, Orange county and Los Angeles are more than 10% overvalued. But where I argue is that they also showed the Austin, Texas market at 10% overvalued, while 7 other markets range from 4% to 7% overvalued. Those include:

• San Antonio, TX;
• Honolulu, HI;
• San Francisco, CA;
• Houston, TX;
• Riverside-San Bernandino, CA
• Oakland, CA

Unsurprisingly, these markets are where job creation has lead the nation, in Texas and California, which have also seen double digit home appreciation over the past year, with Orange County real estate appreciating a strong 23.4% since October of 2012.

So are we in danger of another housing bubble like we experienced last decade? Not quite yet, at least nationally. We cannot comment on those markets outside of Texas. According to their data, the national market remains roughly 4% undervalued overall. And in some markets, like Cleveland, Ohio and Palm Bay-Melborne-Titusville, Florida, home prices are still 20% below their fundamental value yet they do not have the employment growth or demand of the Texas region. Furthermore, even the most frothy markets are less overvalued than the national market was in 2004, when home prices were 24% overvalued nationally.

Starting with residential home values, Austin, San Antonio, D/FW and Houston metros are still challenged in inventory with all having less than 6 months inventory. Analysts at Texas A&M Real Estate Center will tell you that 6 months worth of inventory is equilibrium. Below that it becomes a seller’s market (a market where lack of inventory makes values improve). Above that mark of 6 months, supply dictates an easing of values, making it more of a buyer’s market. So based on demand and supply this market does not seem to be overvalued presently and with current absorption and employment projections, it will be 2 to 3 years at least before this could become an issue.

Looking at residential rental, the market demand currently has been outstripping demand for the last 2 to 3 years, even with near record supply of apartments being built in all Texas metros. Supply at some point should outstrip demand, right? It may happen soon in Austin, San Antonio or D/FW based on current construction. But demand has outstripped supply as shown by the lack of concessions or lower occupancy. Rental values over the last 10 years have appreciated over 50% with home values around 35%. Demand has kept values strong.

One of the things to keep in mind about current demand vs. prerecession is that the non-30 straight rate, 5% to 10% down programs that are prevalent now, were in the minority pre-recession when sales, values, appreciation, and speculation were stronger. The ability to have a bubble in real estate is more restrictive now.

Overvalue is overstated presently in the local regional markets. In other words, the real estate and financial world has changed. Younger families are unable to qualify. Young people have not gotten the economic traction since the recession. Even the ones who can aren’t getting mortgages because credit is much tighter than it was in the pre-bubble years, and recent price increases have been fueled by over-enthusiastic investors rather than true economy-wide demand for housing. Every real estate analyst is forced to used assumptions when forecasting the future prices of homes, and given the fact that home price appreciation in Texas has been healthy for a couple of years, may be going too far in arguing that certain Texas metro markets are overvalued bringing thoughts of another bubble.
Let’s look at appreciation from another source: Corelogic, an analytics company with lots of data. When you look at the following chart you can see that a number of states have had stronger appreciation than the Texas region.

voice graph 1 10-10

Another chart shows annual metro appreciation and supports the same conclusion of good appreciation, but not overvalued.

voice graph 10-10

Texas metros are not overvalued

In all Texas metros demand is outstripping supply and the entitlement and lending process have a way of governing development and building. Will Texas and it metros overdevelop and build in the future? Absolutely, the advantage of a free market is the ability to market real estate if you can get the financing. the market dictates whether the market is overbuilt or not. The market has a way of self correcting. All of our metros seem to be a few years away from slowing. Austin, which led the list of overvalued markets in Texas, has the longest entitlement process of approval, meaning supply will take a while to catch up to demand.

It’s still cheaper to buy than rent. If you live in a metropolitan area, it may make more financial sense to buy a home than rent a house, condo, or apartment. According to a to this same real estate media source study, buying a home is 44 percent cheaper than renting in the 100 largest metro areas in the United States. While this data was calculated based on last year’s lower mortgage rates, there is still a significant price difference in total monthly costs with today’s rates. And again income vs. home value is tremendously better in Texas than almost any other state that is creating jobs.

Comparatively, home prices are relatively low. Housing price trends vary significantly by location and even by neighborhood, but the average housing price trends across the country look promising for prospective homebuyers looking at Texas versus their current state. The S&P/Case-Shiller composite index of 20 metropolitan areas increased only 1 percent this past season, so 2014/15 could still be a great time to buy.

Because of the lack of dramatic appreciation, there is less competition from home flippers. Housing prices in some markets are increasing, making house flipping attractive. But in Texas it has historically been a lower appreciation value. This gives prospective homebuyers more inventory to choose from and the benefit of having less pressure to close a deal because of another pending offer. This could be the time to enjoy the freedom of shopping around for that perfect home and making an offer.

The majority of renters would like to avoid the cost of rising rent. A buyer’s market means it might be time to say goodbye to renting for good, but Texas is a seller’s market. That said, rent increases historically go up quicker than appreciation. So as you look at shrinking housing dollars at your current location or want to move but will experience a spike in rent, consider the benefits of buying a home instead. You may be able to secure a great rate with your credit history and end up paying the equivalent or less in monthly payments as you build equity in a home. Renting can be a more affordable option for the short term, but renters still have to face rising rental costs year after year.

Presently with Texas real estate being undervalued, there is not a more affordable time to buy. Buying a home gives you a chance to start building equity, and you are investing in your future. Even if you end up selling your home in five or ten years, you could profit from the sale and invest that money elsewhere. If you’ve been dealing with rising rent or the hassles of costly moves for the past few years, settling in to a home can stabilize your housing expenses – especially if you get a fixed-rate loan at a great rate. You won’t have to worry about your monthly housing expenses changing significantly for a few years, and you will pay for something that has more value than a rental property. Consider the benefits of making this type of contribution to your future month after month. Of all the regional markets, look what region has had consistent growth over the last 10 years. Not necessarily explosive appreciation, but affordable. Now is the time to buy in Texas!

One of the enduring lessons of the last real estate bubble is that while there are many reasons to buy a house — like the tax-deductibility of mortgage debt, the forced savings mechanism of paying a mortgage, and the pride of homeownership — expecting unrealistic significant appreciation in your home’s value shouldn’t be one of them. If you are looking at the value or your home / real estate it is more important to look at the last 5 to 10 years history to decide if it is overvalued. Looking at a snapshot, is just that; a partial picture of the total.

Metropolitan job growth drives demand for all real estate channels

The median price for homes in the state of Texas hit another all-time high in June 2014 in the four major metros, and demand for homes in the state continues to be strong, but demand has seems to reached a plateau in the last couple of months with values and rents continuing to remain strong while sales have dropped slightly. Office, retail, and most commercial channels continue to have strong absorption with few concessions.

On a statewide basis, 295,769 single-family homes were sold in the last 12 months, up 10.73% from the previous 12 months. This represents the most homes sold in a single year since the boom years of 2005-2006. However, in August 2014, there were 27,999 sales of existing single-family homes, 1.2 percent less than in August 2013.

Continuing the steady increase seen in recent years, prices for Texas homes were extremely strong in the second quarter, hitting an all-time high for the quarter. The median price in 2Q 2014 was up 5.87% from the prior year, reaching $187,300. The average price rose 5.28% from the prior year to $246,209. According to the Texas Association of Realtors, those are the highest figures for median and average price ever seen in Texas real estate.

Texas and California continue to lead the nation in job growth, with Texas capturing over 40% of all jobs created in the country in the last 12 months. The effect on local residential markets has been dramatic.


Austin continues to create jobs and have one of the most healthy labor and real estate markets in the state. Although Austin will probably have a record year in resales, the lack of supply of resales and new homes continues to present challenges to buyers. Austin area home sales declined for the second consecutive month in August 2014 as rising home prices and housing affordability issues continue to affect the Austin-area housing market. Austin area home sales decreased four percent year-over-year to 2,835 single-family home sales in August 2014. Resale home inventory continues to dwindle in September of this year, hitting just 3 months (6 months is considered the equilibrium of a sellers and buyers market).

Austin is looking at 9,800 to 10,000 new home starts this year. Delivery has begun to catch up to demand, with builders aggressively looking for developed lots to meet demand, but also seeing a slowing demand for speculative inventory over $500k. The production builders who are able to deliver homes under $250,000 continue to have more demand than product.

Austin not only has one of the state’s lowest unemployment numbers (4.6%), but has been creating 22,000 to 30,000+ jobs for the last three years. Traditionally, for every two jobs there should be one housing start, however with rates creeping up around a point, cost of land, materials and labor, there has been a shift of buyers pushed to rentals. The new formula is closer to three jobs for one housing start. The new employees still need shelter, however their options now are limited to resale or rental. The good news is that demand is still strong in the $250,000 and below price range and apartments continue to lease with little to no concessions. The statement about rental concessions is significant, seeing that Austin as well as the other metros have been leading the nation’s apartment construction for the last 3 years, leading many analysts to think that overbuilding is a risk. However, due to the demand rents and occupancy continues to lead the state.

A majority of Austin area homes are now priced out of an affordable range for first-time and first-time move up homebuyers, where a significant portion of home sales historically occurs (30+% historically, now around 7%). According to the latest ABOR report, the median price for single-family homes jumped 11 percent year-over-year to $247,500 and average price rose nine percent year-over-year to $311,414. Single-family homes continued to sell quickly as they spent an average 42 days on the market, one day fewer than August 2013.

San Antonio

San Antonio remains on track to end the year with job growth in the 2.5 to 2.6 percent range, a 2.5 percent rate means the area will produce a net gain of about 22,800 jobs this year. The job-growth rate is mostly good news. It’s faster than both the national rate and San Antonio’s long-term job-growth pace. But it’s slower than the forecast for Texas as a whole with San Antonio’s job growth between July 2013 and July 2014 at 2.17 percent, which is below the state’s 3.22 percent but higher than the U.S. pace of 1.88 percent. All other large Texas cities except Dallas were higher than San Antonio during that period. Last year was a bit of a struggle due to the high number of civil defense job layoffs (85,000+/- in Texas affecting El Paso/ Fort Bliss, Killeen / Fort Hood, and San Antonio / Fort Sam Houston, Lackland Air Force Base, and Randolph Air Force Base), however this year San Antonio has averaged under 5% unemployment, a number that a number of national metros covet. So even with the layoffs, the market has gained traction in most areas.

With one of the nation’s largest oil shale plays nearby and the increase in high tech jobs, the market will be challenged to meet demand. Resale inventory is at a six year low with just over 4.5 months supply and most properties selling for near full list price (95+%). Apartment occupancy is just under 92% with rents rising above a $1.00 per square foot. While this is not as robust as other Texas metros, it is still attractive for many investors. The good news is the rental market remains strong even with new units coming to the market. Like Austin, the lack of completed developed lots is a challenge and has led to tremendous activity in large land tract sales to builders and developers.


Dallas / Fort Worth continued to improve this year with a healthy 120,800+ jobs created in the last 12 months, led by the professional and business sector with over 45,800 jobs. This surge of quality jobs has created housing demand.

Over 15,200+ apartments are to be delivered over the next 12 months with occupancy staying above 94+%. Multifamily construction and completions have picked up significantly in the Dallas/Fort Worth region. That would normally cause concern for equity as supply could outstrip demand. However, substantial growth in the Dallas/Fort Worth economy and other demand drivers have helped maintain absorption enough to mute the effect of elevated supply. The Metroplex market demand for new product class ‘A’ has been strong, and ‘B’ and ‘C’ class demand remains strong as well. Such demand has prevented significant occupancy declines, giving apartment management and owner’s confidence to continue raising rents. In particular, middle- and lower-tier market segments in the Dallas metro have exceeded rent growth expectations.

The big questions moving forward are: can the middle and lower tiers maintain that pace, and how long can top-tier units continue to show few side effects from apartment development and a strong single-family home market – especially now that (presumably) much of the pent-up demand will begin to be burned off? In particular, the Metroplex’s ability to absorb new apartment product will face more trying tests going forward, as 14-year high construction volumes promise to push supply levels even further over the next two years.

The lack of resale listings is slowing home sales in most desirable Dallas-area residential districts. The inventory of homes being marketed by Realtors has fallen to less than a 2.5 month supply in the Metroplex, allowing values to continue to improve. The second quarter of 2014 improved over 45% from the first quarter, but demand has slipped a little, 2.5% less than this time last year.

Home starts and development will remain strong for the rest of 2014 and into 2015, with developers / builders following the same script of the other Texas metros in trying to secure as much land as possible. In contrast to the roaring growth in multifamily, single-family home construction has increased at a more gradual pace. The slower growth is partly due to constraints on the supply side, such as a shortage of developed lots, higher construction costs, and widespread labor shortages. Dallas home price appreciation is slowing, increasing 0.2 percent in the second quarter, according to the Federal Housing Finance Agency purchase-only house price index. Year over year, prices are up 6.5 percent.

Like most of the Texas metros, the Dallas / Fort worth area is still facing an inventory shortage. A steady, ongoing supply of new housing stock — particularly in the entry level and first-time move-up market – continue to face challenges. This channel was over 30% of the market and has fallen to less than 10%. These homebuyers represent a large majority of home sales historically and their equity growth and ability to move up will be crucial to Texas housing market growth.

Office markets are healthy, as Dallas/Fort Worth’s office market continues to improve this year as corporate expansions and relocations improve job creation and boost office demand. A great example was the market’s ability to recover relatively quickly from large corporate move outs. Plano, for example, was dealt a blow late last year from Encana Corp.’s (Canadian natural gas company) decision to vacate its newly built offices, but the city has since been selected by FedEx and Toyota for their new corporate headquarters. Combined, these two relocations alone will bring an estimated 5,200 jobs to the area within five years and will attract secondary supporting firms. The Metroplex has shown an envious ability to recover from overdevelopment and building the last few years. A great example is Richardson where over 30% of all office space was available for lease just five years ago, but the corporate campuses for State Farm and Raytheon has sparked a dramatic turnaround in recent quarters. Downtown Dallas has also received a boost from major office-using tenants, with Tenet Healthcare leasing 242,000 square feet and Santander Consumer USA committing to 350,000 square feet in the area. In Fort Worth, the North submarket, which includes Alliance, reports the lowest vacancy rate, though the Northeast and Mid-Cities areas recorded the most tightening over the past year.


The Houston economy continues to lead the nation with over 112,000+ jobs created in the last 12 months. To say the economy is doing well is an understatement. Houston continues to remain strong with a booming energy market, strong trade, and surging real estate development activity. If you have not been able to go to the Woodlands in the last year, you need to take a field trip. The relocation of Exxon and Occidental to the area has caused tremendous growth that has to be seen to be believed. Demand in all channels in this 30,000+ acre community is off the charts.

Although it is off the 2009 high of over 20,000 new apartments delivered, Houston continues to have strong construction in the apartment sector. 2014 should have 12,000+ apartment units being deliver this year, and rental occupancy has stayed steady at 94%. Resale and new home sales struggle with the tremendous demand for inventory, although we saw sales slow this September. Like all of the Texas metros, resale is definitively a seller’s market with just a 3.2 month supply. Like the rest of Texas, land developers of residential, office, and retail are quickly securing positions and starting construction to address the demand.

Citywide, August delivered gains in both residential home sales volume and prices. Housing inventory held steady month-over-month, but is tracking slightly below 2013 levels. While prices were the highest for an August on record, they fell short of the all-time records set in June 2014. Single-family home sales were up tad, at 1.1 percent versus August 2013. Months of inventory, which estimates how long it will take to deplete current active housing inventory based on the previous 12 months of sales activity, matched July’s 3.0-months supply, lower than the 3.3-months supply of last August. It is significantly below the current national supply of 5.5 months of inventory.
Residential values continue to show the strength of the market, with the average price of a single-family home up 6.4 percent year-over-year to $275,369. The median price jumped 10.4 percent to $206,000.

The tremendous job growth and corporate expansion continues to intensify in Houston, driving demand for office space and sparking a construction boom. This year, developers will complete more than 11 million square feet of office space in the metro, which represents the highest total on record since at least the turn of the new millennium. Pre-leased office towers and build-to-suits will account for a sizable share of deliveries through 2014-15, and demand appears strong enough to absorb much of the new construction that remains available. Approximately 85% of the 4.4 million square feet delivered in the first half has been spoken for, and pre-leasing of buildings slated for completion over the balance of the year already exceeds 70%. The market’s recent performance and a dwindling supply of large blocks of Class A space suitable for corporate tenants have renewed speculative development in the metro.


After reviewing most of the state, residential sales demand has slowed, yet values continue to improve, and will allow somewhere between 5-7% appreciation of most residential real estate throughout the state. This lack of sales demand is to be expected with new and resale inventory improving. Even with the tremendous growth Texas has seen over the last number of years, with supply improving, values will remain strong but may be challenged to continue. They should still see appreciation, just not to the degree we saw in 2013. Other channels of real estate will bear watching throughout the state, since many are at a ‘tipping point’ of supply overwhelming demand.

With such strong supply and continued demand, the inventory of Texas resale homes has remained in a ‘sellers’ market. The Texas market had 3.7 months of inventory, and has remained there much of the year. A 6-month supply of homes in a market indicates a balance of supply and demand. The Texas inventory supply indicates strong demand for homes of all values, but particularly entry level.

The point of this exercise is that with mortgage rates and home values continuing to increase, Texas metros as well as many smaller towns continue to see appreciation to the point that waiting to buy does not make sense. The home you look at today will not be there tomorrow. Whether this is just a couple of years of appreciation or a longer cycle for the majority of the state has yet to be seen. However, it is safe to say that buying today is a wise investment.

Texas is the place to be

I came across a great article called “50 Reasons We’re Living Through the Greatest Period in World History”. The article in my estimation is worth reading and should make us appreciate where we are and when we are living. In reading it, I felt the challenge to state why Texas is presently one of the best places to live and raise a family. California in the early 1950’s was the land of opportunity with many families and corporations moving there. In recent times, the pendulum has moved to Texas. Why?

Instead of government, the big drivers of growth now appear to be three basic sectors: energy, technology and, most welcome all, manufacturing. Energy-rich Texas cities dominate. The state has added some 200,000 generally high-paying oil and gas jobs over the past decade — but Texas is also leading in industrial job growth, technology, and services.

The best prospects for the future lie in places that both experience income and employment gains but remain relatively affordable. When the consumer is looking at affordability, Texas is the state that boasts the most effective pay and cost of living for the dollar. With wages staying stagnant, many consumers are looking to Texas because their paycheck stretches farther. If you are just looking at income, Texas is just above average; cities on both coasts will far outweigh total pay. But when you compare to where your paycheck goes the farthest, Texas metros and cities are constantly in the top 10 in most categories.

Texas boasts warm weather, lots of land, no state income tax, and a cost of living that is lower than the national average. The strong economy is led by low unemployment and a relatively robust housing market. The Texas metros that rank highly on most lists have enjoyed rapid population growth and strong domestic in-migration. Houston, Dallas-Fort Worth, and Austin all have been among the leaders the nation in both domestic migration and overall growth.

Texas job creation

Texas has far outpaced the national average. The number of jobs in Texas has grown by a truly impressive 31.5 percent since 1995, compared with just 12 percent nationwide, according to Bureau of Labor Statistics data. When the consumer thinks of Texas, they think of energy, but the technology sector has also seen strong growth.

When we think of Texas and technology, Dell, Texas Instruments, and Compaq/ HP are what commonly comes to mind. However over the last 10 years the social media craze and a surge in private-equity investment has created much more. Homeaway, Bazaarvoice, Rackspace, etc have helped lead the way away from hardware manufacturing to the next level of the technology landscape.

And yet it is not just energy and technology that have helped lead this state to its current economic strength. As stated before in this forum, the demand for teachers, doctors nurses and other positions that require a four year degree have seen over a 42+% growth since 2000. Finance, insurance, real estate, legal, engineering, consulting also have ranked high in the contributing the high wage growth in Texas.

Texas did better than the rest of the United States from 2002 through 2011 in wage growth. For industries paying over 150 percent of the average American wage, Texas could claim 216,000 extra jobs; the rest of the country added 495,000. In other words, the Lone Star State, with 8 percent of the U.S. population, created nearly a third of the country’s highest-paying positions. Texas also added 49,000 positions paying 125 percent to 150 percent of the U.S. average; the rest of the country lost 174,000 jobs in that category.

Not to avoid the lower quartile of jobs, Texas metros 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. Texas is at about 40% of prerecession jobs in construction. So, most job channels continue to look good going into the next few years.

There’s a lot of good news about the current Texas economy. Let’s now discuss some new economic developments that will benefit Texas’s future.

Opening oil exploration in Mexico

How big could these oil reforms be for Texas’s as well as Mexico’s economy? Based on current estimations it could be bigger than the revolution in shale drilling and fracking, and it could end up being one of the most significant changes in Mexico’s economic policy in 100 years. Why would the oil and gas reforms be so significant to Mexico? Because of all the oil and gas it could unlock, and the vast wealth that could be created in the process. How much? Well, according to government estimates Mexico contains proven, probable and possible reserves of more than 45 billion barrels of oil and in excess of 500 trillion cubic feet of natural gas.

Under Pemex, the national Mexican oil company, the oil and gas would simply remains locked in the ground.

Why can’t Pemex get it out? Because Pemex, despite being one of the world’s biggest oil companies, does not have sufficient technical expertise to explore and develop promising prospects such as in the deepwater Gulf of Mexico or in the tricky shale layers just south of the border from Texas’ booming Eagle Ford shale. What’s more, Pemex has virtually no hope of acquiring or borrowing such expertise under the current status quo, which allows the company to only enter into service contracts.

That’s enough to attract the likes of most major energy giants such as a Halliburton or Schlumberger to Mexico. But the Big Oil companies with real expertise and giant balance sheets like ExxonMobil or Chevron wouldn’t even consider taking on the massive risks of drilling wells if they weren’t guaranteed a strong cut of whatever oil and gas they found. Couldn’t Pemex develop that expertise in-house? No. With Mexico relying on Pemex revenues to fund a third of the federal budget, the company has been starved of the capital it needs to drill, develop and grow. Big business and oil could supply that.

What state benefits most from that play? Texas.

Repealing the crude oil exportation ban

Since 2008, U.S. oil production has increased over 55 percent, and our imports have correspondingly fallen to the lowest level since the mid-1990s. In response to this oil boom, refineries have been exporting at record amounts gasoline, diesel, and other products refined from oil, which do not face the same federal restrictions as crude oil.
In response to this trend and the broader oil and natural-gas boom, legislators and many companies including Exxon Mobil and others are calling on Congress to lift the ban.

The ban dates back to the 1973 OPEC oil embargo, which sent domestic oil prices soaring. In the wake of that incident, Congress decided to restrict exports of crude in most cases as a means to limit future oil-price shocks. In the few cases exports are allowed—mostly to Canada—companies must obtain a specific license from the Commerce Department in order to do so. These policies that limit energy exports have limited job creation, economic growth, as well as progress in reversing our trade imbalance, according to the pro-repeal sector. The latest Census data shows the oil and natural gas sector accounted for 8.9 percent of the total balance of exports in the first 11 months of 2013 – contributing more than $129 billion in exports and leading all other sectors. Our trade imbalance is at a four-year low thanks to the 16 percent trade deficit reduction provided by the oil and natural gas industry.

For those that fear that the open market would raise prices, the latest forecast from the Energy Information Administration demonstrates that surging U.S. production will continue to exert downward pressure on fuel prices – even under increased export scenarios.

If the free market is allowed to work in this arena, we could see even more progress toward the Obama Administration’s goal of doubling U.S. exports. And that means jobs. In America’s oil and natural gas industry, good-paying jobs abound – with the average upstream job paying roughly seven times the federal minimum wage. And the state that would probably benefit most is Texas.

Alternative energy economic impact in Texas

We all have heard of the large wind farms throughout the Southwest, but one of the more exciting announcements with short term economic impact is the announcement of Tesla’s electric battery factory. Tesla Motors has said that it plans to invest about $2 billion in a large-scale factory to produce cheaper batteries for their mass-market electric car within three years. The company, which makes all-electric luxury sedans, indicated that it would build the factory in the American Southwest, without specifying which state. Nor would it name its partners, who it said would invest up to another $3 billion in the factory through 2020.

This innovative factory would allow Tesla to develop and cut the costs of its batteries for its vehicles quickly, in part by producing finished batteries from metal ore instead of from components. Sales of its Model S sedan, which costs $70,000 and higher, have been constrained by a battery shortage. Analysts said that Tesla needs more batteries if it is to make its third-generation vehicle, an electric sedan that will be sold for less than $40,000. By building its own factory, Tesla would have more control over the supply and cost of its batteries.

Nevada, Arizona, New Mexico and Texas are among the states Tesla said it was considering for the factory. The finished batteries would be shipped to Tesla’s assembly plant in Fremont, Calif. The factory will cover 500 to 1,000 acres and employ up to 6,500 workers. Texas is a good candidate for this opportunity, with the confluence of multiple transportation lines to easily ship between states. That, coupled with cheap land and low taxes make Texas a contender. That said also realize, that all four states under consideration currently have unfriendly laws towards Tesla’s direct sales model. Any change by any state one would think would have a positive influence to recruiting the battery factory to their state. Once a unique product and factory starts like this, the additional industry attracted would have huge benefits to that region.

Besides energy, the greatest growth areas in Texas are the health, medical, and technology fields. All of the major metros have a national, if not global, presence in these industries.

San Antonio–New Braunfels

Home to one of the largest medical facilities in the nation, San Antonio has seen strong job growth from military medical operations. Ambulatory health-care services combined with new technology has created more than 12,000 jobs over the last five years and looks to continue for a while.
Medical isn’t the only thing driving development. San Antonio is also home to the largest oil and gas development in the world in the Eagle Ford Shale. Record drilling levels and high-yield wells are pumping new jobs into energy and related sectors.

The technology strength is obvious to those that live in San Antonio, with the explosive growth of Rackspace and Geekdom.

The city was ninth in job growth over the last five years. A nationwide restructuring of military bases could lead to many new jobs. So on many fronts those looking to find opportunity have a lot of options in the Alamo city.


Growth in Houston has been fueled by the strength in oil and gas exploration and the supporting technologies. 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. Expect a huge increase in engineering and construction jobs as a result.

But 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.

Last, numerous large energy operations, such as Exxon, Conoco /Phillips, and Occidental and are consolidating their headquarters in this city which in turn has continued to the strong construction and economic growth of the area.


The DFW metro area continues to have one of the most diverse economies in the U.S., with strong establishments in tech, aerospace, telecoms, and financial services. Population growth is strong, housing sales are rising, financial services added 5,000 jobs from 2011-13, and employment at corporate headquarters increased by more than 4,000 works over the last five years.

Look for Dallas’s job growth to get even stronger as American Airlines, Southwest Airlines, and Lockheed Martin look to expand their presence.


The Austin metro area has gotten plenty of positive press over the last few years. Nationally, Austin has come in the top five major metros in the country job growth over the last five years, due in large part to a more diversified economic base. Homegrown tech companies like Dell, National Instruments as well as foreign investment such as Samsung ( with the largest foreign investment in the US) and others complement incoming companies like Apple and IBM (which both now have large bases in Austin), as well as startups coming out of the University of Texas. When you look at the explosive growth of new tech companies such as Homeaway, Bazzarvoice, Invoto and many others, the economic future is obvious.

Austin’s decision to back a new medical school that will open in the fall of 2016 will help attract many more in the medical field, research as well as practitioners. Partnering with the university and the strength of the other medical centers in Texas will allow the state to become much more attractive on a global scale to many. Couple that with the aging demographic nationally as well as world wide of the population, you can see the strength of the economic argument.

Austin business leaders plan is to maintain its high-flying output over the next number of years as it focuses on clean technology, data centers, digital media, biosciences, and other industries.

The state 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.

Another look at rising interest rates

With Texas seeing the resurgence of a seller’s market the last year, there has been concern over what could stop it. One concern is the ending of rock-bottom interest rates, and how it will impact the real estate market.

We will begin to find out. Last month the nation learned that the days of ridiculously low interest rates, the lowest we have seen in our lifetime, will soon be reaching the end of their rope — and in some ways already have. With the recent strength of buyer demand, rebounding home prices and an easing of the unemployment rate, Federal Reserve Chairman Ben Bernanke disclosed that the time for the Federal Reserve to start pulling back the reins on its massive $85 billion-per-month bond-buying program is nearing. The idea behind the program was to stimulate the economy by buying bonds in the open market in order to depress interest rates, which has been quite effective.

Many questioned the Fed’s methods, and were concerned about the size and scale of the three rounds of Quantitative Easing, the name used to describe the bond buying program. However the Federal Reserve was able to nudge down a broad range of interest rates to extraordinarily levels for a long time.

No one had expected these artificially low rates to last forever, and they had already been rising in the weeks leading up to the Fed’s announcement. Mortgage rates were still hovering at record lows of about 3.5 percent in early May, only to cross the 4 percent threshold a few weeks later for the first time in more than a year. Today, the national average for a 30-year fixed mortgage reached 4.58 percent, according to, which, in the grand scheme of things, is still well below historical norms. Since last year we have seen an 1.8+/- point increase in mortgage rates, yet sales have continued to improve.

The low rates have enabled qualified home buyers (and owners looking to refinance) to access cheap financing, adding to already-record-high levels of home affordability. It’s helped bolster a surge in both home sales and price increases (since lower rates help make larger principals possible).

We all knew that this day would come, so it is interesting to see the sudden concern over raising rates. All of us knew upward movement of rates has always been inevitable, the news rattled the markets and real estate industry, which has mixed feelings about whether the market is ready for higher rates.

The fear is that higher interest — coupled with rapid home appreciation — will uproot the affordability that has recently been luring buyers back to the housing market in droves. And they may be correct. Austin and Houston consumers have already found themselves in a position where they notice homes are more expensive than what they’re used to or can afford. The other Texas markets have just begun to see the market turn to a seller’s market. We are coming out of the most affordable time of our lives to buy a home.

Let’s suppose a consumer obtains a 30-year fixed loan and puts 20 percent down on a house priced at $170,500, and if they were lucky enough to catch a 3.5 percent interest rate, the monthly mortgage payment would come to $612.50. But at 6 percent, which is closer to historical norms, that monthly bill would jump by more than $200. Remember for every 1% increase in rates, the consumer is able to buy 12% less.

The view of most economists is that today’s rates aren’t sustainable long term and an increase, as long as it’s gradual, should have a minimal impact. More importantly, it will allow private-sector investors to reclaim the mortgage market and have a truer, market-determined mortgage rate without the Federal government’s subsidy.

This analyst’s view is that rates slowly starting to rise are an indicator of a housing sector that is returning to health. Those concerns that demand will suddenly surge from buyers trying to snag low rates while they still can, only to drop off when rates climb past a certain point, are also somewhat blown out of proportion if you look at historical trends.

In our Texas metros, it’s the surge of home prices, not interest rates, that have been the biggest motivation for buyers this past year. After values staying stable over the last five years in most Texas metros, we have seen values rise because of supply and demand. Presently, realtors and buyers biggest concern is locking something down before prices get too high, which has been exceptionally challenging due to the relentless shortage of homes for sale. Multiple offers and bidding wars all are signs of a strong market with great demand and not enough supply.

Let’s answer the original question: will interest rates have an effect on the local housing markets? Absolutely, but we anticipate the impact to be rather small. We don’t think there will be a dramatic impact on the purchase market. People may qualify for less than they would have before, but the demand is still there. Everyone needs shelter. Whether they rent or buy. However most surveys will show that ‘owning a house is the desired avenue’ for most in our country.

We have seen the effects of rising rates before. Home buying and consumer spending slows for a couple of months as the consumer makes up their mind of the need and shock of losing better money rates. Then it picks right back up. If you look at what has happened over the last month, most local realtors have seen a spike in offers as consumers want to buy while rates are still low. Most understand that the ability off rates coming back to record lows is a thing of the past.

Over the last five years, during the recession, nationally incomes plunged right alongside falling home prices. Texas was spared most of this because of great job creation. Most values stayed stable, but there was not great appreciation due to the concern of national growth and ability to recover. However in this last year, prices nationwide have been seeing stronger appreciation, especially in Austin and Houston where demand is up dramatically (over 30% year-over-year in April). Median household income, on the other hand, has remained relatively stagnant at 2008 levels. That’s where low interest rates had been playing such a huge hand, giving consumers more purchasing power for homes they might not have otherwise been able to afford.

With the lack of resale listings in all Texas metros, and the inability of new home starts and rentals to keep up with demand, values will be the major focus of buyers as rates increase. In the next few months because of this, we should continue to see a surge in home sales and demand. As rates increase we will eventually see a slow down as the consumer tries to understand the inability to buy the dream homes they were looking at last year or last week.

Most realtors and consumers are finding that the house or rental they looked at has been put under contract. And this may happen a number of times to them before they secure any shelter in this stronger market. So yes rates will slow us down, but not for long.

The apartment or house you look at today will not be there tomorrow!

Texas vs. California (Part 3)

This is our third installment in a series discussing Texas and California. We have written about why businesses and individuals seem to be leaving CA for TX. One in five Americans calls California or Texas home. The two most populous states have a lot in common: a long coast, a sunny climate, a diverse population, plenty of oil in the ground, and Mexico to the south. Where the states really diverge is in their governance.

Let’s look at population, GDP, and the states’ respective budgets. We will use budget data from the Census Annual Survey of State Government Finances and job and per capita income data from the Bureau of Economic Analysis.

Last year (2012), California had a population about 30% larger than Texas, a deficit 210% higher, and state debt 380% higher. It’s safe to say that low-tax Texas appears to be in a better fiscal shape.

California earned the name “The Golden State” and adopted the motto in 1968. The nickname’s origins are from the discovery of gold in 1848, and the expansive fields of poppies and many opportunities present in the state. In 1950 the Golden State had 40% higher per capita income than Texas. In 1970, the advantage was still over 30%. By 2009, the difference had shrunk to only 10%, without taking into account the higher cost of living in California.

As we have discussed the last couple of weeks, it appears that Texas is doing better than California not only fiscally, but also in terms of aggregate job and income growth.

One thing I would warn about is exaggerating California’s debt problem. It’s true that they have mismanaged their finances, and expanded government seemingly beyond what they can afford. However, California is still extremely wealthy, with a total GDP of about $1.8 trillion dollars in 2011. This is bigger than Brazil and Russia ($1.6 trillion) and almost as large as Italy ($2.3 trillion). Texas is $1.2 trillion in comparison. So while their tax base may appear narrow, their entire economic base is very wide. The debt to GDP ratio for California alone is still below 10% (or 80%, if you add the national debt).

Also, let’s not make too strong policy-inference from the short-term (less than ten years) mortgage-bubble that is currently distressing California. Policy should be based on evaluations of long term performance. We would argue above that the long term trend also favors Texas.

There are many other reasons why Texas is thriving while other states flail.

Rising oil prices

A boon for Texas, California not so much.

In 2012, the Brent crude oil spot price averaged $112 per barrel, and rose to $119 a barrel in early February. Even though we have seen an unexplained surge at the pumps lately, the Energy Information Administration is projecting an average price of $109 a barrel. Crude prices peaked at $134.02 per barrel in June 2008. Those rising oil prices may have been bad news for drivers, but they helped out the Texas and California economy, which rank #1 and 3 respectively in oil output.

When oil prices are high, job growth in Texas historically has exceeded that of the nation. Texas entered the recession late and came out early, mirroring trends in oil prices, which rose towards the beginning of the recession, fell in 2009, but have been steadily rising since.

The states that are expanding economically are almost all energy states. Based on Dallas Federal Reserve research, a 10 percent increase in oil prices leads to a 0.3 percent rise in employment and a 0.5 percent rise in GDP for the state of Texas.

One of the big differences between the two states has been the introduction of fracking. New recovery techniques, such as steam injection and later hydraulic fracturing (fracking), changed the industry and lessened our reliance on other countries oil production. A decade ago, Texas oil engineers decided to combine horizontal drilling with a process called hydraulic fracturing, which injects chemical-laced water into the shale to push out the minerals. The system has been effective in releasing previously untapped pockets of natural gas in shale formations, such as the Eagle Ford shale formation in South Texas. In 2000, 1 percent of the U.S. gas supplies were from shale, but now the figure is 25 percent. And as a result of the new technology, Texas is home to some of the most prosperous new oil fields in the country.

Fracking has opened up the Eagle Ford formation to tremendous economic opportunity. This region of south Texas was a sparsely populated area that has not historically been very economically strong. Fracking has breathed new life into the area and has not only brought jobs but has also created a new set of millionaires whose land has sky rocketed in value.

In California, fracking has kept older fields open, particularly those in Kern County, and has preserved CA’s place as the nation’s third largest petroleum producer. But to this point, fracking has not been used for new fields due to environmental and regulatory concerns. Meanwhile, oil production is booming in other states, principally North Dakota and Texas, due to extensive use of fracking to tap into deposits in shale — so much so that the U.S. may soon become an exporter again.

But what about California? It’s been estimated that deep shale deposits in California, particularly those along California’s Central Coast and in the Central Valley, contain as much as 400 billion barrels of oil, equivalent to half of Saudi Arabia’s oil fields. But whether California experiences a new oil boom similar to one it saw in the early 20th century depends on whether the state’s extraordinarily sensitive environmental conscious can tolerate more fracking, particularly along the coast.

So will California see a new oil boom? Not immediately, but the potential is there to help improve a somewhat stagnant economy, create many thousands of jobs, and pump billions into state and local government coffers. The question is at what cost?

Housing costs

Texas has been referred to as one of the remarkable economic stories of the last decade. But its growth isn’t due to the wealthy fleeing to places with the lowest tax rates. If you look closer at the data, the people moving out of the state are wealthier than those moving in — so the lower housing costs and living expenses in Texas is a major magnet.

We all are aware of the ramifications of runaway real estate appreciation. From 2000 to 2006 as California experienced over 250% appreciation of real estate assets (Source: OFHEO). At the same time Texas was 50th in appreciation with less than 3% annual appreciation annually.

This lack of appreciation in Texas helped the state escape the foreclosure bust that crippled other states’ economies —less than 2 percent of Texas mortgage borrowers are in or near foreclosure, according to the Mortgage Bankers Association, while the national average is nearly 10 percent. States like Arizona, Florida, and Nevada faced mortgage borrower foreclosure rates of 13, 12, and 19 percent, respectively, in 2012. Texas’s relatively stable market may have been a factor in preventing housing prices from climbing. California and Nevada have been helped by investors shoring up prices. As of December, 10% of Florida’s home loans were still in some stage of foreclosure, the highest percentage in the nation. Behind it were New Jersey (7%), New York (5%), Nevada (4.7%), and Illinois (4.5 percent), according to CoreLogic. Among the five, only Nevada is a non-judicial foreclosure state.

Some credit Texas’s stability to state regulations on cash-out and home equity loans, which don’t allow borrowers to take out loans that total more than 80 percent of a home’s appraised value. California, Florida, and many other states had a run of 100% refinances with borrowers sometimes refinancing two or three times in a couple of years to retrieve money from their over-appreciated homes. These cash-out loans allowed borrows in other places to refinance their homes for more than their original mortgage value — driving up home prices and contributing to the eventual burst of the housing bubble.

Another factor in Texas that prevented housing prices from rising dramatically during the housing boom is the abundance of cheap, open land and easier building regulations. Look at land values on both coasts as well as the length of the entitlement process (the process from purchase through engineering to the start of development). 6 months to 2.5 years in Texas is a walk in the park compared to 7 to 10 years in California, Florida, Arizona and other ‘boom’ states.

Affordable homes are one of the key reasons Texas continues to thrive. The California average home price is $738,526 and the median price is $452,000. Texas is significantly less expensive with a $283,137 average price and a $144,900 median price. Affordable land and limited municipal and state regulation allow for less expensive homes. In Texas the cost of the home is traditionally 5x the price of the lot, or 3x the price of the lot in more desirable areas. In California, it is the opposite, where the land is typically the largest cost.

Cost of labor

Immigrant workers make up the majority of migrant farm workers in places such as California’s Central Valley and southern Texas doing seasonal work such as fruit picking and sorting. Seventy five percent of crop workers in certain areas are from Mexico and about half are undocumented, according to a 2011 U.S. Department of Labor survey. Immigrant workers make up a vital part of the construction workforce. In California, Nevada, Texas and Arizona, it is estimated a third of all construction workers are immigrants. Twenty percent of construction workers nationally were born abroad. Of these figures, more than half came from Mexico and another 25 percent from Latin American countries.

Both states have a pool of cheap, unskilled labor. However, skilled labor is another story. Businesses are moving away from areas with a high concentration of unionized skilled labor. As Dr. Mark Dotzsour from Texas A&M said, ‘Let’s face it. Employers come to Texas and other southern locations because they feel that they can make a higher profit. Taxes are a major consideration. So is the cost of labor. Clearly businesses are moving away from areas with a high concentration of unionized labor.’

The Bureau of Labor Statistics puts out information about the percentage of all workers in each state that are represented by a labor union. Here are the states with the highest concentration:

• New York, 24.9%

• Alaska, 23.9%

• Hawaii, 23.2%

• Washington, 19.5%

• Rhode Island, 18.4%

• California, 18.4%

• Michigan, 17.1%

• New Jersey, 16.8%

• Massachusetts, 16.2%

• Illinois, 15.5%

Here are the states with the lowest concentration:

• Arkansas, 3.7%

• North Carolina, 4.3%

• South Carolina, 4.6%

• Georgia, 5.4%

• Virginia, 5.5%

• Minnesota, 5.7%

• Tennessee, 5.9%

• Texas, 6.8%

Many companies like the flexibility associated with the ability to freely make decisions without the pressure of a union, so states with a low percentage of a unionized private sector labor force ranked near the top for many business owners and CEO’s. That coupled with a lower cost of living for a company’s workers has made moving companies to Texas more attractive.

The ability to make money motivates workers, suggesting an advantage for places with higher pay. The nation’s leaders in earnings per job were found in the Northeast, led by New York, Connecticut, Massachusetts and New Jersey. California, on the other side of the country, comes next. These states lost some of their appeal because steep living costs and taxes ate into the higher pay. Texas, a state with low living costs and taxes, ranked a respectable 13th in earnings.

As we have discussed the last few weeks, both states (California and Texas) have their strengths and weaknesses. Each has had their chance for their day in the economic sun. The question is what will the next decade bring? The strength of less regulation and lower taxes or the need for more government services? California’s habit of raising taxes to fund a burgeoning regulatory state isn’t without impact on its economy. Californians fork over about 10.6 percent of their income to state and local governments, above the U.S. average of 9.8 percent. Texans pay 7.9 percent. This affects the bottom line of both consumers and businesses.

Presently Texas seems to be the people’s choice.

California vs. Texas

It’s hard not to compare California and Texas against each other. Both states are geographically large, coastal, resource-rich, ethnically diverse, and are the #1 and #2 states in both population and GDP. However, the states differ greatly in culture, government, and political and business climate.

Much has been made throughout the Great Recession of the strength of Texas over California. Texans have been crowing about the strength of their economy in comparison to California’s weaknesses. Even though California has been adding jobs lately, its 9.8 percent unemployment rate is sharply higher than Texas’s 6.1 percent rate (that disparity has been true before and through the recession). The Texas economy slid just 1.5 percent in 2009 – the depth of the recession – while California’s dropped 2.2 percent and continued to struggle up to this year. Many would put the blame on California’s “anti-business” attitude.

But a closer look at the two economies shows that in a number of ways, California has been performing well, ranging from long-term economic growth to venture capital investments. A study this last quarter (Q412) by UCLA’s Anderson Forecast said that what separated the two states during the Great Recession was not their business climates, but their mix of businesses. The UCLA economists suggests that Texas’s strength during the recession has largely come from its close ties to the oil industry, which has led the state into both booms and busts throughout the past century, while California’s downfall came primarily because of its reliance on construction and real estate as its key job engine in the last decade. This analyst does not fully agree with this assessment.

California was once a powerful draw for Americans on the move. It was a state where everything could be better. But that California is no more. Around 1990, after decades of spectacular postwar growth, California began sending more people to other states than it got in return. Since that shift, its population has continued to grow (at a rate near the national average) only because of foreign immigration and a relatively high birthrate. Immigration from other nations, though, is declining, and it is likely that the state’s growth rate may soon fall behind that of the U.S. as a whole.

The state now pushes out where it once pulled in. California is a far more populous state than it was in 1960, when it was second to New York in population size with 15,717,204 people. Since then, the state has grown 137 percent, to 37,253,956 in 2010. For comparison, consider New York, which grew by only 15 percent during that same period. On the other hand, Texas has grown faster over these 50 years—by 262 percent. As we’ll see below, though, it’s significant that Texas’s record reflects a recent sprint. Until 2000, its growth matched California’s rather than surpassing it.

So why have job markets in the two states diverged so sharply?

Between 2000 and 2006, California and Texas — the two largest economies in the nation — had virtually the same unemployment rates, tracking within tenths of a percentage of each other. But when the housing bubble popped, the states dramatically diverged. California construction firms, real estate offices and mortgage brokerages shed tens of thousands of workers, bringing the rest of the economy into recession.

Texas, besides the energy and technology industries, excels at factories producing autos, fabricated metals, and other durable goods. But that’s largely because of a shift of manufacturing from the Midwest to factories in northeastern Mexico and Latin America, south of the Texas border. This area has also been the benefactor of rising wages and costs in China, which has shifted more manufacturing back to North America. A diverse mix of industries helped to insulate the Texas economy from the recession.

So what changed California from a “pull” to a “push” state? There is no simple answer to that question. But we do know that several trends converged around that time to sap the state’s economic vitality.

One was the recession of 1990. The state’s unemployment rate, which had tracked the U.S. rate closely through most of the 1980s, surpassed the national average after 1990. By 1993, in fact, the California rate was 2.6 percentage points above the country’s overall rate. Whenever California’s unemployment is higher than the U.S. rate, migration into the state tends to fall and emigration rises. In most years since 1960, California’s unemployment rate has been above the national average.

The early 1990s were the most dramatic demonstration we know of this effect. In those years, California had a sharp and prolonged recession while the rest of the nation was going through a relatively mild and brief downturn. The state’s hard fall was due in part to its dependence on the defense sector which had thrived during the Reagan-era arms buildup of the 1980, and then shriveled with the end of the Cold War. California’s number of aerospace jobs shrunk from 337,000 in 1990 to 191,000 in 1994.

As is to be expected in a recession, construction also took a dive. The number of new residential building permits, which had peaked at nearly 315,000 in 1986, was under 85,000 in 1993 and didn’t exceed 100,000 again until 1997. To put that peak-to-trough drop of 230,000 in perspective, it was greater than the total number of permits issued in any year of the 2000s building boom.

In the same period Texas was coming out of its toughest recession fueled by an energy economy that was not broadly based and created:
• A boom environment. Back then, Texas had been in a long building boom fueled by rising oil prices. Housing prices had risen nicely for years. Many Texans who had started with next to nothing were enjoying a new feeling of wealth as they moved from one appreciating house to another. Sound familiar?

• A finance frenzy. Back then, the savings and loans industry (particularly in Texas) was encouraged by changed accounting rules to make big development loans, booking unearned profits. The end result is that industry is no longer around. Back then, Texas home buyers were advised to put as little as possible down because Texas laws prohibited borrowing equity out of your house. Many people put only 5 percent down — an amount that would be wiped out by selling costs.

• Low, adjustable ‘teaser’ interest rates. Back then, builders and sellers marketed houses by “buying down” mortgage interest rates for a year or two as well as picking up closing costs. In working with production builders back then, it was nothing for the builder to pay 10 basis points to help the buyer ‘afford’ the home. Although ‘buy downs’ were not as giving due to stricter requirements, there was some of this going on in the pre-recession boom. After that, interest rates and monthly payments rose. Many saw their payments rise as the value of their houses fell.

• Employment growth. Back then, construction, oil, real estate, finance and banking employment loomed large in Texas. When the employment growth stops, so does the economy.

California’s population exodus began in the early 90’s, with eventually a net migration of 3.4 million people out of California since 1990. Many of the people “voting with their feet” are the wealthy and productive classes that states and cities compete for.

So what happened to California since the 1990’s that hurt their competiveness?

One of the factors that may have hurt California’s economic competitiveness at the end of the 1980s was that decade’s dramatic spike in real estate prices. Home values increased in most states during the 1980s, but in California they rose far more. According to Census data, the state’s median home values were consistently above national averages in 1940, 1950, 1960, and 1970 but never by more than 36 percent. By 1980, they were 79 percent higher. By 1990, they were 147 percent higher. This was a boon to those Californians who wanted to cash out on their expensive homes and move to cheaper locales. But many consumers saw their homes and real estate investments as an ATM. They could pull equity out of their real estate, spend it in almost any way they wanted, and the surging real estate market would give them a 40+% annual return. It’s shocking, but appreciation on a annual basis in California was running about that according to the Office of Federal Housing Enterprise Oversight (OFHEO), which tracked mortgages and managed FNMA, FHA and FMAC. But for employers looking to fill positions in California, it added to the cost of labor there in comparison with other states. The Texas median home price in 1990, for instance, was less than one-third of California’s.

Looking back on the population surge of the 1980s in California, it’s easy to see why housing prices soared. They were obeying the law of supply and demand, with a boost from the sharp reduction in property taxes brought about by Proposition 13 (then, as now, property taxes were capped at 1 percent of a home’s purchase price, plus an adjustment of no more than 2 percent per year). During the 1980s, the state gained 6,092,257 residents, and builders struggled to keep up by adding 1,903,841 housing units, or less than one for every three new Californians; in the previous decade, the ratio had been one-to-1.6.

Added to sheer demand for housing was the fact that California was growing short on buildable land. This was due both to geography and policy. The most desirable parts of the state are near the coast, where land use was becoming increasingly restrictive. Cities and counties imposed growth controls which continue today, and more and more land was placed off-limits as permanent public open space or preserved farmland. We recognize that many factors go into the price of homes, so it is impossible to determine how much of the California premium was due to building restrictions, land-use rules, land scarcity, demand for housing, or tax policy. We can only note that all these factors played a role and that their combined effect was to make housing far more costly in California than in most other states.

By comparison, housing was a relatively unimportant factor in job growth in Texas as the recession hit, with most new jobs being created in diverse professional fields such as accounting, law, and security services. The more diverse Texas economy also benefited from its interaction with the oil and natural gas industry, which are an important part of the tax base. But in the early 2000’s these were not high growth industries.

Apologists for the Golden State frequently point to Texas’s flourishing oil and gas industry as the reason for its success. Texas does lead the nation in proven oil reserves, but California ranks third. The real difference isn’t in geology but in public policy: Californians have decided to make it difficult to extract the oil under their feet, as well as having a history of passing higher tax burdens to individuals and corporations.
However one of the chief reasons California remains slow coming out of the recession and Texas skirted is fairly obvious. California’s major industries were more directly tied to the causes of the recession, resulting in steeper job loss when the recession hit. California experienced a more acute housing bubble than most states, including Texas. California lost more jobs than many other states because it was the center of the sub-prime mortgage finance industry, and housing was a major employer. In addition, California was also hit harder than most by the slowdown in Asia, which meant that fewer manufacturing goods were being moved to and from its important ports.

All this took a toll on the state budget and forced a financial crisis. This crisis has forced the state to look at harsh realities of new tax revenues. Last November the state passed Proposition 30 (California’s Millionaire Tax to Restore Funding for Education and Essential Services Act of 2012), which increases the tax rate for taxpayers earning more than $1 million by three percent and taxpayers earning over $2 million by five percent, making California’s highest tax bracket 15.3 percent. The tax increases would last for 12 years. The passage of this proposition moved California’s highest tax bracket to the highest in the country (formerly 10.3 percent, above Hawaii, who had the highest tax bracket at 11 percent.) All this took effect January 1, 2013.
The revenue generated from these additional taxes will be used to fund public schools as well as senior and social services.

This 15.3 percent income tax rate, in addition to the proposed highest Federal income tax rate, 39.6 percent, could subject California high-net worth taxpayers to an income tax rate of 54.9 percent on any income over $2 million. (No wonder golfer Phil Mickelson and others have stated publicly that they are thinking of moving out of the state.)

Both the Federal and California tax income progressively, meaning that not all income a taxpayer earns is taxed at the highest rate. For all taxpayers, the first portion of income is taxed at the lowest rate and then higher rates are applied for additional income. For this reason, only income over $2 million would be subject to a 54.9 percent income tax rate. For example, under the current Federal and state tax rates a person earning $2 million dollars would pay $677,314 for Federal taxes and $191,295 in California taxes, without any credits, deductions, or exemptions. That is a total of $868,609 on $2 million or a tax rate of 43.4 percent.

Many of the new California tax laws are aimed at taxing wealthy entrepreneurs. California and Texas have always led the nation in intellectual capital (patents). Lots of these patents were done by entrepreneurs at startup companies. Entrepreneurs are job creators, risk takers, and innovators who generate new wealth. We know that small businesses generate nearly two out of three new jobs in the U.S., and we also know California is suffering greatly with the second-highest unemployment rate in the nation, yet one of the highest tax burdens for individuals and corporations.

As pointed out by our state and local chambers, California’s harsher regulations and continued increased tax burden will continue to push more individuals and corporations to look at more cost effective business environments. Texas and its metros are at the top of the list.

There are many more reasons for the population exodus from California to Texas. We will explore more in the coming weeks.

Getting ready for the next housing boom

Yes, you read that right.

Get ready for the next housing boom. With the negative media, political dysfunction, mortgage delinquencies and foreclosures we still have going on, and the record levels of housing inventory, how could we possibly have another housing boom, right?

Despite all the problems we are seeing today, pent up demand is creating the next housing boom. Demand for housing is closely tied to the rate of household formation which, if you hadn’t noticed, has been lacking the last five to six years. Any growing economy creates more households and more households eventually need more houses and more apartments. Right now, due to the challenged economy and jobs market, household formation is been on hold. This is one reason why the housing market continues to pick up.

A household is simply a residential unit of shelter. Everyone has to have shelter. It refers to a person or persons living under one roof. Traditionally, a household has been thought of as a nuclear family. Boy meets girl, boy marries girl, and boy and girl buy a house or rent an apartment. In this way, marriage creates more households and demand for more places to live. Divorce, too, creates more households and demand for more housing. People who get divorced do not want to continue living together under the same roof. Households are also formed when children grow up and move out. Most kids can’t wait to get their own place. The US still has population growth, driving employment growth, which leads to housing growth, and results in increased housing demand.

Much of this growth has been postponed. As we all know, employment remains depressed, particularly marginal manufacturing jobs, that have been shipped overseas (except in Texas). College graduates have been moving back with parents. The process of generating new households seems to have stopped or slowed down dramatically. Whether it is the poor economy or just the new norm, more people are postponing marriage. For the first time since 1940, less than 50% of households are maintained by married couples (per 2010 Census). Others are postponing divorce. And as much as they would like to be independent, many grown children are staying put. Some can’t find jobs even after graduating from college, so they are choosing to live with mom and dad just a little longer. Even those lucky enough to be employed are moving in with their parents in order to cut expenses.

This lack of household formation is good news for housing in the long run. It means there is a lot of pent up demand for housing and, based on the last Census, it is growing. Current household formation may be slower currently, yet potential household demand is strong. As the economy continues to pick up steam and more people start to find jobs, household formation will surge. Once that happens, demand for houses and apartments will also surge.

Let’s examine the primary drivers of this demand.

• Job creation is paramount – Texas leads the nation, having created (and still creating) roughly a quarter of all jobs in the US the last few years and projections suggesting that this should continue.

• Population growth – Texas, primarily the four metros, will double in population over the next twenty years. Austin alone is projected to add 60,000 people a year (160 people a day).

• Baby Boomers/retirees – Texas has a low tax burden (46th in the nation), no state income tax, and warm weather, making Texas the #2 destination for this age group. 46% currently own a home.

• Echo boomers – the biggest opportunity here is that 51% still rent (US Census Bureau). However according to the latest FNMA surveys, close to 70% still think that buying a home is something they want to do. Part of that demand is based on businesses discovering the cost savings of moving to Texas. With no state income tax and a low tax burden, estimated savings is close to 30% compared to most other states.

Looking at all the Texas metros, where is the opportunity?

• Austin is in a unique position with limited supply of residential inventory, developed lots, homes, apartments, and 95% to 98% occupancy for rentals in the five county area. All residential is tight. Office is strong; retail is stronger than other markets. Austin was named by HomeVestors as one of the top 25 areas to buy investment property.

• Inside Houston’s outside loop core we continue to have a unique market with strong appreciation and absorption. Also the Woodlands has seen explosive growth with Exxon moving their global headquarters there.

• San Antonio residential continues to improve with limited availability of new homes and development. Multi family continues to improve. Office, retail will remain flat with industrial having a tremendous boost from the Eagle Ford shale play.

• Dallas/Fort Worth has turned the quarter at 97% of pre-recession residential absorption. Multifamily is doing better, but continues to be challenged with short sales and foreclosures.

It’s happening. Locally we have seen the housing market tighten up tremendously as people from all over the country move here for jobs and the high quality of life Austin offers. Even still, in the Austin area and Texas, there continues to be challenged areas. So recovery may not happen for a few more years nationally (possibly 25+ years in some areas. Here in Austin there are some areas that have over 70 years of inventory still.)

This is not to say that any of this is imminent. More likely than not, the process could take a few more years. The United States continues to slowly improve. However many believe that the housing market will turn around. All that pent up demand for household formation should create a strong rebound in the demand for housing. That is, if we can avoid the coming fiscal cliff, which has the potential to undo all the recovery we have made and plunge the United States into a new recession.

The fiscal cliff and housing

If the federal government does not come to a budget solution, what could it mean for the home building and mortgage industry? As Republicans and Democrats brace for a budget standoff based on ideological differences on tax hikes and their impact on small business, lawmakers may find common ground by including housing market relief into discussions on how to grow Main Street America. Depressed home values remain a key constraint for small business creation and widespread negative home equity in many hard hit regions precludes real estate assets from being used a source of capital for hiring or expansion.

But that’s not to say trends aren’t improving, as the nation’s overall home equity surplus shows an increasing rate of recovery. In third quarter results released by the Federal Reserve in late September, home equity rose to its highest post-crisis level, even eclipsing 2008 levels.

Presently, the nation now faces something equally different and just as dangerous — falling off of the fiscal cliff. The outcome of our trip to the edge of or over the fiscal cliff has wide ramifications for our economy, yet the impact on the housing market could be among the most significant.

Quite simply, the fiscal cliff is the combination of automatic spending cuts and automatic tax increases that take effect either at the end of 2012, or the very beginning of 2013. It was a gimmick, known as the Budget Control Act of 2011, which was put in place by Congress and President Obama to attempt to force a budgetary compromise. It represents a “kick-the-can-down-the-road” approach to policymaking – which seems like the dominant way our national budget has been managed for the last decade.

Unable to reach an acceptable compromise by the deadline, our elected Congressional and administrative officials on both sides chose to vote for something they did not entirely support largely because it contained policies that their opponents also found intolerable.

Among the changes to current law set to take effect at midnight on December 31, 2012 are the end of last year’s payroll tax cuts (2% for most workers), the end of certain tax breaks for businesses, modifications to the Alternative Minimum Tax that would impact far more people, the end of the Bush tax cuts, including capital gains and estate tax cuts, and the initiation of taxes related to the Affordable Care Act.

Concurrently, spending cuts that were agreed upon as part of the debt ceiling deal of 2011 would commence. Estimates are that over one thousand government programs will face steep cuts, including $500 billion from defense over the next decade.

It is vital to remember the recent rebound in the housing market is a function of two primary factors. First, historically low interest rates served to prop up the ailing market. Second, the market has benefited from the sense that it has finally bottomed out, which buoyed consumer confidence. What impact would failure to avoid the fiscal cliff have on the housing market and the economy as a whole? In a word: disaster. Let’s examine how the fiscal cliff will directly derail the two factors that have driven the rebound in housing.

First, failure to address the cliff will end the incredibly low interest rates we have been enjoying. Let’s not forget the reason such massive spending cuts and tax hikes are being contemplated during this time in history is the existence of our nation’s $16 Trillion debt. According to figures from the U.S. Treasury from August 2012, approximately 53% of our current debt is owned by foreign investors. China accounts for 10% of U.S. debt ownership, but — and this is key — China appears to be reducing its holdings of U.S. treasuries.

The reason for China’s reduction in Treasury holdings is a belief on their part that the value of U.S. denominated debt will decrease over time based on the inability of U.S. officials to put a credible debt reduction plan in place that does not compromise economic growth. China and other foreign investors would be tempted to sell more U.S. debt and reduce their future purchases if it appears a responsible plan will not be adopted. When U.S. debt loses its appeal, interest rates have to be increased to lure purchasers. If that happens, our current period of historically low interest rates will end.

The second reason for the resurgence in housing has been a sense that the worst was behind us relative to the economy, the jobs market and property values. A new recession (caused by falling from the fiscal cliff) with as many as 1 to 2 million new unemployed Americans will devastate consumer confidence and risks another wave of home foreclosures. Moreover, the recent gains in home values would likely evaporate as the pool of potential buyers falls dramatically.

In order to avoid a catastrophic outcome, our political leaders must work out a compromise on taxes and entitlements that is amenable to both sides that sets our country on a fiscally responsible path. The alternatives – kicking the can down the road, or simply plunging over the cliff – are unacceptable.

After this hard fought political season, our political leaders difficult response to the crisis at hand is needed. Out of control entitlement, defense, and social spending needs to be a thing of the past. Compromise and working together need to be the mission. Anyone that has been in a successful relationship will tell you that compromise is paramount. If Congress is too late, they risk the wrath of global investors passing on Treasuries with potentially “rocky” consequences. Credible action must take place before the end of the year. It doesn’t have to be the final deal, yet it must be detailed enough and involve pledges from all parties that the deal will be resolved within a very short period of time.

The housing market continues to swim upstream in a sea of uncertainty and won’t be on its way to recovery until some sort of concrete forward-looking directional guidance is offered by an official source, good or bad! This mess can’t be cleaned up overnight, nor do we think it’s fair to expect a broad-based reform package to be implemented with one swipe of the President’s pen. What we do expect is better management of expectations and a clear voice of leadership in Congress or the administration. If the regulators are really having this much difficulty making a decision on the next move, then maybe they shouldn’t implement patchwork regulations just to appease outcries for reform. All that does is create more confusion, which only breeds more uncertainties and adds further barriers to the home loan qualification process.

The housing market is particularly vulnerable at this moment in its recovery. The potential consequences for housing include rising interest rates, dropping home values, a resurgence of foreclosures and a dramatic, perhaps generational long loss of consumer confidence. With stakes like these, all Americans, particularly homeowners and those dependent on the housing economy, must demand action from our leaders.

If no serious attention is given to housing finance reform until after the fiscal cliff, what are the implications on the broader economy? A clear solution is what is needed. It will take time for any solution to start the healing process, but if you continue the political haggling, it is like ripping the band aid off again and again. It slows the healing process.

Texas continues to outpace the US

Texas continues to outpace the US in job growth, driving Texas real estate

The Texas economy continues to grow at a rate higher than the national average. The state gained 261,000 nonagricultural jobs from August 2011 to August 2012, an annual growth rate of 2.5 percent compared with 1.4 percent for the United States. The state’s private sector added 270,900 jobs, an annual growth rate of 3.1 percent compared with 1.8 percent for the nation’s nongovernment sector. Or as we have said many times before, one out or four jobs in the nation have been created in Texas since the recession

The Texas growth narrative is well-known by now. Texas’s population grew by 11 million people (79 percent) between 1980 and 2011, more than double the rate of growth of the nation as a whole. With that population growth came job growth. Since the 1990s, the rate of Texas job growth has been a full percentage point or more above the national average most years.

Texas’s rapid population growth has been a major driver of the state’s economic growth over the last several decades. The vast majority of the state’s growth is the result of two factors specific to Texas: The state’s relatively high level of “natural growth,” i.e. births minus deaths; and international immigration, much of it from neighboring Mexico.

Specifically, Texas has the nation’s second-highest birth rate (after Utah), which researchers attribute to a variety of demographic, socio-economic, and cultural factors. Texas is also a major entrance point for immigration from Mexico and Central America to the United States. International immigration provides Texas a steady base of population growth. Between 2000 and 2009, more than half of the net migration to Texas was from Mexico and other countries (according to the Office of the State Demographer “Texas Demographic Characteristics and Trends” presentation February 3, 2012; and U.S. Census Bureau, Components of Population Change).

Most recently, about 72% of Texas’s net population growth last year resulted from international migration and natural growth, according to the Census Bureau; the remaining 28% percent resulted from net domestic migration according to CBPP calculations of Census data. This population growth in turn has caused job growth. Population growth has fueled demand for housing, goods, and services such as education. This increased demand has spurred expansion of businesses, schools, and so on, creating jobs in both the private and public sectors.

Commercial and residential real estate in Texas and other regional states, which never rose too high or fell too far, is now benefiting from the region’s hot economy.

In some of the states, you could even say real estate is a well-oiled machine — energy production in the central U.S. has helped bolster the region, as seen in the states’ low unemployment. People in the region, simply, are working.

In Texas, here’s how that translates into housing and real estate prices. Each of the state’s major metro areas — Houston, Dallas/Fort Worth, Austin and San Antonio — saw minimal declines in the bust and are essentially fully recovered.

Each metro area has its own economic strengths that diversify the state’s economy beyond the energy sector, like high-tech and government in Austin or tourism and the military in San Antonio. The diversity of the Texas economy has helped drive job growth and demand for real estate in all metros, with thee out of the four metros, Austin, San Antonio and Houston recovered to pre-recession employment and better. DFW is at 97% of pre recession numbers.

Low cost of living and low housing prices

Another major contributor to Texas growth is that the cost of living is considerably lower than the national average. Housing, which represents roughly one-third of a typical household’s spending, is particularly inexpensive.

Texas has the second-biggest land area in the country, much of it quite flat and thus available for development. The supply of land keeps prices low and makes it considerably less expensive to start a business or build housing than in many other parts of the country. Texas has by far the most open land among the nation’s most populous states. The population density of Texas is less than half of that of California, less than one-fourth of New York’s or Florida’s. These four states account for over 30% of the nation’s population.

There is some debate about why housing prices did not soar in Texas along with the rest of the country. Texas had the lowest appreciation in 2005/2006 in the country according to OHFEO. Whether it was because Texas was the last state to allow homeowners to borrow against their homes through equity loans and placed strict controls on the amount they could borrow, or whether it was the plentiful land or some other reason, there is no doubt that Texas did not face the boom and bust in housing that preceded the 2007-2009 real estate recession in many states.

In addition to keeping real estate prices low (particularly housing), the absence of a housing price speculation bubble (and subsequent implosion) benefitted the Texas economy in other ways. The mortgage foreclosure rate soared in other states but has been much lower in Texas. The Texas foreclosure rate was one in every 1,203 mortgages in August 2012, just 60 percent of the national rate and less that one-third the rates in Nevada, California, Arizona and Florida. As people in other states were losing there homes and equity, Texans were largely spared from the economic fallout.

Employment drives the local real estate economy, and commercial real estate is a good indicator of employment trends. Let’s look at commercial real estate in the major Texas metros.

Austin is an economic success story in the face of nationwide uncertainty, with employment growth at 3.6% annual growth and the addition of 29,000+/- jobs annually.

Austin’s apartment inventory will grow by 8+% / 11,738 units, the majority within a couple miles of CBD. Last year, completions dropped to the lowest level since the early 1990’s. Vacancy will remain tight with less than 3,500 units available in the five county area presently. This may be the tightest market since the early 2000’s. Asking rents will rise 5% or more, which means the housing affordability gap has closed for class ‘A’ renters with upward pressure on ‘B’ and ‘C’ renters. Actual numbers per Austin Investor Interests: 7,700 units delivered in next 12 month with a current 4.8% vacancy rate.

The above average economic growth and pro-business climate have been welcomed in Austin’s office market. Although office leasing is off over 20+% nationally, Austin has seen a net increase of 180,000 sq feet. These absorption numbers would have been larger if and Cirrus Logic and Intel had not vacated large chunks of space as they moved into their own buildings. Rents are projected to increase 2+% this year (source: Marcus Millichap).

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 over 930,000 sq feet brought on this year, and retailers are projected to absorb over 1.1 million sq. ft., the largest amount since 2007. Rents should continue to rise with some concessions in retail.

San Antonio grew employment this year by 20,500 jobs, or a 2.4% 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.

The stronger job market bodes well for the local apartment market with an increase of 7,979 units under construction and 3,826 units delivered in next twelve months. 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.

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 and continued military spending has had a dramatic effect on boosting retail in San Antonio. Retail continues 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. Retail developers will bring 625,000 square feet of space online in 2012, adding to the 674,000 square feet of space that came online last year.

Houston’s economy continues to remain well positioned with over 95,000 jobs created this year. A 3.65% increase in employment will continue to feed housing, office and retail absorption

Metrowide, over 10,500 apartment units are under construction with another 18,000+/- planned. While new apartment supply doubles from 2011, demand outstrips development putting pressure to raise rents and fewer concessions from land lords, 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.

After 1.6 million square feet of office space was completed last year, developers will have a slower year in 2012, delivering around 450,000 square feet. 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 with continued optimism.

With over two times the national employment growth, retail continues to buck the national trend with 1.2 million square feet of new space and 826,000 last year. There has been a flight to quality on the loops and areas of high housing growth and should continue into 2013.

The Dallas/Fort Worth economy has turned the corner with over 89,000 jobs created last year, a 2.8% 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 97% recovery. The economic slowdown and hesitancy to build is apparent in the tightness of the market.

With apartment occupancy at 95%, and a limited number of new apartment communities coming on line (8100+/-), rents should continue to rise and lease negotiation should remain firmly on the sides of the landlords. The biggest competition for rentals continues to come from the large amount of foreclosures in D/FW. Dallas is closer to the statewide foreclosure rate, with 1 out of 1100 units in potential foreclosure. Fort Worth continues to be challenged with 1 in 750 in potential foreclosure. Because of this, apartment developers have focused primarily on the Dallas metro of new development.

The Dallas/Fort Worth office market will continue to post modest gains in occupancy as new supply continues to lag behind demand. Just 350,000 sq. ft. will come online this year, more than doubling last years output of 161,000 square feet. D/FW vacancy is still challenged at 80 to 85% occupancy and over 40 million square feet available. However, with lack of new construction, it is allowing rents to improve for lessors. Dallas offices include the homes of 24 Fortune 500 companies. Projections indicate that the year 2013 may well see a gross area domestic product of $389 billion for this area.

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.


Since the founding of Texas, there has been constant change in the composition of the state’s growth. Population in rural areas in many parts of the state is declining and in all likelihood will continue to. The opposite is true in Texas’s four major metros. Projections show that the state’s doubling of population in the next twenty years will occur mainly in Houston Dallas / Ft Worth, San Antonio and Austin. It is critical to understand these changes in generations, cultural backgrounds, family histories, etc. as these new families move here or raise their families here. We need to understand that diversity is increasing as a national phenomenon, not just in Texas, California and New York, but the country as a whole. Here’s some key facts about the changing demographics of our state and nation.

Overall, Texas’s population will double over the next forty years

  • Bastrop County population will double in seventeen years, and will have grown six times as large from 2000 to 2040
  • Hays County population will double in fourteen years, or 147% over the next 40 years
  • Williamson County population will double in thirteen years, or 204% over the next forty years
  • San Antonio had the 8th largest boost from migration among people 55+, 2,577 people per each year
  • The birth rate in the US has been declining since 2005

  • The US population grew in 2011 at the lowest rate since 1940
  • By the 2030s, immigration will be the only source of population growth, while organic growth will be flat or negative
  • US population grew by over 1% a year until 2007 and is now growing less than 1% per year
  • Since 2008, the U.S. total fertility ratio (TFR) has fallen below the replacement level of 2.1 and is now approaching 1.9 children per woman. A fertility level of 2.6 children per women is considered ‘replacement level’
  • At a rate of 1 million immigrants a year, immigration will be insufficient to reverse these negative demographic trends in the short run

    Baby Boomers

  • Texas Baby Boomers’ average age is 44, with 66% married, 22% divorced or seperate.
  • Most were parents (84%) and the average number of children is 2.65
  • 73% are fully employed
  • Boomers’ incomes rose faster than previous generations, leading to never before seen levels of consumer spending
  • As Boomers’ age, they are looking to retire in areas that can maintain their lifestyle, near others their age
  • The recession had delayed retirement for many, with individual’s retirement portfolios and home equity greatly reduced
  • More affluent empty nest Boomers look to buy CBD condos
  • 5.9m Boomers, roughly 29% of the sixteen and older population
  • 31.7% of of the 78.2 million people engaged in the workforce nationally are Boomers looking to retire in the next ten years
  • Texas is somewhat better off with Generation X and Y making the largest proportion in the workforce
  • The US dependency ratio (sum of people under 14 and over 65, divided by the number of people aged 15-64) had declined for several decades – essentially the ratio between the too young and the too old and the middle aged people that must support them