Tierra Grande - October 2012

OCTOBER 2012

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

NON-PROFIT ORG. U.S. POSTAGE PAID DALLAS, TEXAS PERMIT No. 70 COLLEGE STATION, TEXAS 77843-2115

In This Issue Taxes and the “Fiscal Cliff” Real Estate Industry Wealth Housing Markets Improving Oil and Gas Economic Impact Housing Market Segments Texas Dodges Foreclosure Fiasco Foreclosures and Appraisal Values

OCTOBER 2012

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

honored

GARY

MALER

hired DR. LUIS

TORRES

Dr. Luis Torres has joined the Center staff as an associate research scientist. Dr. Torres comes to the Center from Banco de Mexico where he was an economist and communications analyst. He is an author, lecturer and researcher who has extensively studied the Mexican regional economy and U.S.- Mexico issues.

Dr. Torres received a master of economics in 2006 and a Ph.D. in economics from the University of Colorado in 2011.

Born in California, he has a master of science degree from the University of Texas at El Paso (2002). He received a bachelor of arts degree in economics from the Instituto Tecnologico de Estudios Superiores in Monterrey, Mexico (1995).

The new Center researcher is fluent in written and spoken English and Spanish.

To read more on Dr. Torres, go to: http://recenter.tamu.edu/staff/ltorres

iii

Gary Maler, Real Estate Center director, is one of nine 2012 Outstanding Alumni for the College of Architecture at Texas A&M University. Maler received a master of architecture degree in 1974. He lifted the Real Estate Center to global prominence after a private-sector career spearheading some of Houston’s most notable developments.

“Under his leadership, the Center has become one of the most highly respected and trusted sources of research and information that is heavily relied on by members of the legislature, the governor’s office, state agencies and the business community,” said Susan Combs, Texas comptroller of public accounts.

More on Maler’s award can be found at http://recenter.tamu.edu/news/pdf/NewsRel27-0812.pdf

published DR. CHARLES

GILLILAND A book by Dr. Charles Gilliland — Buying Rural Land in Texas — will be released by the Texas A&M University Press this month. In it, Dr. Gilliland demonstrates that buyers can and should arm themselves with knowledge of the land-buying process, potential problems and available resources.

Dr. Gilliland has been with the Center since 1977. He is a clinical professor of finance, research economist and the Helen and O.N. Mitchell Fellow for the Mays Business School. He is a recognized authority on property taxation and appraisal, but it is his rural land expertise that he called on to complete his latest major undertaking.

Buying Rural Land in Texas is $25 and is available from the Texas A&M University Press Consortium at http://www.tamupress.com

See more on Dr. Gilliland at http://recenter.tamu.edu/staff/cgilliland

TIERRA GRANDE

Visit us online at

recenter.tamu.edu

OCTOBER 2012

VOLUME 19, NUMBER 4

TIERRA GRANDE JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

Director, GARY W. MALER Chief Economist, MARK G. DOTZOUR Senior Editor, DAVID S. JONES Managing Editor, NANCY MCQUISTION Associate Editor, BRYAN POPE Assistant Editor, KAMMY BAUMANN Art Director, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Circulation Manager, MARK BAUMANN Lithography, MOTHERAL PRINTING, FORT WORTH

ADVISORY COMMITTEE: Joe Bob McCartt, Amarillo, chairman; Mario A. Arriaga, Spring, vice chairman; James Michael Boyd, Houston; Russell Cain, Port Lavaca; Jacquelyn K. Hawkins, Austin; Kathleen McKenzie Owen, Pipe Creek; Kimberly Shambley, Dallas; Ronald C. Wakefield, San Antonio; and Avis Wukasch, Georgetown, ex-officio repre­ senting the Texas Real Estate Commission.

13 Crude Awakening Oil, Gas Jobs in Play

TIERRA GRANDE (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115.

Telephone: 979-845-2031.

The oil and gas industry supports roughly two million direct and indirect jobs in Texas.

That’s a huge chunk of the state’s economy.

SUBSCRIPTIONS free to Texas real estate licen­ sees. Other subscribers, $20 per year. Subscribe online at http://recenter.tamu.edu/store VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Real Estate Center, Mays Business School or Texas A&M University. The Texas A&M University System serves people of all ages, regardless of socioeconomic level, race, color, sex, religion, disability or national origin.

PHOTOGRAPHY/ILLUSTRATIONS: Robert Beals II, pp. 1, 6, 10–11, 12, 14–15, 16, 17; Real Estate Center files, pp. 13, 18–19, 26, 28; JP Beato III, pp. 2 (illustration), 7; Kelly Rathbun, p. 22 (illustration). © 2012, Real Estate Center. All rights reserved.

BY HAROLD D. HUNT

2 Taxmageddon

The automatic tax hikes scheduled to take effect in January will take a big bite out of virtually all Americans’ wallets. Will Congress take action to extend existing tax cuts in the eleventh hour?

BY JERROLD J. STERN

18 Home in the Range

Housing markets are divided into segments based on what percentage of all sales fall into which price brackets. Texas’ markets consist of three segments, two of which are growing and a third that’s declining.

BY ALI ANARI

6 Texas Treasure

Center research reveals that despite the Great Recession, the state’s real estate industry remained strong, second only to manufacturing.

And Texas’ real estate wealth continues to climb.

BY ALI ANARI

22 Dodging the Bullet

Texas Escapes Worst Foreclosure Hits Everything’s relative. Texas didn’t avoid the pain of foreclosures completely. Thanks to our strong economy and fewer job losses, though, it was more a headache than a concussion.

BY JAMES P. GAINES

10 Home Improvement ON THE COVER Brazos River Bridge near the BurlesonBrazos County line

PHOTOGRAPHER JP Beato III

It’s been a long time coming, but the housing market is on its way up. Prices have stabilized, inventory is returning to normal and building permits are on the rise.

BY MARK G. DOTZOUR

26 Bringing Down the House?

Foreclosure Effects on Market Values

Housing markets hit hard by foreclosures can be a challenge for appraisers. Whether foreclosures are dominating the local market and whether investors are buying up the foreclosed homes (rather than people buying them to live in) factors into appraisal value.

BY CHARLES E. GILLILAND

OCTOBER 2012

1

Income Taxes

“Taxmageddon” and “fiscal cliff” are terms being used throughout the financial press to describe the potential result of federal government inertia regarding the tax system.

Without new legislation, automatic tax hikes could top $4 trillion during the coming years, according to the Washington Times. The Congressional Joint Committee on Taxation predicts a $300 billion tax increase in 2013 alone.

2

TIERRA GRANDE

S

ome economists predict a return to recession if the tax increases materialize and $1.2 trillion in defense and domestic spending cuts occur over the next ten years (including cuts of $110 million in 2013). The budget cuts are required by the 2011 Budget Control Act. While many tax commentators expect at least minimal tax legislation, they do not foresee any new tax laws being enacted prior to the November presidential election. Predicting the final outcome with certainty is not possible even though Democrats and Republicans agree on postponing some of the scheduled tax increases. The inability to predict future tax rules is a significant problem that has long plagued the U.S. tax system.

Current law requires major tax increases that include a significant rise in tax rates on ordinary income, capital gains and other types of investment income for virtually all Americans. In addition, numerous tax hikes will affect the real estate industry if the federal government does not act.

the second $50,000 salary would push them into a higher tax rate bracket.

Scheduled changes to salary (payroll) and self-employment (SE) taxes will push effective top marginal tax rates higher.

Real estate professionals are generally considered selfemployed for tax purposes. The current payroll/SE tax rates of 5.65/13.3 percent will return to their pre-2011 levels, 7.65/15.3 percent, in 2013. Income levels determine the actual amount of payroll/SE taxes paid.

Investment Income Rates

Table 2 summarizes the scheduled 2013 top tax rate increases for most types of income.

Starting in 2013, a 3.8 percent surtax will apply to the investment income of taxpayers whose adjusted gross income (AGI) is more than $200,000 for singles and $250,000 for marrieds. (In all cases, “singles” includes “unmarried heads of households” — typically, singles who support a dependent.)

The surtax will increase taxes on capital gains, interest, Tax Rates on Ordinary Income dividends, “passive income” from real estate investments The 2001–03 Bush-era tax cuts, originally set to expire after (such as the passive rental of farm land, or passive income from 2010, are now scheduled to end after 2012. Expiration will real estate partnerships/limited liability companies), royalties, increase rates in almost every tax bracket for every taxpayer and some annuities. Capital gains include gains from the sale starting in 2013. For example, Table 1 shows the increases for of a principal residence more than $500,000 for marrieds and married taxpayers who file jointly. $250,000 for singles (Table 2). The $500,000/$250,000 excluThe top tax rates on ordinary income such as salaries and sion does not apply to sales of second homes. self-employment income are The following are exempt scheduled to increase to 36 and from the 3.8 percent surtax: 39.6 percent in 2013, from 35 “active business rents” (such Table 1

percent (Table 1). High-income as apartment and commercial Comparison of 2012 Income Tax Brackets* taxpayers who itemize their building rents); municipal Married Filing Jointly deductions (such as mortgage bond interest; social security interest and real estate taxes) income; earned income (such 2012 Current 2013 Scheduled will see a decline in total itemas salary and self-employment Taxable Income Tax Rates Tax Rates ized deductions as well as perincome); and qualified retire$0 – $17,400 10% 15% sonal and dependency exempment income from qualified $17,400 – $59,000 15% 15% tions thanks to the return of pensions such as 401(k) plans, $59,000 – $70,700 15% 28% complex phase-out rules in certain annuities and IRAs. $70,700 – $142,700 25% 28% 2013. The phase-out rules will Moreover, the regular $142,700 – $217,450 28% 31% $217,450 – $388,350 33% 36% cause the effective marginal capital gains tax rate in 2013 $388,350 – 35% 39.6% tax rates for these taxpayers to will be 20 percent for most standard deduction $11,900 $9,950 increase. investors, up from the curpersonal exemption $3,800 $3,800 Also scheduled to return is rent 15 percent. Thus, the * The table assumes the current 2012 tax brackets will remain the same in the so-called “marriage tax effective capital gains tax 2013. The actual 2013 tax brackets, which will widen slightly based on inflation, are not yet known. penalty.” The Bush tax cuts rate for $200,000/$250,000 Source: Table 1 in “An Overview of Tax Provisions Expiring in 2012,” by widened the married-filingAGI taxpayers would reach Margot L. Crandall-Hollick, 4-17-12, Congressional Research Service. jointly tax brackets to be 23.8 percent (20 percent + 3.8 The information was compiled from the Tax Policy Center and the IRS. twice that of singles. Thus, for percent). example, two married individuFor example, in 2013 a marals earning $50,000 each in salary would pay the same tax as ried couple with $250,000 salary and $100,000 capital gains a single person earning $100,000 (assuming equal deductions).

(AGI of $350,000) will pay $23,800 tax ($100,000 × [20 percent In 2013, the two married individuals would pay more in tax as + 3.8 percent, or 23.8 percent]) on the $100,000. Under current OCTOBER 2012

3

2012 law, the tax would be $15,000 ($100,000 times 15 percent). Thus, the tax increase will be $8,800, or 8.8 percent on $100,000.

The same $23,800 capital gains tax would be generated if the $100,000 capital gain resulted from selling a personal residence for a $600,000 profit. The taxable capital gain would be $100,000 and not $600,000 because of the $500,000 personal residence exclusion, mentioned previously. If the residence was a second home, the entire $600,000 profit would be a taxable capital gain, taxed at 23.8 percent in 2013 (rather than the 15 percent rate in 2012).

The story is much worse for dividend income. Currently, dividends are taxed like capital gains and have a maximum tax rate of 15 percent. Starting in 2013, dividends will be treated as ordinary income, subject to the tax rates in Table 1.

(Interest income has always been taxed as ordinary income.)

Adding the 3.8 percent surtax for high-income individuals, the top tax rate on dividends (and interest) would reach 43.4 percent (3.8 percent plus the 39.6 percent top tax bracket rate noted in Table 1). From a tax-investment planning perspective, municipal bonds may be preferable to some stocks (depending on risk, growth potential and other factors) because municipals typically provide interest that is exempt from federal income taxation.

Alternative Minimum Tax The federal government initiated the first version of the alternative minimum tax (AMT) in 1969 following a realization that roughly 150 individuals with AGIs over $200,000 paid no tax in 1966. Since 1969, the AMT’s objective has remained the same: “to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions and credits” (1986 Senate Finance Committee Report). uring its long history, the number of individuals paying the AMT has expanded dramatically. According to the Urban Institute’s Tax Policy Center, the number of taxpayers paying the AMT expanded from roughly 20,000 in 1970 to about four million in 2011. Many of these taxpayers are in the middle and upper-middle classes and would have paid significant taxes without additional AMT taxes. The primary reason for the enormous 1970–2011 increase is that AMT tax brackets and rates are not indexed for inflation.

The Bush tax cuts initiated a series of one- and twoyear “tax patches” to slow the AMT’s growth. The 2011 tax patch provided exemptions of $48,450 for singles and $74,450 for marrieds, along with certain tax credits that can be applied against the AMT. If the government does not extend the patch to 2012, the exemption amounts will

D

Table 2 Top Tax Rates1 2012 Current Top Tax Rates

Capital gains Sales of personal residences On profits under: $250k (singles) $500k (marrieds) On profits over:4 $250k (singles) $500k (marrieds) Dividends Interest and “passive” rental income “Active” rental income Ordinary income (e.g., salary, payroll, self-employment [SE]) Payroll/SE tax rates5

2013 Scheduled Top Tax Rates2 Adjusted Gross Adjusted Gross Income under Income over $200k (singles) $200k (singles) $250k (marrieds) $250k (marrieds)

15%

20%

23.8%3

0% 0%

0% 0%

0% 0%

15% 15% 15% 35% 35%

20% 20% 39.6% 39.6% 39.6%

23.8%3 23.8%3 43.4%3 43.4%3 39.6%

35% 5.65%/13.3%

39.6% 7.65%/15.3%

39.6% 7.65%/15.3%

1 All 2

top effective tax rates (other than 0% tax rates) could be higher due to the alternative minimum tax (AMT).

Top effective tax rates could be higher due to phase-outs of itemized deductions, and personal and dependency exemptions.

3 Tax rate includes 3.8% investment income surtax.

4 These profits are taxable capital gains.

5 Paid in addition to ordinary income tax rates (depending upon income level).

Note: “Singles” includes “unmarried heads of households” — typically, singles who support a dependent.

Source: Jerrold Stern

4

TIERRA GRANDE

fall to $33,750/$45,000, and the new AMT credits will disappear.

Alarmingly, the lack of a patch will cause an estimated 30 million taxpayers (almost 20 percent of all taxpayers) to pay the AMT in 2012, according to the Congressional Research Service. However, some tax commentators believe a 2012 patch is highly likely.

Real Estate Taxation

According to the Urban Institute’s Tax Policy Center, the number of taxpayers paying the alternative minimum tax (AMT) expanded from roughly 20,000 in 1970 to about four million in 2011.

Without new federal legislation, real estate professionals will pay higher self-employment taxes; highincome homeowners will pay higher capital gains taxes on large home sale profits; real estate investors will be subjected to higher capital gains taxes; certain real estate rental income will be subject to a new 3.8 percent surtax; and home mortgage interest and real estate tax deductions may yield less tax savings. Additional real estaterelated tax issues should be considered as well.

$2 Million Foreclosure Tax Exemption

T

he $2 million tax exemption for personal residence foreclosures is scheduled to expire after 2012 but has been reinstated in the past. Consider the following example.

A married couple purchased a residence for $300,000, paying $60,000 down and mortgaging the $240,000 balance with a recourse mortgage. By the time the mortgage balance was $210,000, the property value had dropped to $140,000. Because of financial difficulties, the couple could not continue making mortgage payments, and the lender foreclosed on the property.

Without the taxable income exemption, the couple would have to pay tax at ordinary tax rates on $70,000 ($210,000 minus $140,000).

Currently, the exemption applies even if the $70,000 was $2 million. The exemption is not needed in cases of insolvency, bankruptcy or nonrecourse loans, for which no tax would be due regardless of mortgage balance.

Federal Estate Tax In 2013, the estate tax exemption is scheduled to become $1 million, and the top estate tax rate will be 55 percent — a significant tax-increasing change from the $5 million/35 percent rules now in place. Thus, according to the Research Institute of America, a $5 million property left to heirs in 2012 would escape tax entirely, whereas the same bequest in 2013 could generate an estate tax as high as $2 million (depending on estate tax deductions).

15-Year Write-Offs of Certain Real Estate Through 2011, the write-off period for qualified leasehold improvements, retail improvements and restaurant property OCTOBER 2012

was 15 years. The write-off period increased to 39 years in 2012.

A retroactive reinstatement of the 15-year write-off period for 2012 and later years is possible.

Mortgage Insurance Premium Deduction

This deduction expired at the end of 2011, but will likely be reinstated for 2012 and possibly future years. The deduction has been retroactively reinstated in the past.

Under the rule, the amount paid for mortgage insurance for the first year of homeownership is deductible as mortgage interest. The deduction phases out gradually once AGI reaches $100,000. No deduction is available if AGI is higher than $109,000.

Deducting Environmental Contamination Cleanup Costs This deduction expired in 2011. In the past, however, the deduction has typically been reinstated. The deduction pertains to expenses for physical cleanup, legal fees, consultants and the like.

Credit for Energy-Efficient Home Construction Although it expired in 2011, this credit has a history of reinstatement. A $1,000 or $2,000 credit per home (depending on the level of energy efficiency) is provided to the builder/ manufacturer. Specific criteria pertain to heating and cooling systems as well as the building envelope.

Credits for Home Residence Energy Property A series of small home energy credits expired in 2011. Reinstatement for 2012 is possible. The credits range from $50 to $300 for certain windows, fans, water heaters, insulation and exterior doors. The lifetime limit of such credits is $500.

Major tax increases will start in 2012 without new legislation. Attention to the financial press and assistance from a competent tax accountant or tax attorney are advised.

Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate Center at the Texas A&M University Mays School of Business and a professor of accounting in the Kelley School of Business at Indiana University.

THE TAKEAWAY Without new legislation, taxes for almost everyone will rise. Most tax increases are scheduled to begin in 2013 while a few will take effect in 2012. A number of these increases directly or indirectly affect the real estate industry.

5

Texas Economy

Texas Treasure

By Ali Anari

In the aftermath of the Great Industry’s Effect on Texas Recession, how strong is Texas’ real estate industry?

An ongoing Real Estate Center research program monitors the relative importance of the Texas real estate industry and the state’s real estate wealth. Most recent data show the state’s real estate industry is maintaining its standing among the state’s industries and that real estate wealth continues to grow.

6

Economy

The real estate industry accounted for 8.4 percent of Texas’ gross domestic product (GDP) in 2011 compared with 11.7 percent for the United States (Table 1). The lower than national average share is mainly attributable to lower than national average Texas home prices.

Real estate is the second largest Texas industry after manufacturing, which accounted for 14.7 percent of the state’s 2010 GDP (Table 1).

Texas’ real estate industry has the largest proportion of self-employed persons. Including the self-employed, 521,684 persons worked in the Texas real estate industry in 2011, representing 3.6 percent of statewide employment; nationwide, they were 4.0 percent (Table 2). The corresponding percentages for Florida, California and Arizona were 5.1, 4.8 and 5.5, respectively. Real estate’s share in Texas’ total employment increased from 2.6 percent in 1999 to 3.5 percent in 2011 (Figure 1).

TIERRA GRANDE

Table 1. Value Added by Industry, Texas and United States, 2011 Value Added, $Million All industries total Private industries Agriculture, forestry, fishing, and hunting Mining Utilities Construction Manufacturing Durable goods Nondurable goods Wholesale trade Retail trade Transportation and warehousing Information Finance and insurance Real estate and rental and leasing Professional, scientific and technical services Management of companies and enterprises Administrative and waste management services Educational services Health care and social assistance Arts, entertainment, and recreation Accommodation and food services Other services, except government Government

Percent of Total

Texas

United States

Texas

United States

1,308,132 1,161,971 9,897 118,578 24,234 57,970 192,024 83,212 108,812 85,753 76,625 43,200 44,903 89,757 109,657 92,107 12,411 40,137 8,052 81,953 7,727 35,777 31,209 146,162

14,981,020 13,097,365 177,795 287,584 250,825 520,340 1,837,031 989,258 847,774 844,928 916,951 418,807 662,324 1,256,198 1,751,682 1,171,145 282,487 444,313 169,315 1,151,187 144,058 441,647 368,747 1,883,655

100.0 88.8 0.8 9.1 1.9 4.4 14.7 6.4 8.3 6.6 5.9 3.3 3.4 6.9 8.4 7.0 0.9 3.1 0.6 6.3 0.6 2.7 2.4 11.2

100.0 87.4 1.2 1.9 1.7 3.5 12.3 6.6 5.7 5.6 6.1 2.8 4.4 8.4 11.7 7.8 1.9 3.0 1.1 7.7 1.0 2.9 2.5 12.6

Sources: U.S. Bureau of Economic Analysis and Real Estate Center at Texas A&M University

Every $1 million of real estate industry revenue generates: • just over half a million dollars of revenue in other parts of the Texas economy, • 5.2 jobs in the state’s real estate industry and • five jobs in other industries.

Real estate taxes are a big contributor to the state’s overall wealth: • Taxes paid by the real estate industry accounted for 14.8 percent of total Texas business taxes in 2009.

• Texas’ property tax revenue in 2009 was more than $40 billion or 47.8 percent of the state’s tax revenues.

• Texas school districts levied $21.7 billion in property taxes in 2009, accounting for 54.4 percent of total property tax revenues.

In 2010, the state’s four largest metropolitan areas accounted for a majority of real estate employment (Table 3).

• Dallas-Fort Worth-Arlington, Houston-Sugar Land-Baytown, Austin-Round Rock-San Marcos, and San Antonio-New Braunfels, had 81.4 percent of Texas’ real estate employment.

OCTOBER 2012

• 174,141 persons, including those self-employed, were working in Dallas-Fort Worth-Arlington’s real estate, rental and leasing industry, or 33.3 percent of that industry’s Texas employment.

• 149,310 persons, including the self-employed, were working in Houston-Sugar Land-Baytown’s real estate, rental and leasing industry, some 28.6 percent of employment in Texas’ real estate industry.

COMMERCIAL PROPERTIES represent 16.6 percent of Texas’ total real estate wealth. The largest category is singlefamily residences, which make up 56.3 percent.

7

Figure 1. Real Estate Employment as Percentage of Total Employment, 1990–2011

Percentage

4.0

3.5 TEXAS

3.0

2.5 1990

UNITED STATES 1993

1996

1999

2002

2005

2008

2011

Sources: U.S. Bureau of Economic Analysis and Real Estate Center at Texas A&M University

Table 2. Employment by Industry, Texas and United States, 2011 properties, mineral real estate, utility company Industry Texas United States Texas United States properties, rural acreage and Total employment 14,611,475 175,834,700 100.0 100.0 vacant lots.

Farm employment 258,641 2,635,000 1.8 1.5 Single-family residential Nonfarm employment 14,352,834 173,199,700 98.2 98.5 wealth in Texas in 2011 Private employment 12,368,147 148,898,700 84.6 84.7 totaled $945.1 billion, Forestry, fishing, and related activities 55,848 862,700 0.4 0.5 accounting for 56.3 percent of Mining 452,452 1,429,400 3.1 0.8 Utilities 54,018 576,500 0.4 0.3 the state’s real estate wealth Construction 906,154 8,732,500 6.2 5.0 (Figure 2). The total value Manufacturing 893,871 12,344,600 6.1 7.0 of single-family residential Durable goods manufacturing 578,155 7,656,400 4.0 4.4 wealth in 2011 was 2.8 times Nondurable goods manufacturing 315,716 4,688,200 2.2 2.7 its value in 1997 (Table 4).

Wholesale trade 566,598 6,122,100 3.9 3.5 Single-family residential Retail trade 1,438,676 17,829,600 9.8 10.1 Transportation and warehousing 525,226 5,635,400 3.6 3.2 wealth includes houses, Information 234,935 3,200,400 1.6 1.8 condominiums and mobile Finance and insurance 868,903 9,509,700 5.9 5.4 homes on land owned by the Real estate and rental and leasing 598,639 7,844,100 4.1 4.5 occupant.

Real estate 521,684 7,099,700 3.6 4.0 The total value of Texas’ Professional, scientific, and technical services 941,264 12,034,700 6.4 6.8 multiple-family residential Management of companies and enterprises 114,336 2,071,200 0.8 1.2 Administrative and waste management services 987,751 10,890,400 6.8 6.2 wealth in 2011 was $85.1 Educational services 228,287 4,242,800 1.6 2.4 billion, accounting for 5.1 Health care and social assistance 1,418,313 19,391,400 9.7 11.0 percent of real estate wealth.

Arts, entertainment, and recreation 235,590 3,851,700 1.6 2.2 The total value of multipleAccommodation and food services 1,023,854 12,338,500 7.0 7.0 family residential wealth in Other services, except public administration 823,432 9,991,000 5.6 5.7 2011 was 2.5 times its value Government and government enterprises 1,984,687 24,301,000 13.6 13.8 in 1997 (Table 4).

Sources: U.S. Bureau of Economic Analysis and Real Estate Center at Texas A&M University Multifamily residential real estate includes apartments Restoring Texas Real Estate and residential buildings containing two Wealth or more dwelling units belonging to one owner. Hotels and motels are excluded. he total value of Texas real estate Commercial real estate had the largest wealth in 2011 was more than share of the state’s real estate wealth $1.6 trillion (Table 4). Since in 2011 after single-family residential 1997, the total value of Texas real estate (Table 4). Texas’ commercial real estate wealth has increased 2.4 times. Texas’ wealth was $278.9 billion, 2.5 times its per capita real estate wealth in 2011 was value in 1997. Commercial real estate $65,432, up 86.7 percent from $35,055 in consists of land and improvements 1997. devoted to sales or services to the public.

Real estate wealth comprises singleTexas’ 2011 industrial real estate family residences, multifamily resiwealth amounted to $95 billion, or 5.7 dences, commercial properties, industrial Number

Percent of Total

T

8

TIERRA GRANDE

Table 3. Texas Real Estate and Rental and Leasing Employment in 2010

Sources: Texas Comptroller of Public Accounts and Real Estate Center at Texas A&M University

Region

Number

Percent of Total

Total Texas Dallas-Fort Worth-Arlington Houston-Sugar Land-Baytown Austin-Round Rock-San Marcos San Antonio-New Braunfels El Paso Corpus Christi McAllen-Edinburg-Mission Killeen-Temple-Fort Hood Beaumont-Port Arthur Lubbock Brownsville-Harlingen Amarillo College Station-Bryan Waco Tyler Longview Laredo Midland Abilene Odessa San Angelo Wichita Falls Victoria Texarkana Sherman-Denison

522,306 174,141 149,310 53,671 48,066 12,716 8,673 8,116 6,120 5,900 5,877 5,371 5,255 4,310 4,181 4,145 3,909 3,835 3,677 2,767 2,650 2,132 2,064 1,906 1,829 1,685

100.0 33.3 28.6 10.3 9.2 2.4 1.7 1.6 1.2 1.1 1.1 1.0 1.0 0.8 0.8 0.8 0.7 0.7 0.7 0.5 0.5 0.4 0.4 0.4 0.4 0.3

Sources: U.S. Bureau of Economic Analysis and Real Estate Center at Texas A&M University

percent of the state’s real Table 4. Texas Real Estate Wealth, 1997 and 2011 estate wealth. That was 2010 1997 1.8 times the value in 1997 (Table 4). Industrial real Percent Percent 2010/1997 estate wealth consists of Real Estate Category $Billion of Total $Billion of Total Ratio land and improvements Single-family residences 945.1 56.3 338.3 48.9 2.8 devoted to the developMultiple family residences 85.1 5.1 34.1 4.9 2.5 ment, processing or storCommercial real estate 278.9 16.6 110.3 15.9 2.5 Industrial real estate 95.0 5.7 54.2 7.8 1.8 age of a product, excluding Mineral real estate 106.0 6.3 37.1 5.4 2.9 utilities.

Utilities 50.0 3.0 48.5 7.0 1.0 Texas’ mineral real estate Vacant lots 39.5 2.4 19.8 2.9 2.0 wealth in 2011 totaled $106 Rural acreage 80.3 4.8 49.7 7.2 1.6 billion, accounting for 6.3 Total real estate wealth 1,679.9 100.0 692.0 100.0 2.4 percent of real estate wealth. Sources: Texas Comptroller of Public Accounts and Real Estate Center at Texas A&M University This was 2.9 times its 1997 value (Table 4). Mineral real estate wealth comprises producing and The total value of Texas’ rural acreage THE TAKEAWAY nonproducing oil and natural gas wells, in 2011 was $80.3 billion, 4.8 percent all other mineral interests, and equipof the state’s real estate wealth and 1.6 Texas’ real estate industry is the ment used for extracting and producing times its value in 1997 (Table 4). second largest in the state after minerals.

The 2011 value of vacant lots was manufacturing. Real estate has the In 2011, utility company properties in $39.5 billion or 2.4 percent of the state’s largest proportion of self-employed Texas were valued at $50 billion, close to real estate wealth. This was twice its persons of all Texas industries. Since their 1997 value (Table 4). The utilities value in 1997 (Table 4).

1997, the total value of Texas real industry includes gas companies, electric estate has increased by 2.4 times. Per Dr. Anari (m-anari@tamu.edu) is a research companies, railroads, water companies, capita real estate wealth in 2011 was economist with the Real Estate Center at Texas pipeline companies and cable television up 86.7 percent from 1997.

A&M University. providers.

OCTOBER 2012

9

Housing Markets

HOME IMPROVEMENT

By Mark G. Dotzour

America’s housing market is rebounding.

This is a true recovery from the bottom. In economic cycle analysis, a contraction is followed by a bottom, which is followed by a new expansion cycle. The data indicate that Texas has clearly moved from the bottom of the last cycle to the early stages of expansion. The U.S. housing market is improving as well. Several indicators

are signaling this.

10

TIERRA GRANDE

Home Prices Have Stabilized

Dollars (thousands)

Home prices as measured by the Standard & Poor’s (S&P)/CaseShiller Home Price Indices were up 1.3 percent in the 20-city composite index in June. David Blitzer with S&P referred to this increase as a “spike” in prices. Blitzer said, “We are coming back, and this looks like a solid turn.”

Lender Processing Services Figure 1. Median Home reported in June that home Sales Price in Texas sales prices were essentially 2007–12 flat. Managing Director Kyle 160 Lundstedt said, “There may be 150 reason to be cautiously optimis140 tic, since we’ve now seen three 130 consecutive months of minor 2007 2012 Sources: Real Estate Center at Texas A&M appreciation.”

University and MLS Data The median price of homes in Texas has been virtually stable for the past five years. But prices have broken out on the upside in the most recent period, reaching $162,400 in May 2012 (Figure 1).

Inventory Normal

OCTOBER 2012

Months

A

mericans have been skittish about buying homes for the past few years in light of negative economic news.

Their two key worries have been whether or not they will have jobs, and, in Arizona, California, Nevada, Florida and Georgia, significantly declining home prices.

But recent news indicates that residential markets in California and Arizona are rebounding. California sales in May were up more than 11 percent from May 2011. The Phoenix market has strengthened as well, with fewer distressed sales and sales prices up 25.3 percent from a year earlier. May home prices in Orlando were 9 percent higher than a year earlier. The National Association of Realtors reported that nationwide, May sales were up 9.2 percent from May 2011.

Fannie Mae’s national housing survey in May reflected brightened consumer sentiment toward housing. In that survey, 73 percent of respondents said that now is a good time to buy a house. This is the highest level since the survey was inaugurated two years ago. Fully 69 percent said they would buy if they were going to move, an increase of 6 percent from the previous month. The percentage of respondents who said they would rent dropped from 32 percent to 27 percent, the lowest in the survey’s history.

New Home Sales Up Nationally Lennar Corporation CEO Stuart Miller in June said, “Evidence from the field suggests that the ‘for sale’ housing market has, in fact, bottomed and that we have commenced a slow and steady recovery process.”

Figure 3. New Single-Family The company’s new home Houses Sold, 2002–12 orders nationally were up 40 1,600 percent in the second quarter.

1,200 Sales of newly built homes 800 were at a two-year high in 400 May; 369,000 are expected to 0 2002 2007 2012 sell in 2012 (Figure 3). The Source: Federal Reserve Bank of St. Louis Wall Street Journal reported in Houses Sold

Buyer Psychology Improving

Real Estate Center research has determined that for Texas, 6.5 months of inventory of homes for sale is a stable market. When inventory is below 6.5 months, Figure 2. Months Inventory prices increase more rapidly.

Texas Homes for Sale Inventory greater than 6.5 months 2007–12 causes price increases to slow (Fig9 ure 2). When inventory gets into the nine- to 12-month range, prices 6.5 start falling.

4 Texas’ inventory of unsold homes 2007 2012 stood at six months in May. This Sources: Real Estate Center at Texas A&M University and MLS Data suggests stable or even increasing prices going forward.

The number of Texas homes for sale declined significantly in the past two years, from a peak of 147,170 in May 2008 to 108,594 in May 2012. Limited supply can result in competing offers on the same home.

11

Building Permits Issued, First Five Months of 2011, 2012

July that the home builder confidence survey recorded the biggest jump since September 2002. New singlefamily home sales in the United States were up 19.8 percent for the first six months of 2012, compared with the same period in 2011.

Building Permits Up

Region

2011

2012

Percent Increase

United States Texas Austin-San Marcos Dallas Fort Worth-Arlington Houston Odessa-Midland San Antonio

151,564 26,174 2,799 3,900 1,951 7,898 339 1,668

184,396 31,540 3,281 4,961 2,151 10,347 514 2,014

21.7 20.5 17.2 27.2 10.2 31.0 51.6 20.7

Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University

Existing Home Sales Volume Up

Center research indicates that three variables correlate with home sales volume: job growth, interest rates and home price appreciation.

In the past four years, mortgage rates have never been lower, but job growth and home price appreciation prospects have been uncertain.

Texas recorded positive job Figure 4. Monthly Home growth, low interest rates and Sales Reported in Texas 30 virtually stable 25 prices for the 20 past two years.

15 This resulted in 10 increasing home 2007 2012 sales volume, a Sources: Real Estate Center at Texas A&M University trend that is continuing in 2012 (Figure 4). For the first five months of 2012, home sales were 13.3 percent higher than the same period in 2011.

Home Sales (thousands)

Nationally, single-family building permits were up 21.7 percent through May 2012 compared with the same time last year (see table). Texas posted a 20.5 percent increase during that time. New home construction is important to the economic recovery of both Texas and the United States. As homebuilding increases, the economy will continue to recover. Construction

jobs have a huge multiplier effect, with positive impacts on retail sales, car sales and industrial warehouse demand.

What Next?

After languishing for several years, Texas and U.S. housing markets have finally turned the corner. The rebound is likely to be gradual, spanning several years.

Three things have to happen before the housing market grows at a faster pace. First, Congress has to set tax policy so that employers will hire more workers. Second, the pace of foreclosure sales has to pick up. The faster the “shadow inventory” of homes with delinquent mortgages is sold, the better. Third, financial regulators need to tweak Dodd-Frank mortgage regulations so that qualified Americans with less-than-perfect credit can buy homes again.

Dr. Dotzour (dotzour@tamu.edu) is chief economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY HOME BUILDER CONFIDENCE is up, as are building permits. New home construction is a “must-have” element for economic recovery. Texas’ positive job growth is already boosting home sales.

12

Texas’ housing market, and the U.S. market as well, have hit bottom and rebounded.

Consumer interest in buying is on the rise, home prices have leveled out, and inventory of homes for sale is stable.

TIERRA GRANDE

Texas Economy

I

t’s no secret that the oil and gas sector has been one of the few bright spots in the U.S. economy during the past few years.

Luckily, Texas has been a major beneficiary of increased oilfield employment, and that continues to have a positive impact on many of the state’s real estate markets.

A recent PricewaterhouseCoopers (PWC) report estimates that the oil and gas industry supports about two million direct and indirect jobs in Texas that power 24 percent of the state’s economy. As a result, residential and commercial real estate markets in Texas are largely outperforming those in the rest of the country.

How have the state’s hottest oilfield employment areas been performing? Has the decline in natural gas prices had an impact on these areas? How could Texas real estate markets be affected if crude prices remain high and natural gas prices stay low?

OCTOBER 2012

Three Key Oilfield Plays Although employment gains are being felt well beyond the oil patch, some of the biggest effects have been in areas at the heart of the drilling activity. This research reveals the significant impact oil and gas activity is having on some of the most active counties in the Permian Basin, Eagle Ford and Barnett shale regions or “plays.”

These three plays each span two dozen or more counties.

However, many counties have seen little or no economic benefit from recent increases in drilling activity. Only the five counties with the highest rig count in each play are represented in the employment statistics of this analysis, so results reflect the areas heavily influenced by drilling activity.

Rig count for the Permian Basin and Barnett shale was calculated from January 2005 forward. Since the first shale well in the Eagle Ford was not completed until 2008, rig count was calculated from January 2008 forward for that play.

The top five counties in each play are: Barnett — Denton, Johnson, Parker, Tarrant and Wise. Eagle Ford — Dimmit, Karnes, La Salle, McMullen and Webb. Permian Basin — Andrews, Martin, Midland, Pecos and Upton.

13

Figure 1. Total Private Employment

Percent Change from Same Month a Year Ago 12.5 10.0 7.5

Permian

Percent

5.0

Eagle Ford

Texas

2.5

Barnett

0.0

Figure 2. Mining , Oil and Gas Employment Percent Change from Same Month a Year Ago

–2.5 –5.0 –7.5 2007

2008

2009

2010

2011

2012

Eagle Ford

Percent

–10.0 2006

100 90 80 70 60 50 40 30 20 10 0 –10 –20 –30 2006

Source: Texas Workforce Commission

Employment Trends, 2006–12

Barnett Permian

14

60

4

40

125

0

75

–5

2

20 0 2006

Average Rig Count

$ per thousand cubic feet of Natural Gas

The rig count for all 24 counties in the Eagle Ford was low yet fairly stable into 2008 (Figure 4).

However, the pre-shale rig levels were not a large enough influence to protect private employment in

6

80

2008

2010

2012

Source: Energy Information Administration

0

25 2005

2007

2009

Percent Change Private Employment

Rig Count’s Effect on Private Employment

$ per barrel of Crude Oil

Texas Total private job growth (Figure 1) in the most active Barnett shale counties closely resembles the state’s job growth pattern. This is primarily because of the large populations and diverse economies of Tarrant 2007 2008 2009 2010 2011 2012 and Denton counties, where oil and gas activity has a Source: Texas Workforce Commission smaller role.

In contrast, the less populated counties in the Permian Basin and Eagle Ford shale plays show more private employment volatility. None of the three plays totally escaped the negative effect of the recent recession on private job growth.

Job growth in the mining and oil and gas sector (Figure 2) was strong in the Barnett in the two years leading up to the recession. The Barnett is largely a dry natural gas play, and natural gas prices were relatively high during this period. The average monthly wellhead price peaked near $11 per thousand cubic feet (mcf) in mid-2008 (Figure 3), while spot futures prices reached record levels at just under $14 per mcf.

The negative oil and gas job growth in the Eagle Ford before 2008 and strong positive growth since 2010 shows the dramatic difference in oilfield activity before and after shale discoveries. The rate of year-on-year job growth exceeded 90 percent in June 2011.

Positive oil and gas employment in the Permian held up much longer than the other two plays and Texas as a whole, finally falling to a brief negative period in 2010. The Permian Figure 4. Eagle Ford Shale Average has traditionally been an oil play, Monthly Rig Count versus Percent Figure 3. Natural Gas Wellhead Price and oil prices in excess of $100 per Change in Total Private Employment vs. West Texas Intermediate Crude Price barrel throughout much of 2008 275 15 12 160 likely extended positive job growth through 2009. The ensuing drop in 140 225 10 10 crude prices to the low $40s may 120 have also led to the employment 8 175 5 decline during 2010.

100

–10 2011 2012

Sources: Smith Services and Texas Workforce Commission TIERRA GRANDE

Figure 6. Barnett Shale Average Monthly Rig Count versus Percent Change in Total Private Employment

2007

2009

Sources: Smith Services and Texas Workforce Commission OCTOBER 2012

200

9

180 160 Average Rig Count

18 16 14 12 10 8 6 4 2 0 –2 –4 –6 –10 2011 2012

6

140 120

3

100 80

0

60 40

–3

20 0 2005

2007

2009

Sources: Smith Services and Texas Workforce Commission

–6 2011 2012

Percent Change Private Employment

325 300 275 250 225 200 175 150 125 100 75 50 25 0 2005

Percent Change Private Employment

Average Rig Count

Figure 5. Texas Permian Average Monthly Rig Count versus Percent Change in Total Private Employment

the core counties from the effects of the recession. Negative job growth spanned early 2008 through early 2010.

As rig count began its rise in 2009 on the back of the Eagle Ford shale discoveries, private employment growth shortly followed. The increasingly close connection between rig count and the EaglFord’s total private employment growth becomes obvious from 2009 through late 2011. The tapping out of local labor may explain the divergence between private employment and rig count that began in 2012.

The combined effects of the recession and declining rig count in the Permian’s 27 Texas counties (Figure 5) following the rapid drop in crude prices worked together to drive private job growth into

15

THE EAGLE FORD CABINS in Cotulla shelter the influx of oilfield workers. With 50 units (200 beds), this cabin community provides maid service along with three meals a day in a dining hall. (Below, right) Yorktown bustles with the addition of multiple RV parks and motels. The highways through town are busy with oilfield traffic.

negative territory. Job growth remained negative from early 2009 to early 2010, springing back strongly with the increased rig count resulting from a sustained crude price and the success of hydraulic fracking in the Wolfberry and Bone Spring formations.

The Barnett region (Figure 6) showed negative private-sector job growth by mid-2008, even as the play’s 24-county rig count remained strong. Again, this reflects the stronger influence of the larger and more diverse economies of Tarrant and Denton counties. Likewise, job growth since early 2010 has been positive in spite of a declining rig count from low natural gas prices.

Gauging Economic Impact Estimating economic activity in the state’s smaller counties can be difficult. However, the Texas Comptroller’s Office does offer a plausible proxy of county economic trends through its publication of historical quarterly sales tax data.

The reports track data from all holders of sales tax permits. The year-over-year percentage change in the amount of

goods and services subject to sales tax (see table) reveals that all counties in the three plays were hit hard during 2009 as a result of the recession.

More interesting is the varying speed at which sales have recovered since 2009. The large size and diversity of the Barnett play’s counties temper their ability to register high percentage gains in sales, although increases in total sales were substantial. The effect of extremely low natural gas prices was not significant enough to produce negative sales growth. ith the exception of Webb County, the percentage increases displayed in the Eagle Ford are impressive.

Webb County’s population, like several other counties in the Barnett play, is relatively large. The county is also more diverse and dependent on economic trends that affect international trade rather than oil and gas activity.

Several counties in the Permian also show large gains prior to the recession in 2008. This was likely a benefit of increasingly high crude oil prices, culminating in a peak in the price around mid-2008.

W

Sales of Goods and Services Subject to State Sales Tax Year–to–Year Percent Change in Dollar Value Top Five Eagle Ford Counties

by Drilling Activity

Top Five Barnett Counties

by Drilling Activity

Top Five Permian Basin Counties

by Drilling Activity

Date

Dimmit

Karnes

La Salle

McMullen

Webb

Denton

Johnson

Parker

Tarrant

Wise

Andrews

Martin

Midland

Pecos

Upton

2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3

9.1 6.0 11.4 6.2 11.4 12.3 13.3 17.7 4.7 –1.5 1.3 3.4 8.9 19.6 29.7 20.4 1.4 –7.8 –16.3 –13.1 12.3 32.1 83.9 74.1 78.9 97.3 89.7

2.2 8.7 6.7 10.0 4.7 –0.5 –2.3 0.0 4.3 14.7 21.3 11.3 10.7 11.6 17.4 11.7 8.7 –4.1 –14.0 –3.7 6.6 17.7 25.3 42.7 86.7 72.1 100.0

0.9 2.3 12.7 4.3 8.1 9.1 14.2 14.0 3.9 8.2 –7.9 –2.1 25.6 11.1 78.2 18.0 54.8 –19.7 –19.3 42.3 –17.9 95.0 58.9 46.3 98.6 86.8 81.2

40.9 54.6 58.6 26.1 –0.4 1.9 –10.0 9.7 22.6 53.1 8.5 0.3 17.8 –27.1 2.3 10.7 102.3 –3.2 –9.1 –16.0 –56.5 18.7 39.1 150.0 134.8 208.6 237.1

12.1 6.9 10.1 11.5 12.5 11.3 9.6 9.8 4.6 2.2 5.7 2.6 2.0 2.2 0.8 –7.6 –13.3 –13.3 –17.2 –7.0 1.8 6.3 11.2 11.0 12.9 12.1 12.0

12.4 10.7 8.8 11.8 5.5 5.8 5.1 3.9 7.7 3.6 6.7 8.7 4.7 9.4 9.4 –1.4 –3.7 –6.6 –9.6 –4.7 –0.3 3.9 3.5 7.0 6.1 5.9 13.1

15.6 17.0 14.0 17.7 21.0 21.8 21.0 14.4 20.1 17.9 22.0 14.3 11.1 12.2 10.7 8.1 –4.2 –16.2 –23.2 –18.8 –7.4 4.3 11.7 9.7 6.0 16.6 17.0

24.8 28.3 22.3 27.5 8.5 7.6 7.3 5.7 16.2 15.8 15.8 12.7 10.1 11.9 15.3 8.7 –1.5 –10.4 –19.6 12.9 –12.2 –1.8 2.0 –23.3 7.3 4.0 10.1

9.8 10.3 9.3 12.1 10.3 9.3 8.4 2.3 0.4 –0.1 4.9 8.4 8.7 10.9 7.0 0.5 –5.1 –11.7 –14.1 –10.6 –4.1 1.8 3.1 8.6 6.5 5.5 8.7

19.7 16.9 16.0 20.2 26.8 22.6 22.9 21.3 12.4 24.7 35.2 30.4 24.0 19.0 4.4 7.4 –18.6 –37.2 –41.8 –43.0 –22.5 3.7 13.0 16.2 8.7 9.0 15.0

33.0 43.0 34.0 29.4 25.9 13.5 16.4 15.1 19.4 8.6 16.0 20.5 23.9 43.0 48.7 30.8 –17.2 –36.4 –36.6 –28.0 7.5 45.0 32.7 26.8 34.5 31.1 49.9

23.8 15.6 –0.6 –1.7 0.9 5.9 23.9 36.4 24.3 16.3 16.0 –12.5 13.4 30.8 10.3 46.7 8.8 –29.4 –27.0 –24.2 –20.8 22.9 49.1 29.3 46.1 12.4 –1.5

20.1 15.2 13.5 17.4 14.1 13.4 20.5 18.0 14.7 17.7 18.7 11.6 19.8 32.0 34.7 23.2 –8.8 –31.4 –35.9 –28.6 0.7 28.5 33.0 42.4 45.1 37.0 41.3

9.9 10.9 25.4 23.4 66.7 70.5 50.5 38.2 45.0 1.9 2.0 6.7 –13.4 62.1 73.8 113.9 111.7 –10.0 –31.3 –65.9 –20.2 –29.8 –13.2 18.0 –52.3 43.0 48.5

38.5 43.7 27.0 46.5 27.2 14.0 37.0 18.6 14.2 8.0 6.9 –0.8 –8.2 –0.6 8.5 –0.2 –10.8 –28.9 –40.3 –14.8 21.8 65.9 68.6 43.4 38.2 34.9 38.6

2011 Q4

94.1

76.5

68.6

95.0

8.1

10.9

14.9

12.4

4.2

14.7

49.0

–12.2

27.8

67.5

38.3

Note: Blue numbers denote increases of 40 percent or more.

Source: Texas Comptroller of Public Accounts

16

TIERRA GRANDE

Texas Real Estate and Future of Oil and Gas

F

orecasts are for the price of natural gas to remain about $3 per mcf into fall 2012. Futures prices dropped below $2 per mcf on April 11, 2012, the first time since January 2002. Natural gas price volatility remains heavily influenced by weather and the amount of spare U.S. storage capacity.

A March 2012 report by Citi Global Perspectives & Solutions argues that no significant dry gas drilling will occur until natural gas futures begin to near the $5 per mcf mark. The consensus is that this may take another three to four years.

Alternately, crude prices remain quite high by historical standards. Crude traded at a ratio of eight to 12 times the price of natural gas for more than 20 years, until 2009. The ratio has recently exceeded 50 to 1 using West Texas Intermediate (WTI) crude prices and more than 60 to 1 based on the price of Brent crude.

The assumption that crude prices will remain relatively high while natural gas prices remain low is driving a number of significant changes that will affect Texas real estate.

Drilling activity should continue to shift from regions that are mainly gas plays to areas offering oil and natural gas liquid (NGL) plays. About 140 fewer Texas rigs were drilling for natural gas in September 2012 compared with September 2011.

Conversely, about 130 more rigs were drilling for crude and NGLs (such as propane, butane and ethane) priced relative to crude prices.

The large projected increases in a closer and more affordable supply of NGLs is also driving the state’s petrochemical companies to expand the capacity of their facilities. Although not an exhaustive list, some of the petrochemical construction and expansions are: • new ethylene plant in Baytown (Chevron), • expansion of NGL fractionation plant in Old Ocean (Chevron), • expansion of Shoup and Armstrong NGL fractionation plants in Nueces and DeWitt counties (Enterprise Products Partners and Duncan Energy Partners), • expansion of NGL fractionation plant in Mont Belvieu (Enterprise Products Partners), • new NGL fractionation plant in Yoakum (Enterprise Products Partners), • new synthetic lubricant plant in Baytown (ExxonMobil Chemical), OCTOBER 2012

• expansion of ethylene plant in Point Comfort (Formosa), • new petroleum condensate processing plant on Houston Ship Channel (Kinder Morgan), • restart of methanol manufacturing plant in Channelview (LyondellBasell) and • new methanol manufacturing plant in Beaumont (Orascom). ther sectors benefitting from low natural gas prices will include electrical power generators and manufacturers of paper products, plastic products, cement, fertilizers and fabricated metals. Existing or possible new locations for these types of facilities should see increased interest in the next few years.

Other manufacturing along the Texas-Mexico border may benefit as well. Brazil’s Santana Textiles is constructing a $180 million denim plant in Edinburg. The company reported that low natural gas costs played an important part in the decision to locate in Texas rather than Mexico.

PWC reports that inexpensive natural gas could help U.S. manufacturing save more than $11 billion per year and create 500,000 new jobs by 2025. The lure of cheap natural gas is raising expectations for a reindustrialization of America, and Texas is well positioned to take advantage of low-priced energy. This is good news for the state’s real estate markets.

O

Dr. Hunt (hhunt@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY In the past two years, the high price of oil and the low price of natural gas have been working to the advantage of the Texas economy. High oil prices are promoting high exploration activity. The low price of natural gas is providing a boost to the industrial and manufacturing sectors in Texas.

17

Housing Markets

T

exas’ housing market comprises homes priced from less than $10,000 to several million dollars. The home price differential has divided the state’s residential real estate market into several market segments according to price brackets. The shares of these segments in total homes sold gradually change over time in response to changes in income and consumer preferences.

Growing incomes and prosperity are usually reflected in higher growth rates of shares of higher-priced homes sold.

However, socioeconomic factors and business cycles also impact market shares of different home price brackets. For instance, elderly or retired persons often prefer smaller, lowerpriced homes that are more easily maintained.

Ordinarily, the housing market is made up of two broad segments: a growing segment and a declining one. Growth is measured by the shares of homes sold in each segment as a percentage of total homes sold. The distribution of the percentages of homes sold is divided into two segments by a home price line.

In a growing economy, the market shares of houses with prices above (or below) the price line increase (or decrease).

18

Real Estate Center research on the market shares of homes sold in Texas found that currently the state’s housing market comprises three market segments: two growing segments and one declining.

Before and After Housing Crisis, Great Recession Overlaying the graph of 2005 distribution of homes sold on 2001’s graph shows the two graphs intersect at the $90,000– $100,000 price bracket (Figure 1). The price-line dividing the market into two segments is about $98,000. That is, homes with prices above (or below) $98,000 were increasing (or decreasing) their market shares from 2001 to 2005. The graph shows that the state’s housing market consisted of two market segments before the housing crisis that began in 2006.

Overlaying the 2011 distribution of homes sold on 2001’s graph shows the two intersect at the $30,000–$40,000 and $120,000–$140,000 price brackets (Figure 2). The price-lines dividing the state’s housing market into three segments are about $38,000 and $138,000; that is, homes priced less than TIERRA GRANDE

Texas Home Sales Distribution, 2001–11 Percent of Homes Sold Price Range

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

$29,999 or less 30,000 – 39,999 40,000 – 49,999 50,000 – 59,999 60,000 – 69,999 70,000 – 79,999 80,000 – 89,999 90,000 – 99,999 100,000 – 119,999 120,000 – 139,999 140,000 – 159,999 160,000 – 179,999 180,000 – 199,999 200,000 – 249,999 250,000 – 299,999 300,000 – 399,999 400,000 – 499,999 $500,000 and more

2.3 2.1 2.9 4.0 5.5 6.8 8.0 7.0 11.7 11.3 8.6 6.6 4.6 7.0 4.2 3.8 1.5 2.1

2.4 2.0 2.6 3.6 4.8 5.7 7.3 7.0 11.9 11.8 9.1 7.1 4.8 7.4 4.5 4.2 1.6 2.3

2.3 2.0 2.4 3.2 4.3 5.3 6.6 6.8 12.4 12.3 9.4 7.3 5.0 7.7 4.8 4.4 1.7 2.3

2.2 1.9 2.3 3.0 4.0 5.1 6.3 6.7 12.5 12.4 9.4 7.3 5.0 7.8 4.9 4.7 1.8 2.7

1.9 1.7 2.0 2.6 3.4 4.2 5.5 5.8 12.1 12.9 10.1 8.0 5.5 8.5 5.3 5.2 2.1 3.1

1.5 1.5 1.8 2.3 3.0 3.9 4.9 5.2 11.4 13.0 10.5 8.5 5.9 9.1 5.7 5.9 2.5 3.5

1.6 1.5 1.9 2.3 3.1 3.8 4.7 4.7 10.5 12.3 10.2 8.3 6.0 9.7 6.2 6.5 2.8 4.1

2.1 1.9 2.2 2.5 3.3 3.9 4.6 4.6 9.9 11.7 9.8 8.0 6.0 9.8 6.3 6.6 2.8 4.1

2.4 2.1 2.3 2.7 3.2 3.7 4.4 4.6 9.9 11.8 9.9 8.1 6.0 9.9 6.6 6.3 2.6 3.6

2.7 2.3 2.4 2.7 3.3 3.7 4.4 4.4 9.4 10.9 9.5 7.8 5.7 9.9 6.7 6.8 3.0 4.3

2.8 2.5 2.8 3.1 3.5 3.9 4.3 4.2 8.9 10.2 9.0 7.6 5.7 9.9 7.0 7.2 3.1 4.6

Source: Real Estate Center at Texas A&M University

Figure 1. Texas Housing Market Segments, 2005 12 9

2001 Home Sales Distribution

6

2005 Home Sales Distribution

price line

3 0

$29 k or

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

Percent Homes Sold

15

Home Prices

Source: Real Estate Center at Texas A&M University

Figure 2. Texas Housing Market Segments, 2011 9

2001 Home Sales Distribution

2005 Home Sales Distribution

6 3 0

price line

price line

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

Percent Homes Sold

12

$29 k or

$38,000 and homes priced above $138,000 are increasing their market shares (Figure 2).

Transformation of the state’s housing market from two-segment to three-segment began with the housing crisis and the Great Recession in its aftermath (Figures 3.1 to 3.18). Homes priced less than $70,000 were losing market share until 2006; since then the trend has reversed (Figures 3.1 to 3.5). The market share of homes sold in the $70,000–$119,999 price bracket have been on a continual downward trend from 2001 to 2011 (Figures 3.6 to 3.9). Market shares of homes sold in price brackets from $120,000– $199,999 were increasing until 2006 and since then have trended downward (Figures 3.10 to 3.13).

The most solid residential market segment comprises homes with prices higher than $200,000 (Figures 3.14 to 3.18). The market share of homes sold in this segment has increased every year since 2001. Shares of homes sold with prices of more than $300,000 fell briefly in 2009 but soon recovered (Figures 3.16 to 3.18).

Home Prices

Source: Real Estate Center at Texas A&M University

Data and Methods

T

he datasets used in this study consist of distributions of homes sold in different price brackets in Texas each year from 2001 to 2011. The distributions were constructed by computing the percentages of homes sold in 18 price brackets (see table). Similar distributions

OCTOBER 2012

of homes sold are computed for the state’s metro areas.

To analyze changes in the market shares of homes sold in different market segments over a specified period, the graph of price distribution of homes sold in the last year of the period is overlaid on the first year’s

graph. The points of the intersections of the two graphs show price-lines dividing the total market into growing and declining market segments. Then, changes of market shares of each market segment over time are graphed to see the impact of business cycles on each segment’s market share.

19

Figure 3. Changes in the Market Shares of Homes Sold in Texas From 2001 to 2011 Percent of Market Share Figure 3.1 Price Less than $29,000

Figure 3.2 $30,000–$39,999

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

Figure 3.3 $40,000–$49,999 3.0 2.5 2.0

1.0 1.0 1.5 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 Figure 3.5 $60,000–$69,999

Figure 3.4 $50,000–$59,999 5.0 4.0 3.0

7.0

5.0

6.0

4.0

5.0

3.0

4.0

2.0 2.0 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 8.0

Figure 3.9 $100,000–$119,999 14.0

7.0

8.0

3.0 2001 2003 2005 2007 2009 2011

Figure 3.8 $90,000–$99,999

Figure 3.7 $80,000–$89,999 10.0

Figure 3.6 $70,000–$79,999

6.0

12.0

6.0 6.0

10.0

5.0

4.0 4.0 8.0 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 Figure 3.10 $120,000–$139,999 14.0 13.0

Figure 3.12 $160,000–$179,999

Figure 3.11 $140,000–$159,999 11.0

9.0

10.0

8.0

9.0

7.0

12.0 11.0

10.0 6.0 8.0 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 Figure 3.13 $180,000–$199,999

Figure 3.15 $250,000–$299,999

Figure 3.14 $200,000–$249,999

6.5

10.0

8.0

6.0

9.0

7.0

5.5

8.0

6.0

5.0

7.0

5.0

4.0 4.5 6.0 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011 Figure 3.17 $400,000–$499,999 3.2 2.8 6.0 2.4 2.0 4.0 1.6 1.2 2.0 2001 2003 2005 2007 2009 2011 2001 2003 2005 2007 2009 2011

Figure 3.18 $500,000 or more

Figure 3.16 $300,000–$399,999

8.0

5.0 4.0 3.0 2.0 2001 2003 2005 2007 2009 2011

Source: Real Estate Center at Texas A&M University

20

TIERRA GRANDE

Market Segments in Texas Metros

Figure 7. Houston Housing Market Segments, 2011

Figure 4. Austin Housing Market Segments, 2011 9

2011 Home Sales Distribution

2001 Home Sales Distribution

price line

$29 k or

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

0

Figure 5. Dallas Housing Market Segments, 2011 Percent Homes Sold

12 9

2011 Home Sales Distribution

2001 Home Sales Distribution

3

price line

price line

$29 k or

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

0

Home Prices

Source: Real Estate Center at Texas A&M University

Figure 6. Fort Worth Housing Market Segments, 2011 Percent Homes Sold

12 2001 Home Sales Distribution 2011 Home Sales Distribution

6 3 price line

price line

$29 k or

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

0

Percent Homes Sold

price line

price line

$29 k or

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

0

Home Prices

Source: Real Estate Center at Texas A&M University

Figure 8. San Antonio Housing Market Segments, 2011 12

2011 Home Sales Distribution

2001 Home Sales Distribution 8 4

price line

Home Prices

Source: Real Estate Center at Texas A&M University

Home Prices

Source: Real Estate Center at Texas A&M University

9

4

0

3

6

8

less 30– 39 40– 49 50– 59 60– 69 70– 79 80– 89 90– 99 100 –11 9 120 –13 9 140 –15 9 160 –17 9 180 –19 9 200 –24 9 250 –29 9 300 –39 9 400 –49 $50 9 0k o r mo re

6

2011 Home Sales Distribution

2001 Home Sales Distribution

$29 k or

Percent Homes Sold

12

12

Percent Homes Sold

C

urrent housing market segments for the state’s major metropolitan areas are shown in Figures 4 to 8. In Austin, homes priced less than $90,000 did not have a significant market share in total homes sold from 2001 to 2011 (Figure 4). Currently, homes priced more than $160,000 are gaining larger market shares of homes sold. The market share of homes in the $90,000–$159,999 price bracket has significantly declined from 2001.

Housing markets in Dallas, Fort Worth and Houston are currently three-segment markets (Figures 5, 6 and 7). In Dallas, the market shares of homes sold with prices more than $170,000 or less than $60,000 are increasing as homes with prices between $60,000 and $170,000 decline (Figure 5). In Fort Worth, the market shares of homes sold with prices higher than $96,000 or less than $33,000 are expanding at the expense of homes with prices between $33,000–$96,000 (Figure 6).

Home Prices

Source: Real Estate Center at Texas A&M University

OCTOBER 2012

In Houston, market shares of homes sold with prices more than $140,000 or less than $50,000 are increasing while homes with prices between $50,000–$140,000 are decreasing (Figure 7). San Antonio’s housing market is a two-segment market with a home price line of $120,000 dividing the market (Figure 8). Market shares of homes with prices more than $120,000 are expanding while those with prices less than $120,000 are not.

The coincidence of an emerging, growing market segment for lower-priced homes in Texas along with the nationwide housing crisis and the Great Recession suggests that growing sales in lower price brackets may be attributable to foreclosures or the resurgence of the market shares of rental housing units (Figure 3).

This type of analysis helps brokers and salespeople identify the growing sections of the local housing market. For example, the resurgent growth in lower priced homes may dictate new strategies to sell these properties or develop a property management capability to manage rental property. Similarly, if certain price segments are declining, it may be prudent to reduce marketing and advertising and refocus resources on growing sectors of the price spectrum.

Dr. Anari (m-anari@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas’ housing market currently consists of three segments based on home price brackets. Two of those segments are growing and one is decreasing.

21

Housing Markets

22

TIERRA GRANDE

U.S.

3 2

TEXAS

Texas Foreclosure Levels

1

0 1979

1990

2001

2012

Sources: Mortgage Bankers Association and Real Estate Center at Texas A&M University

F

of Realtors Note: Data include notices of trustee sales plus notices of foreclosure sale; 12-month moving average median price

oreclosures in Texas generally have not caused a problem in overall market balance. While the MBA’s foreclosure rate (measured as percent of total loans) approached and even exceeded the record highs of the late 1980s, the market has been able to absorb the inventory of foreclosures relatively well. In Figure 3.

Monthly Foreclosure Filings and Jobs 2011, RealtyTrac reported 89,675 foreclosure filings 160 143 in Texas, which ranked seventh nationally, 120 139 primarily because of the sheer size of the market 80 135 (Figure 3). RealtyTrac’s 2011 rate of foreclosure filings (measured as the 40 131 percent of total housing units) of 0.89 percent, 0 127 however, ranked 25th and June Oct. Feb. June was nearly 38 percent less 2005 2007 2010 2012 than the national rate of Sources: RealtyTrac Inc. and Bureau of Labor Statistics Note: Data include notices of trustee sales plus 1.43 percent (Figure 3). notices of foreclosure sale RealtyTrac reported one foreclosure filing for every 113 housing units in Texas in 2011 (Figure 4) compared with one filing per 70 units nationally. Year-to-date, 2012 Texas filings equal one per 214 units relative to one in every 131 units nationally.

Jobs (thousands) brown line

Texas weathered the foreclosure storm better than most other states. Here, foreclosures increased from a little more than 1 percent to just less than 2 percent.

The absence of artificially inflated home prices in conjunction with a resilient job market buffered the negative effects on the state’s economy and housing market.

Despite foreclosure rates that equaled and even surpassed those of the mid 1980s, when Texas’ housing market was devastated, the state generally suffered relatively minor damage.

Monthly foreclosure filings have followed a somewhat irregular pattern. The number of monthly foreclosure filings for the United States as reported by RealtyTrac Inc. exploded from less than 30,000 to nearly 160,000 per month from June 2005 through March 2010.

The fall in home prices starting in mid-2006 closely correlates with the initial upsurge in foreclosures (Figure 2).

The ensuing loss of jobs starting in 2008 further accelerated the pace of foreclosure filings (Figure 3).

OCTOBER 2012

Foreclosure Filings (thousands) orange line

4

Foreclosure Filings (thousands) orange line

Percent of Loans in Foreclosure at End of Quarter

5

Figure 1. Texas, U.S. Foreclosure Rates

Since mid-2010, foreclosure fillings have decreased significantly because of federal programs that require loan servicers/lenders to use loan modifications, loan refinancing or both; Figure 2. Monthly Foreclosure Filings increased use of short and 12-Month Moving Average sales; and foreclosure Median Single-Family Home Price moratoriums put in place 160 230 pending resolution of the states’ attorneys general 120 210 suit against major lenders and servicers. Continued high levels of existing 80 190 delinquencies reported by the MBA and other loan 40 170 data providers, however, suggest that foreclosures 0 150 will pick back up as overJune Oct. Feb. May all market fundamentals 2005 2007 2010 2012 remain fragile.

Sources: RealtyTrac Inc. and National Association

12-MMA Median Single-Family Home Price (thousands) brown line

The Great Recession made “foreclosure” a household word.

Massive job losses plus the unprecedented drop in home values produced record numbers of foreclosures. Nationally, loans in foreclosure surged from around 1 percent to more than 4.5 percent between 2007 and early 2012, according to the Mortgage Bankers Association (MBA). This impaired an already weak housing market (Figure 1).

23

Oct. 2007

Feb. 2010

2 May 2012

Sources: RealtyTrac Inc. and Real Estate Center at Texas A&M University Note: Data include notices of trustee sales plus notices of foreclosure sale

24

Sales, Inventory and Price Effect

Notice of Trustee Sales Filings (thousands) brown line

130 June 2005

T

he change in number of foreclosure filings relative to changes in home prices and jobs in Texas is shown in Figures 5 and 6. Unlike the national experience, the positive influences of increasing home values and new job creation appear to mitigate the level of Texas foreclosures. It remains to be seen what increase in filings may arise from the settlement between the attorneys general and the largest mortgage loan servicers and providers. Even if foreclosures increase significantly for a few months, they should pose little problem for Texas overall. If new foreclosures cluster in specific neighborhoods, however, the impacts could be severe.

As a nonjudicial state and with the market able to absorb foreclosures relatively well, lenders/servicers have little reason to delay foreclosure actions. A recent report on actual days to foreclose shows the comparative advantage of Texas in this regard. Foreclosure actions in Florida and New York may take three years or more to process (Figure 7). Even in California, another nonjudicial state, the process takes nearly a year. The strength of the Texas market and the short processing time for foreclosures lead to a more sustainable market.

So far, the Texas market has been able to absorb foreclosure and REO sales with little difficulty. Nationally, foreclosure sales account for 20 to 25 percent of total sales since January 2010. In Texas, foreclosure sales typically Figure 6. Texas Monthly Foreclosures amount to less than 10 and Monthly Jobs percent of total sales.

16 10.9 Foreclosure sales in 14 10.7 Dallas and Houston, the two biggest markets, 12 10.5 are somewhat higher, 10 10.3 generally in the 15 to 18 8 10.1 percent range. In 2011, Dallas and Houston 6 9.9 ranked 84th and 85th, 4 9.7 respectively, by foreclo2 9.5 sure rate among all U.S. June Oct. Feb. May MSAs. They were the 2005 2007 2010 2012 only two Texas MSAs Sources: Texas Workforce Commission ranked in the top 100. and RealtyTrac Inc.

Jobs (millions) orange line

12-MMA Median Home Price (thousands) orange line

4

133

Notice of Trustee Sales Filings (thousands) brown line

Foreclosure filings in 2011 totaled 25 percent fewer than those recorded in 2010 (see table). The year-to-date 2012 total number of recorded filings in Texas is down 15 percent from the corresponding 2011 Figure 4. Texas Total Foreclosures and Rate per Total Housing Units level despite a surge in filings during the past several 65,342 Housing Units 2005 72% months. As the number brown 83,645 of foreclosure filings may Percent of Total 2006 91% Housing Units pick up somewhat during 84,469 orange 2007 90% the rest of the year, the 96,157 projected final 2012 total 2008 100% may be roughly equivalent 100,045 2009 103% to the 2009 level or more.

Fortunately, the Texas 118,923 2010 119% residential market is show89,675 ing sufficient strength 2011 89% to handle an increase in Sources: RealtyTrac Inc. and Real Estate Center foreclosures. Home sales at Texas A&M University in Texas for the first half of the year increased approximately 13 percent over last year, and median prices improved nearly 5 percent, so an increase in foreclosures should have a relatively minor impact on the market.

Each individual Texas metropolitan area had fewer Figure 5. Texas Monthly Foreclosures foreclosure filings in and 12-Month Moving Average 2011 than in 2010.

Median Price In some metro areas, 16 151 the decline was 75 14 148 percent or more; on 12 145 average, it was 44 percent, ranging from 10 142 a low of 6.5 percent in 8 139 Waco to 85.9 percent in Wichita Falls.

6 136

TIERRA GRANDE

Number of Properties with Foreclosure Filing in Texas Metropolitan Areas

Figure 7 Actual Days to Foreclose 1,000

New York - Brown Florida - Red California - Green 800 Texas - Orange

1,019 806

600 400 263 169 134 57

352

90

0 2007 2008 2009 2010 2011

Sources: RealtyTrac Inc. and Real Estate Center at Texas A&M University

Foreclosures have not added significantly to total for-sale inventory nor apparently created a substantial “shadow inventory.” Indeed, as the number of foreclosures declined in 2011 and into early 2012, and with substantially diminished new construction, most Texas markets had significant declines in for-sale inventory.

The statewide estimate of months of inventory is around six, and 13 of the MLS areas tracked by the Center have fewer than five months. Austin, for example, currently measures about 4.5 months inventory of homes available and some markets are less than three.

These inventory levels would normally indicate a strong housing market with anticipated healthy price increases. However, robust price increases have been spotty, occurring in particular submarkets but are not pervasive. ome lenders/servicers may be holding REO properties for subsequent sale rather than releasing them all at once. This may actually be good for the overall market if, as seems likely, a substantial number of foreclosed properties cluster in specific neighborhoods or developments. Putting all of the properties on the market at once could severely damage those areas. Releasing properties to the market over time helps stabilize local prices and may, in the long run, be more beneficial to the lender as well.

Foreclosure sales and the price discounts they garner have no doubt

S

OCTOBER 2012

Number of Properties MSA Abilene Amarillo Austin-Round Rock Beaumont-Port Arthur Brownsville-Harlingen College Station-Bryan Corpus Christi Dallas-Plano Fort Worth-Arlington Houston Killeen-Temple-Fort Hood Laredo Longview Lufkin McAllen-Edinburg-Mission Midland Odessa San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls

Percent Change

2011

2010

2010–11

69 465 7,524 999 409 112 1,300 21,976 10,229 29,917 1,215 246 161 31 2,334 69 73 235 8,272 247 98 230 49 779 79

301 1,162 9,809 1,277 1,656 191 1,732 27,222 14,103 35,816 1,851 755 337 136 2,775 192 310 322 11,196 617 138 471 194 833 562

–77.1 –60.0 –23.3 –21.8 –75.3 –41.4 –24.9 –19.3 –27.5 –16.5 –34.4 –67.4 –52.2 –77.2 –15.9 –64.1 –76.5 –27.0 –26.1 –60.0 –29.0 –51.2 –74.7 –6.5 –85.9

Source: RealtyTrac Inc.

limited overall annual price appreciation during the past four years. Some limited research in the major Texas markets found that the discounts paid for foreclosures were more than offset by price increases for nondistressed home sales.

As compared with the nearly 25 percent decline in the median home price nationally, Texas’ annual median home price remained essentially flat between 2007 and 2010, falling less than 1 percent from its peak. Texas’ median home price in 2011 was the highest on record and surged to a new monthly record high during the summer of 2012. The current median prices in the five principal Texas metropolitan markets (Austin, Dallas, Fort Worth, Houston and San Antonio) are at or near all-time highs.

The 1986–89 housing bust crippled markets for years. The difference with the housing bust of the past few years is that the state’s economy held up, with relatively modest job losses that for the

most part have been recovered. Except for specific subdivisions or neighborhoods where foreclosures were excessive, by and large the dampening price effects were spread out and not long term.

Repressed demand from tight mortgage credit underwriting and job insecurities have been the key drivers of the recent housing market, not undue foreclosure levels.

Dr. Gaines (jpgaines@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas did not escape the negative effects of foreclosures resulting from the boom-bust housing market the past several years. But the stronger than average economy and fewer job losses meant the impact on the state was not as severe as in other areas.

25

Appraisal

Bringing Down the House?

Foreclosure Effects on Market Values

By Charles E. Gilliland

Appraising real estate in difficult markets can be puzzling to the appraisers challenged with interpreting potentially confusing market signals. Recent reversals in residential markets led the Appraisal Foundation to issue a valuation advisory entitled Residential Appraising in a Declining Market. This document provides guidance to appraisers as they struggle to make sense of markets buffeted by the downturn in home prices following the Great Recession.

Because specific localized markets may have escaped the downdraft caused by collapsing mortgages, the advisory identifies conditions that characterize a declining market. These include: • an oversupply of competing properties; • extended marketing times for active, pending and closed sales; • prior listings of the subject that reflect list prices notably higher than the current contract, sale price or value; • prior sales of the subject, comparables or both that reflect higher prices than current prices; • a decrease in sale prices as a percent of list prices; and • an increase in REO (properties acquired by lenders through foreclosure) listings in the neighborhood.

The document states that a declining market normally has several of these characteristics.

26

Identify Client’s Intended Use

D

escribing the state of the market requires analysis of transactions over a period sufficient to reveal trends in prices. Examining historic levels of typical days on the market, median prices, and the relationship between sale price and list price provides evidence of the health of the market. Economic studies and various databases can also provide insights into the direction the market is headed. Analysis of these kinds of information leads an appraiser to conclude that markets are either increasing, stable or declining.

When an appraiser concludes that a property is in a declining market, the assignment entails challenges not encountered in stable or increasing venues. Declining markets likely will have sales of REO, short sales or foreclosure sales. Normal appraisal assignments aiming to estimate market value usually exclude prices for these kinds of transfers because buyers or TIERRA GRANDE

sellers were not “typically motivated.” Presumably, distressed sellers made concessions that affected the final prices in these transactions, driving them below a reasonable market value.

For many appraisal assignments, all of these sales would likely be dismissed by appraisers. owever, when these types of transactions dominate markets in an area, excluding them may leave no market data to analyze. For those situations, an alternate definition of value may better serve a client’s needs, especially if they want to know the most likely price the property would fetch under current conditions. The advisory cites disposition value, foreclosure sale, liquidation value and other values in addition to the standard market value as possible objectives of an appraisal. The value definition that most effectively meets a client’s intended use of the appraisal should be identified in the report’s scope of work and communicated to the client.

For appraisals in a declining market, the determining factor depends on the assumed most likely buyer of the residence.

Specifically, buyers tend to be either end users or investors.

The former desires to acquire a home to live in; the latter looks for distressed sales, anticipating reselling at a higher price or renting property for income. The advisory stipulates that for sales in the same market, end users tend to pay higher prices, while investors generally pay discounted prices. The gap between the two price levels can be substantial and varies from market to market. An unpublished Center analysis of distressed sales from Multiple Listing Service data confirmed this in Dallas and Austin residential markets.

H

Describe Market Conditions The advisory cites three market situations: one dominated by end users, one reflecting a mixture of end users and investors and one in which all sales are consummated with investment buyers. In the first instance, comparable sales selection focuses primarily on differences among properties. In the second case, sales to investors will likely yield lower prices than sales of similar properties sold to end users.

For the mixed and investordominated market, the selection becomes muddled.

Should the appraiser discard investor-related sales in the mixed market or perhaps adjust those sales upward to account for the conditions of the sale?

Residential appraisal form reports normally do not include a line item for this adjustment, which is frequently encountered in narrative reports. However, the assignment may require an appraiser to make such an adjustment. To help resolve this dilemma, the Appraisal Foundation stipulates that an appraiser should consider “ . . . the public perception of the defined term” (market value), “the client’s intended use of the appraisal report, and the public policy….” The client should be informed about the condition of the market, but the foundation insists that the comparable sales selection process should abide by the following: If an appraiser finds the subject property is located in a market where both non-REO and REO property

sales exist and these result in significantly different value opinions, the appraiser should use the comparable sales that represent the actions of buyers most similar to the most probable buyer for the subject.

It is also possible for an appraiser to give clients two values, properly defined, in the same report.

Clearly, similar houses in the same market area could have dissimilar valuations depending on the assumed potential buyer. Because of that possibility, the advisory discusses the following list of values: • disposition value, • liquidation value, • market value and • other values.

Define Alternative Values

B

y definition, market value reports the most probable price expected from a sale in a free and open market between informed buyers and sellers, assuming that neither is under duress. Official definitions impose a set of restrictions designed to describe a transaction that approximates an ideal, perfectly competitive market as closely as possible.

Most alternate value definitions represent a departure from this ideal. For example, disposition value subjects the estimate to current market conditions with a seller compelled to sell. A liquidation value envisions a sale within a short period with a seller under extreme pressure to sell. An appraisal reciting an alternative value in addition to market value should contain explicit definitions of each value concept used.

These stipulations acknowledge that price does not necessarily equal value. Sales of apples or oranges occur at prices set by competitive forces in the market place. Most buyers find the offer of these items at a take it or leave it stated price.

Shopping among competing sellers normally results in observing similar prices in all markets. Those prices arguably reflect the value of the apples or oranges in the given market. However, a late shopper encountering a seller with a few oranges left and a burning desire to close may be able to strike a bargain by offering to buy the remaining stock at a lower price. Those specific circumstances have caused the agreed-to price to stray from the previously established market value.

In real estate, each transaction occurs after some price negotiation. The classic definition of market value assumes that neither buyer nor seller holds an advantage in those negotiations. The interplay of offer and acceptance occurs in the environment of current market realities with the result reflecting market value for typically motivated buyers and sellers.

For appraisals in a declining market, the determining factor depends on the assumed most likely buyer of the residence.

OCTOBER 2012

Consider Circumstances Carefully When circumstances in the market environment mutate, the negotiations likely will change to reflect those changes. For example, a noticeable drop in interest rates reduces borrowing costs to buyers. Each one can now offer more for a given

27

property. That reality traces through the market in general price increases. imilarly, when sales of foreclosed properties occur in a market, observers might anticipate an overall drop in prices, believing that foreclosed properties sell at a discount from market values. That drop would follow from two circumstances: the seller is motivated to liquidate an unwanted investment, and inventories of foreclosed properties add to the supply of homes on the market. The casual observer would justifiably expect foreclosure sales to drive values lower.

Unlike the markets for apples and oranges, where large volumes are traded each day, real estate markets generate a limited number of transactions requiring careful consideration of the circumstances involved in each individual transaction. Appraisers normally dismiss transactions that do not fit the criteria specified by the appraisal definition of market value from their analyses. Appraisers frequently note sales of foreclosed properties before dismissing those transactions as reliable indicators of market value, citing undue pressures on the seller.

One can assume that sales of foreclosed properties should result in transactions at apparently depressed prices. Possibly because of such perceptions, the Texas Property Tax Code contains the following provision referring to appraisal of homes for property tax purposes: § 23.01. Appraisals Generally (a) Except as otherwise provided by this chapter, all taxable property is appraised at its market value as of January 1. (b) The market value of property shall be determined by the application of generally accepted appraisal methods and techniques. If the appraisal district determines the appraised value of a property using mass appraisal standards, the mass appraisal standards must comply with the Uniform Standards of Professional Appraisal Practice. The same or similar appraisal methods and techniques shall be used in appraising the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property’s market value, and all available evidence that is specific to the value of the property shall be taken into account in determining the property’s market value. (c) Notwithstanding Section 1.04(7)(C), in determining the market value of a residence homestead, the chief appraiser may not exclude from consideration the value of other residential property that is in the same neighborhood as the residence

S

28

homestead being appraised and would otherwise be considered in appraising the residence homestead because the other residential property: (1) was sold at a foreclosure sale conducted in any of the three years preceding the tax year in which the residence homestead is being appraised and was comparable at the time of sale based on relevant characteristics with other residence homesteads in the same neighborhood; or (2) has a market value that has declined because of a declining economy.

Include Foreclosure Sales If . . .

T

he foundation advisory acknowledges that appraisers may include foreclosure sales if state assessment rules require it and still comply with Uniform Standards of Professional Appraisal Practice. The way seems clear for tax appraisals to decline to reflect the sale prices on the foreclosure sales. However, many Texans find that residential tax values have continued to rise even as foreclosure sales have popped up in local markets, leading them to conclude that the appraisal district is disregarding the code.

The appraisal district responds that the sales were considered, but they did not impact the estimated market value of the homestead property.

That response reflects the dual nature of price levels in markets populated by foreclosures. The first difficulty arises over the meaning of the instruction to “not exclude from consideration” foreclosure sales. As this discussion makes clear, an appraiser may likely find a two-tiered market where foreclosed homes appear in a neighborhood. Arguably, sales to end users represent the best evidence of market value given the legal definition envisioning arms-length transactions.

Sales to investors probably reflect some level of duress.

In fact, appraisers would likely make conditions of sale adjustments before including the sale in an appraisal. Thus appraisal districts can consider foreclosure sales without allowing the depressed price levels to affect their estimates of market values.

Dr. Gilliland (c-gilliland@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Foreclosure sales do not automatically depress values of all houses. Depressed prices of foreclosures may present investment opportunities when those prices return to owner-occupied market values.

TIERRA GRANDE

OCTOBER 2012

29