JULY 2018 â„¢
JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY
NON-PROFIT ORG. U.S. POSTAGE PAID HOUSTON, TEXAS PERMIT No. 4126 COLLEGE STATION, TEXAS 77843-2115
In This Issue New-Home Shortage Storms and Houston’s Economy Dallas’ Rising Home Costs Texas’ Seven Land Regions Making Housing Affordable Home Prices and Land Cost
Helping Texans make better real estate decisions since 1971
JULY 2018 â„¢
JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY
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Your quarterly guide to price trends in a range of housing markets around the state.
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Director, GARY W. MALER Chief Economist, JAMES P. GAINES Senior Editor, DAVID S. JONES Managing Editor, BRYAN POPE Associate Editor, KAMMY BAUMANN Communications Specialist, HAYLEY RIEDER Art Director, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Graphic Designer, ALDEN DeMOSS Circulation Manager, MARK BAUMANN
JULY 2018
VOLUME 25, NUMBER 3 ™
TIERRA GRANDE JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY
10 Dallas’ Affordability
Puzzle
Riddle me this: What happens to housing affordability when people move by the thousands to Dallas, a city with an already low housing inventory and rising land and construction costs? The answer is a lesson in basic economics. BY JOSHUA G. ROBERSON
Lithography, RR DONNELLEY, HOUSTON
ADVISORY COMMITTEE: Doug Jennings, Fort Worth, chairman; Besa Martin, Boerne, vice chairman; Mario A. Arriaga, Conroe; Russell Cain, Port Lavaca; Alvin Collins, Andrews; Jacquelyn K. Hawkins, Austin; Walter F. “Ted” Nelson, Houston; Doug Roberts, Austin; C. Clark Welder, Fredericksburg; and Jan Fite-Miller, Dallas, ex-officio repre senting the Texas Real Estate Commission. 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. 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. Nothing in this publication should be construed as legal or tax advice. For specific advice, consult an attorney and/or a tax professional. PHOTOGRAPHY/ILLUSTRATIONS: Getty Images, pp. 1, 6–7, 8, 14–15, 16, 17, 18; Robert Beals II, pp. 2, 5, 13, 24–25, 26; Alden DeMoss, pp. 10, 11; JP Beato III, p. 20. © 2018, Real Estate Center. All rights reserved.
14 Magnificent Seven 2 Home Delivery
Where is All the New Housing? For the past six years, new-home inventories in Texas have been well below what’s considered a balanced market, and there is no easy fix. A myriad of factors—including rising land prices and supply costs, sluggish labor productivity, and new building and financial regulations—are making it difficult for builders to keep up with increasing demand. BY LUIS B. TORRES AND WESLEY MILLER
6 H-Town
Houston and Hurricanes
ON THE COVER Cypress trees in Wimberley’s Blue Hole Regional Park
PHOTOGRAPHER JP Beato III
JULY 2018
“Houston Strong” was coined in 2017 when the Astros gave its Harvey-ravaged hometown a much-needed World Series win, but the mantra resonates well beyond baseball. Houston has been proving itself economically strong against one storm after another for at least 35 years. BY ROBERT W. GILMER
Texas Land Market Regions
In 2002, the Real Estate Center embarked on the challenge of dividing roughly 268,600 square miles of varying Texas landscapes into distinct regions, each with a unique set of soil and landuse types. The result? More accurate reporting of land market trends. BY ERIN KIELLA
20 Out of Reach?
Texas Affordable Housing Homeownership has always been part of the American Dream, but rising home prices and lagging income growth are putting it out of reach for many lower-income buyers. That’s true even in Texas, where home prices are still generally affordable compared with the rest of the nation. BY LUIS B. TORRES AND WAYNE DAY
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Dirt Isn’t Cheap . . . Anymore Land’s Impact on Home Prices
Texas land prices are on the rise. While that’s good news for landowners looking to sell to residential developers, it’s a different story for potential new-home buyers who are seeing higher land costs reflected in higher home prices. BY ALI ANARI AND JAMES P. GAINES
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Residential
By Luis B. Torres and Wesley Miller
T
he heart of the affordability problem lies in the single-family market, where analyses are typically bifurcated into new- and existinghome categories. While existing homes constitute a majority of sales activity, new-home trends provide useful forwardlooking information. After all, every new house enters the resale stock at some point following its initial transaction. The inherent singularities of the newhome market, combined with today’s
2
Figure 1. Texas Single-Family New-Home Sales Distribution (by Year)
2003 2017
Density
Since the turn of the 21st century, the Texas economic model has attracted significant national attention. While the U.S. economy collapsed during the Great Recession (GR), Texas escaped most of the damage and thrived after the shale oil boom in 2011. Housing affordability was critical to the state’s success but is quickly diminishing, the result of rapid home price increases and sluggish income growth. Periods of income stagnation are not uncommon, occurring in every decade since 1950, and are generally allayed by improved technology and labor productivity. The current rate of home price growth, however, exceeds historical comparison, including the oil boom era of the 1970s. extreme price growth, warrant a deeper examination.
Prices Soar and Sales Activity Shifts From 2003 to 2017, the median price for new single-family homes sold through Texas Multiple Listing Services rose 70 percent. These gains, however, were not because homes were bigger. The median square footage for new homes actually decreased 4
0
$250,000 $500,000 $750,000
Close Price
Note: The probability density functions specify the probability that home sales occur within a particular range of values. The probability is measured by the area under the curve within the range (e.g., within $190,000 and $250,000). Source: Real Estate Center at Texas A&M University
percent during the period, pushing the median price per square foot up 62 percent and discounting the explanation of larger homes driving up the median price. TIERRA GRANDE
Density
Density
Not only did home prices Figure 2. 2017 Single-Family New-Home Sales Distribution (by MSA) increase, but the statewide sales distribution transformed. In 2003, sales of new homes were highly concenDallas-Fort WorthAustin-Round Rock trated around $145,000, where Arlington San Antoniomore than 40 percent of final HoustonNew Braunfels The Woodlandstransactions occurred within a Sugar Land $60,000 interval (Figure 1). By 2017, peak activity shifted toward $220,000 and dispersed significantly, flattening the top of the distribution and widening its tails. As a result, less than a quarter of new-home sales occurred between $190,000 0 $250,000 $500,000 $750,000 0 $250,000 $500,000 $750,000 and $250,000 (a comparable Close Price Close Price $60,000 interval). The thickNote: The probability density functions specify the probability that home sales occur within a particular range of values. The ened distribution, particularly probability is measured by the area under the curve within the range (e.g., within $190,000 and $250,000). toward higher price ranges, Source: Real Estate Center at Texas A&M University suggests that median and average price metrics insufficiently capa complete growth recovery. The cyclical construction activity generated most ture the magnitude of price increases in slowdown did, however, shock Texas of the imbalance. In 2017, Texas issued the market. income levels. Through 2017, real per 110,647 single-family building permits, ousing market deviations in the capita income remained 3 percent below still 29 percent below 2006 levels. After major Metropolitan Statistical its previous peak. On the other hand, the adjusting for population growth, permits Areas (MSA) drove the distribuoil bust hardly disrupted the statewide remained a dismal 42 percent behind tional shift. In 2003, new-home sales in housing market, allowing prices to climb their prerecession peak. the major MSAs concentrated uniformly even higher. The confluence of idle Rapid price increases resulting from around $145,000. By 2017, bimodal incomes and rising home prices chalrestricted supply summarizes the myriad distributions developed in the Dallas and lenged Texas’ famed affordability. of challenges facing the homebuilding Houston MSAs, while Austin and industry. Texas has a housing shortage Figure 3. Texas Income and Home Price but particularly a shortage of homes San Antonio maintained a single Index (Q1 2006 = 100) predominant peak (Figure 2). under $300,000. Rising supply-side 160 Diverging prices in the Dallas and costs squeezed profit margins, forcing FHFA Housing Price Index Fort Worth Metropolitan Divisions builders to shift construction to higher Nominal Income Per Capita 150 produced North Texas’ doubleprice cohorts. As a result, the months pointed distribution. During those of inventory for homes priced above 140 14 years, the premium paid at the $500,000 has doubled that of homes median level for new homes in priced below that mark over the past 130 Dallas over Fort Worth jumped seven years. from $20,000 to $55,000. An analoLand Prices Spill into Housing 120 gous shift occurred in Houston as higher-end residential development ising land prices provoked subgravitated north of downtown. stantial increases in home con110 Despite regional price variastruction costs. Over the past 20 tions, home prices soared in 2011 years, the proportion of sale price attrib100 as the shale oil boom propelled uted to land cost has increased five-fold the Texas economy out of the GR. from less than 5 percent to 20 percent in 90 It took less than a year to reduce Texas. The land share was even higher 2007 2009 2011 2013 2015 2017 new-home surpluses that had in the largest MSAs, representing more Note: FHFA Housing Price data are seasonally adjusted, and nominal income per capita data are seasonally accrued during the downturn. The than a quarter of the sale price in Dallas adjusted and annualized. economy flourished for four years, and Houston (Austin data do not exist). Sources: Federal Housing Finance Agency and Bureau of Economic Analysis igniting housing demand without Anecdotally, land prices sometimes an adequate supply-side response, forcing constitute the entire purchase value. For Sluggish Supply-Side Response prices upward. example, during gentrification periods Since 2012, new-home inventories have Texas’ per capita income kept pace some existing homes are purchased and persisted below the six- to 6.5-month with soaring home prices until the oil immediately cleared for the construction equilibrium level, averaging just 4.8 bust at the end of 2014 (Figure 3). While of new homes. In this case, not only does months. Robust demand contributed to averting a full-blown recession, the land account for the total purchase value the shortage, but depressed single-family economy staggered and has yet to reach but also the cost of demolition.
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have hindered smaller developers who could supplement the constrained supply. In 2017, the total loan volume for Texas land development was less than three-quarters of the 2007 level. Given the state’s prolonged economic expansion and housing shortage, one would expect a hyperactive residential construction credit market. On the contrary, securing debt remains increasingly difficult, thereby heightening the supply-side constraint.
Commodity Prices Recover and Rise In terms of the actual housing structure, softwood lumber used in framing accounts for 15 percent of the total building cost. Softwood prices soared in the 1990s amid trade disputes with Canada and domestic supply restrictions for environmental protection. The housing crisis slammed lumber prices down 30 percent between 2004 and 2009 as demand dwindled (Figure 4). Prices recovered for five years before falling back after the expiration of quotas and tariffs on Canadian softwood in 2015. The dispute renewed in 2017 with the
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Jobs (thousands)
B
Index (Jan. 1990 = 100)
In the past two decades, rural to satisfy the domestic labor shortage. Figure 4. Primary Producer Costs land values inflated significantly Increasing the labor supply should be an Index (2004 = 100) 200 across Texas. As expected, prices obvious solution to relieve price presSoftwood Lumber dropped during the downturn, but sure, but the data suggest a more compliCement and Concrete explosive growth returned with the cated phenomenon. 160 oil boom. Between 2012 and 2017, Texas residential construction employthe price per acre spiked 33 perment suffered disproportionately during cent. Rising rural prices spilled into the housing crisis, crashing 26 percent 120 urban areas through competition between first quarter 2008 and first between various residential and quarter 2010 (Figure 5). The industry had nonresidential land uses. a drudgingly slow recovery and failed 80 As the population expands, subto recoup peak levels until 2016. Since then, employment has expanded steadily, urban developments and peripheral surpassing 52,000 total jobs in third businesses desire an increasing 40 quarter 2017. amount of former farmland (or The record number of industry jobs land previously used rurally). The coincides with sluggish single-family conmassive gains in rural land prices, 0 struction activity. In 2017, the number of combined with a larger proportional 2004 2006 2008 2010 2012 2014 2016 single-family permits issued per residenland cost, reflect the transformed Source: Bureau of Labor Statistics tial construction worker (Figure 6) was 32 supply structure confronting Texas U.S. government’s imposihomebuilders. Figure 5. Texas Residential tion of a 20 percent average Regulations and red tape contributed Construction Labor Market import duty on Canadian to the land-cost burden, too. Stricter 250 softwood. Combined with building codes and zoning restrictions, 50 domestic housing shortages, while sometimes necessary, distort the this shock sent prices soarmarket and pressure prices upward. The 200 current regulatory environment is poised ing to historic highs, further 40 straining the homebuilding to expand. For example, local governindustry. ments along the Gulf Coast are consid150 ehind framing, founering updating flood plain and building 30 dation-related activirequirements after consecutive years of ties accounted for 11 destructive storms. 100 20 percent of building costs. Additionally, financial regulations Cement and concrete are the primary physical inputs 50 10 Employment (Left Axis) used for foundations. These Real Wages (Right Axis) commodities exhibited less volatility than lumber, hold0 0 ing firm during the GR and 1991 1995 1999 2003 2007 2011 2015 2017 Source: Bureau of Labor Statistics rising constantly afterward. Cement and concrete prices Figure 6. Texas Residential Construction jumped 56 percent from 2004 Productivity Ratio to 2017. Foundation cost also 0.35 includes excavation and backfill processes, requiring workers with 0.3 machine-operation skills and experience. Recent wage increases 0.25 further inflated construction costs, squeezing profit margins 0.2 and elevating home prices.
Wage and Productivity Slack The headline complaint from the homebuilding industry is the lack of skilled labor. Developers claim to constantly compete for specialized workers whose skilled crafts are disappearing in today’s technology-centered society. In response, homebuilders plead to expand guest-worker programs
0.15 0.1 0.05
Single-Family Permits Per Residential Construction Worker
0 1990 1994 1998 2002 2006 2010 2014 2017 Note: The trend-cycle component for single-family permits is divided by the number of residential construction workers. Source: Bureau of Labor Statistics TIERRA GRANDE
THE RISING COST OF BUILDING materials, including lumber, has contributed to skyrocketing newhome prices. Softwood lumber currently accounts for 15 percent of construction costs.
percent below its prerecession average. In other words, before the recession there were less than four residential construction jobs per single-family permit in Texas. Today’s industry requires six jobs per permit. These values may appear trivial, but when aggregated across the state they explain residential construction’s underlying productivity issues. Residential construction workers encompass both single- and multifamily industries, potentially distorting sectorspecific productivity variations. Detailed data at the national level, specifically for single-family general contractors, mirrored the stagnant productivity trend. While the entire economy has been concerned with boosting productivity, the construction industry has been notoriously unimaginative. The industry’s inefficiencies are illustrated not only by weak productivity growth but by lagging wages. eal residential construction wages have yet to recover from the housing crisis despite claims of labor constraints (Figure 5). These wages jumped 27 percent between third quarter 2011 and third quarter 2017, but this growth represents merely a recovery after an even larger collapse. Furthermore, residential construction wages have not kept pace with other goods-producing industries, such as mining and manufacturing, even after the energy downturn in late 2014. These trends suggest builders aren’t competing for labor as drastically as claimed, restraining wages below their previous peak. While homebuilders are certainly struggling to produce lower-priced
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housing, a skilled-labor shortage is far from the full story.
Supply-Side Struggles Challenge Economic Capacity Despite waning housing affordability, Texas conditions remain favorable compared with other states. Texas is consistently one of the largest recipients of domestic migrants (U.S. citizens moving from another state), who often originate from higher-cost states such as California and Florida. In 2017, domestic migration sunk to its lowest level since 2005, portending decreased relative advantages. Some of this change resulted from overall economic improvements in other states and the nation. Americans observed Texas’ resilience during and after the GR, while most states struggled with major economic losses. Those states have begun to catch up, thereby weakening Texas’ relative appeal. The Lone Star State continues to have steady job growth, benefitting from a variety of natural resource endowments, global trade access, and a pro-business tax environment. Texas boasts massive amounts of land, allowing practically unlimited population growth. Of course, population follows employment, which is increasingly found in urban areas. Although Texas is not geographically constrained like California, New York, and Florida, it is experiencing similar housing market trends, albeit to a lesser degree. Economic growth is strengthening
regional housing demand, particularly around major job centers. Homebuilders are struggling to keep pace, even compared with production levels reached last decade. The outlook is bleaker for homes priced under $300,000, where demand is strongest. ncreased regulations, building restrictions, and input prices have forced builders away from the bulk of housing demand. Lumber and labor, however, are not the primary cause of the market imbalance as prices are nearly identical to last decade. The decrease in labor productivity in residential construction is a primary concern. The data suggest it takes more workers to build a house today than it did in 2007. In addition, the shortage of skilled labor (for example, plumbers and electricians) is lengthening the time it takes to build a house, adding to the cost. Unless these issues are addressed, Texas’ housing affordability will decline further and hinder future economic growth and prosperity.
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Dr. Torres (ltorres@mays.tamu.edu) is a research economist and Miller (wamiller@tamu.edu) a research associate with the Real Estate Center at Texas A&M University.
THE TAKEAWAY New-home inventories in Texas have averaged 4.8 months since 2012, well below the six- to 6.5-month equilibrium level. Rising land prices and lagging labor productivity prevented a sufficient supply-side response following the Great Recession.
5
Economy
By Robert W. Gilmer
Hurricane Harvey made its initial landfall near Rockport, Texas, about 160 miles southwest of Houston. Houston received little damage from high wind or storm surge, but as the storm stalled in warm Gulf waters, it pumped historic levels of rain into a metro area of 6.8 million people. Rains averaged 40 inches over Harris County and reached 50 inches in some areas. The Space Science and Engineering Center at the University of Wisconsin-Madison declared Harvey a 1,000-year storm with no precedent in North American history. 6
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oody Analytics estimated total storm damage at $81.5 billion, with Houston making up a significant share. More than 120,000 high-water rescues played for days on national television, and many commentators predicted dire consequences for Houston’s economic future. AccuWeather, for example, predicted $190 billion in property losses and that the “floodwaters and lack of electricity and basic services will put Houston into third-world-like conditions for days or weeks to come.” Predictions of economic disaster were common, but they struck economists as simply wrong. The conventional wisdom, based on many studies, is that these storms have a small and short-lived impact on measures of local income, employment, and production.
Sorting Out a Storm’s Economic Impact The primary source of confusion about storms and the economy is property damage versus income and employment. Storm damages are a loss of wealth, a regrettable loss of capital stock that leaves people collectively poorer. These losses on the balance sheet reduce social welfare. However, an economy’s progress is measured by the income statement—the current flow of jobs, income, and production. As a storm like Harvey approaches, the population takes shelter and loses several days of work, then it emerges to an intense but shortlived boom in sectors like retail and construction. After several months, recovery activities offset losses from the shelter period. The effects of a business cycle must be distinguished from the effects of the storms, a problem for careless analysts. Eight Houston storms have caused billions of dollars in damages, and only two of these storms have not been mixed up in significant business cycle reversals. For example, Tropical Storm Allison landed in June 2001 with the Tech Bust, and HurriHouston’s Storms and Business Cycle Reversals cane Ike came in SeptemIke and Great Recession Allison and Tech Bust ber 2008 with the Great 1.5 1.0 3-Month Percent Change in Payrolls 3-Month Percent Change in Payrolls Recession (see figure). In 0.8 1.0 both cases, most of the Allison Ike 0.6 large, continuing job losses 0.5 were due to recession, not 0.4 storms. 0.0 0.2 Hurricanes have 0.0 –0.5 resulted in heavy out–0.2 migration and serious eco–1.0 nomic setbacks for New –0.4 Orleans and Puerto Rico. –1.5 –0.6 However, was this because –0.8 –2.0 of the storms or the lack 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 of infrastructure in the face Source: Institute for Regional Forecasting, The University of Houston C.T. Bauer College of Business of severe but predictable JULY 2018
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HURRICANE HARVEY’S FLOODWATERS ENGULF an intersection near Buffalo Bayou, an area that has flooded each of the past three years. Two weeks after Harvey, the Houston Chronicle reported that water had risen to almost 39 feet inside Buffalo Bayou Park.
storms? A city built below sea level with inadequate dikes will eventually suffer the consequences, as will an island that has allowed its electrical system to seriously deteriorate before the storm. The argument that the economy is resilient assumes that the affected region is taking care of business by providing adequate storm defenses. For Houston, the lasting effect of Harvey will be the realization that after decades of rapid economic development its reservoir operations and infrastructure may be inadequate. Harvey’s warning about flooding in river systems comes on the heels of Hurricane Ike, a storm that swept over Galveston Island in 2008, demonstrating that the region’s coastal areas are dangerously exposed to storm surge. Stormrelated infrastructure is about keeping the economy resilient.
Houston, Hurricanes, and Floods
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ccording to the National Oceanic and Atmospheric Administration’s National Weather Centers for Environmental Information, eight severe weather events have each caused a billion dollars or more in damages in Houston since 1983 (Table 1). Losses are in 2017 dollars and adjusted for changes in price levels. Houston events are a mix of floods, tropical storms, and hurricanes. They bring high winds and storm surge and cause flooding in streets and along regional waterways. During hurricanes like Alicia and Ike, a city follows the pattern of evacuation or shelter, loss of several days of work, and a brief boom in retail sales and construction. Hurricanes tend to leave a distinctive down-and-up pattern in the economic data on employment and income.
Table 1. Damage, Patterns of Houston’s Severe Weather Events Date month/year
Conditions
Pattern
Damage Billion $ 2017
Wind
Surge
Floods
Shelter
Recovery
x
x
x
x
x
Hurricane Alicia
August 1983
$12
SE Texas Floods
October 1994
$1.7
x x
Tropical Storm Allison
June 2001
$11.9
Hurricane Rita
September 2005
$23.9
Hurricane Ike
September 2008
$34.8
Memorial Day Floods
May 2015
$2.6
x
Tax Day Floods
April 2016
$2.8
x
August 2017
About $80
x
Hurricane Harvey
x x x
x
x
x
x
x x x
x
x
Note: Damage estimates are specific to the storm, not to the Houston metro area. Source: Institute for Regional Forecasting, The University of Houston C.T. Bauer College of Business
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Flood events, on the other hand, catch the city by surprise Certain economic sectors, such as spending and construcwith intense thunderstorms and heavy rain. Economic activtion activity, are stimulated in the wake of major storms. ity does not usually stop in the face of impending disaster, and Spending was measured by local sales and use tax collections. workday routines often can resume relatively quickly after Construction activity was measured by construction employthese flood events. Freshwater flooding follows more predictment. Both had significant and positive impacts as repairs able and localized channels than wind or storm surge, leaving follow storms. hanges in construction employment were smaller than most roadways, electrical lines, and infrastructure untouched expected, perhaps because this measure understates in a metro area as large as Houston. The 1994 floods and the storm-related cleanup activity. Many contractors Memorial Day and Tax Day floods all followed this pattern. specializing in flood cleanup came from outside the city and The surprise comes when floods reach beyond previously weren’t counted on local payrolls. Much of the cleanup activity established flood plains. (mucking buildings, pulling carpet, cutting wallboard) was the Three hybrid events are also listed in the table. Tropical work of day labor and not construction. It was also an opportuStorm Allison, for example, came ashore with high rates of rainfall but no shelter period and only moderate winds and surge. Table 2. Houston’s Billion-Dollar Storms The National Hurricane Center (Cumulative Percentage Impact Six Months After Storm) stopped issuing bulletins as Allison Date Employment BCI* Spending Construction traveled north as far as Lufkin, but Hurricane Alicia August 1983 — 1.50% — 27.4% a return visit to Houston brought major floods. Allison’s impact was SE Texas Floods October 1994 — — — — more like a flood event: no warnTropical Storm Allison June 2001 — — –1.20% 23.5% ing or shelter period, no surge, no Hurricane Rita September 2005 — — — 2.96% wind, and damage mostly from fresh Hurricane Ike September 2008 — — — 21.9% water. Memorial Day Floods May 2015 0.51 — — 2.74% By contrast, Rita was preceded Tax Day Floods April 2016 0.68 — — — by a significant amount of preparation and shelter-related activities Hurricane Harvey August 2017 13.2% 1.00% 1.57% 3.66% throughout the Houston area, but *FRB Dallas Business Cycle Index. Percent change is shown only if there is a 75 percent or higher probability that it is greater than zero; changes with 90 percent or higher probability are in bold. landfall came just east of Houston with little local damage and no real Source: Institute for Regional Forecasting, The University of Houston C.T. Bauer College of Business recovery period. Hurricane Harvey nity for local construction workers to work off the books and also required Houstonians to take shelter as it approached the make some tax-free income. coast, and, like Rita, it missed the region at landfall. However, Houston’s economy has proven remarkably resilient in the unlike Rita, Harvey landed to the west, bringing major rainface of eight major storms, including Harvey. In fact, Harvey fall to Houston. There were no local hurricane-force winds or was a small plus for the economy but with two key qualificastorm surge, and Harvey left its mark as regional flooding. tions. First, the measurement comes after the write-off of $80 Eight Storms and Houston’s Economy billion in property damage, and no one advocates a hurricane he Institute for Regional Forecasting summarized to improve social welfare. Second, adequate infrastructure for Houston’s economic reaction to these storms using data flood prevention must be in place. While Houston dodged ecoavailable six months after each event (Table 2). The per- nomic disaster with Ike and Harvey, better flood management centages show the net change in two economy-wide measures and infrastructure remain a challenge for the city. of Houston’s economic performance: local payroll employment Dr. Gilmer (rwgilmer@Central.UH.edu) is director with the University of and the Dallas Fed’s Business Cycle Index (BCI) for Houston. Houston Bauer Institute for Regional Forecasting. The BCI also includes payroll employment to describe economic events, along with real wages, real retail sales, and the unemTHE TAKEAWAY ployment rate. As expected, the economic changes were small. There was no storm-driven turning point in economic events. Since 1983, eight severe weather events have each For measures of the economy as a whole, Allison caused caused a billion dollars or more in damages in Houston. small negative changes to the local economy, while the effects While the city has proven economically resilient after of Alicia, the Memorial Day and Tax Day Floods, and Harvey each storm, better flood management and infrastructure were small but positive. Only Allison’s and Harvey’s economic remain a challenge. impacts reached 90 percent levels of statistical significance.
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By Joshua G. Roberson
Latest U.S. Census Bureau estimates show Dallas-Fort Worth with a net population growth of 973,431 since 2010, more than Houston, New York, Atlanta, and Phoenix. The Dallas-Plano-Irving metropolitan division, or Dallas, was behind almost 70 percent of that growth with 682,000 net new residents.
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General Economy
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ith such large population gains and an expanding economy, it’s no wonder that the Dallas housing market is booming. Home prices have heated up but, more importantly, supply has dwindled. How has the market responded, and can the region keep up with demand? 61
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submarkets having as little as one month of inventory. How80long the shift in listings and inventory will continue is yet to be seen. 72 At the county level, Collin County home sales for the year ending March 81 2018 rose more than 6 percent year over year to 17,176 while Dallas County rose 74 Median slightly over 1 percent to 25,607. price in Collin County was up almost 2 percent to $326,050 while months inventory rose slightly from 2.3 to 2.5 months. In Dallas County, median price rose 7.5 percent to $235,000, and75months inventory fell from 2.4 to 2.1 months.
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Dallas’ economy consistently continues to be among the strongest in the state. While total job creation slowed in 2017, the overall growth rate exceeded both state and national levels as of February 2018 with a 2.7 percent year-overyear increase. Unemployment was also
ahead of state and national levels at 3.7 76 77 percent. With Dallas’ unemployment rate at its lowest, labor 82 supply has been problematic in a number of employment sectors. Filling construction jobs remains difficult as strong housing demand grows. Despite almost 3 percent annual growth in 2017, job creation in this sector peaked mid-year and has been in a downward trend ever since. This trend could further push up construction and housing costs. ncome growth in general has also been slow despite strong economic gains. Median household income for the Dallas-Plano-Irving metropolitan division grew by 2.3 percent to $61,817, according to the U.S. Census Bureau’s income survey in 2016, the most recent survey. Per capita personal income, provided by the Bureau of Economic Analysis, registered a miniscule growth rate of less than 1 percent in 2016 to $53,082
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Overall Housing Market Dallas home sales (including new and existing single-family homes, condominiums, and townhomes) for first quarter 2018 totaled 13,560, up almost 2 percent from first quarter 2017. Over the same period, median prices also climbed without much sign of slowing. Median price and price per square foot (PSF) as of first quarter 2018 reached $290,000 and $132, about a 5 and 6 percent increase, respectively, year over year. Active listings finally made some gains in 2017 after several years of decline, resulting in slight increases in months inventory toward the end of the year. However, overall housing inventory levels were still among the lowest in the state. Homes in the lowest price tiers were especially scarce, with some
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1.6
Median Household Income Median Home Price
1.4 1.2 1.0 2009
2011
2013
2015
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
after posting an almost 4 percent growth rate the year before. Income data typically lag by at least a year, but even if income grew in 2017, homebuying power is still expected to diminish as housing prices continue to rise at sustained levels and mortgage rates begin climbing (Figure 1).
Home Affordability
H
2017
Figure 2. Housing Affordability Index, Major Texas Metros Austin Dallas-Plano-Irving Fort Worth-Arlington Houston San Antonio
2.6 2.4 2.2 2.0 1.8 1.6 1.4 2011
2012
2013
2014
2015
2016
2017
Source: Real Estate Center at Texas A&M University
just over a month. These figures are well below the Dallas level where median price is $280,000, supply is at 2.3 months, and the average marketing period is over a month and a half.
right at a month while the rest of the new-construction market was at almost three months. Additionally, median price discounts for homes in the lowest price tier were almost nonexistent at half a percent of original list price. Median price discounts for the rest of the market were approximately 5.5 percent. Rising construction costs play a big role in rising newhome prices. Builders focus on higher-priced markets to make their necessary profit margins. This trend is not unique to Dallas. Throw in rising mortgage rates and land costs and many potential Dallas homebuyers may simply be out of luck.
Various market forces have played a hand in the affordability equation. Among the leading factors is dwindling housing supply, especially within key, traditionally middleincome neighborhoods.
ousing affordability remains a growing issue in Dallas as home prices continue rising. According to the Real Estate Center’s Texas Housing Affordability Index (THAI), Dallas was among the least affordable metros in the state for overall and new homebuyers. The overall Dallas THAI has fallen from 1.58 to 1.42 since 2016 (Figure 2), a 10 percent drop, while the THAI for firsttime homebuyers also fell 10 percent from 1.38 to 1.24. Over the same period, Texas affordability fell over 6 percent for both overall and first-time buyers. Various market forces have played a hand in the affordability equation. Among the leading factors is dwindling housing supply, especially within key, traditionally middle-income neighborhoods. For example, in Garland, where the median price is $197,000, months inventory has dropped to 1.2 months with an average marketing period of
12
2.8 Less Affordable - More Affordable
1.8
Figure 1. Median Income, Home Price Index, Dallas-Plano-Irving
New construction pipeline data suggest the affordability problem is not likely to be solved by new housing stock. Building permits for single-family homes increased 2.3 percent year over year to 56,239 in 2017, but the median newhome price increased by 4 percent to $288,850. he median price for new homes sold through the Multiple Listing Service fell 5.2 percent while median price PSF rose 1.82 percent year over year. The median price of new single-family homes sold was $368,000 for the year ending in March 2018. Days on market for the lowest-priced tier of new homes (those below $300,000) was
T
Roberson (jroberson@mays.tamu.edu) is a senior data analyst with the Real Estate Center at Texas A&M University.
THE TAKEAWAY Dallas-Plano-Irving’s continued population growth is good for the local economy, but it presents challenges for the local housing market. Low inventory, expensive land, rising mortgage rates, and a trend toward higher-priced new homes mean fewer options for many potential homebuyers.
TIERRA GRANDE
no-Irving Metropolitan Divisi a l P s a l on Dal Home Sales for Year Ending Q1 2018 Frisco
Plano
3,394 sold
1.1%
3,542 sold
–4.3%
390,000
0%
337,250
2.2%
3.1 months
1.2%
2 months
13.8%
DENTON
McKinney 3,829 sold
18.4%
312,500
2.5%
2.3 months
4.6%
COLLIN
HUNT
ROCKWALL
Irving 1,747 sold
–10.2%
294,498
22.3%
1.9 months
–4.8%
KAUFMAN DALLAS
Dallas 12,350 sold
–5%
296,500
4%
2.7 months
1.4%
ELLIS Garland 2,548 sold
6.7%
197,000
12.6%
1.2 months
0.8%
Closed Listings / Closed Listings YOY Median Close Price / Median Close Price YOY
Source: Real Estate Center at Texas A&M University
Months Inventory / Months Inventory YOY Blue dots represent single-family homes sold.
JULY 2018
13
Land Markets
14
TIERRA GRANDE
Texas’ size and vast landscapes make insightful discussions on statewide market trends difficult. Unlike, say, Iowa, where rural land is relatively contiguous in terms of geography and production types, Texas’ rural land is dedicated to many different production types and influenced by numerous nonagricultural factors.
JULY 2018
15
ecause of this, the Real Estate Center conducts its rural land research at a regional level. Studies done at the regional level avoid “washing out” important details and trends that can occur when aggregating at the state level. The regional studies also capture factors tied not only to agricultural production and rural land management but also off-land trends specific to those areas. In 2002, the Real Estate Center attempted to capture the unique characteristics of Texas land markets by delineating rural land market regions. Countywide assessment of land types and production as well as input from regional land experts determined the seven regions used today. Seventeen years later, the Center can assess the success of the original delineation.
Creating Texas’ Land Regions Dividing an area into distinct regions proves difficult because one could reasonably argue for making regions bigger or smaller. For instance, areas on a region’s periphery tend to look similar to the surrounding regions, so why not make that region larger? On the other hand, the differences within a region promote the argument of splitting regions even further. Several measures can be used to determine the success of the regions’ delineations. First, are the regions different enough to justify the boundaries created? A pairwise test performed on the relationships between each of Texas’ seven regions addressed the question of uniqueness. The tests assessed the ability of one region’s price history to explain or predict changes in another region’s prices. Results indicate limited predictive power from one region to another for all possible regional relationships. Most results indicated each region largely explained itself, and including price information from other regions did not improve the predictive nature of the model. These results show historical data from other regions is not statistically
16
TIERRA GRANDE
relevant and, therefore, the markets are statistically different from each other. Next, do the regions make sense intuitively to regional land market experts? Most importantly, regional delineation must make intuitive sense to market participants. Several information sources were considered in determining the regions. The Center used historical land market data, including rural land uses and production, and consulted land market experts to create a holistic view of the markets that researchers, due to limited resources, would not fully obtain by using only one source or the other. Finally, do the regions provide enough data individually to make statements about the regional markets? The database used to make generalizations about regional land trends consists of land sales taking place within each region at a particular point in time. As the number of transactions in the database increases, so does the strength of the generalizations made. Having more transactions also reduces the chance of an obscure transaction skewing a region’s general trends. The Center’s database has an average of over 2,000 market transactions per region per year (see figure, pg. 19). Some regions average more than 3,000. Only in Region 2 (Far West Texas) do market transactions average fewer than 100 per year. While Region 2’s average is far fewer than other regions, the number of acres per transaction is considerably higher. Given the nature of Region 2 land, the number of transactions is typical for that market.
Variances in Production and Land Use Texas land market regions, while similar in many regards, vary in production and land use. Production diversity is a product of the varied geography and soil types across the state. Pasture remains the predominant land-use type. Other uses range from timber to cropland. The regions capture these inherent differences to create coherent submarkets. JULY 2018
R
egion 1 (Panhandle and South Plains) is responsible for 48 percent of Texas’ cropland production, the highest concentration in the state. The region also accounts for 66 percent of Texas’ irrigated cropland. While upland cotton and winter wheat are the predominant crops, the region accounts for about two-thirds of the total acreage in Texas dedicated to corn production. By contrast, Region 2 (Far West Texas) holds about 3 percent of the state’s cropland production. Unlike many other regions, its geography is not suitable for most types of crops, but the region does account for about 20 percent of Texas orchards. Native pasture dominates the rural landscape at 96 percent of rural land use.
17
Regions 3, 6, and 7 (West Texas, South Texas, and Austin-Waco-Hill Country, respectively) contain about 80 percent of the state’s wildlife management land with Region 3 accounting for about 21 percent. Region 3 is largely native pasture with about 17 percent dedicated to cropland production, predominantly winter wheat and upland cotton. Because about 95 percent of the cropland is dryland production, these less water-intensive crops dominate Region 3. Region 6, with about 29 percent of the state’s wildlife management acreage, differentiates itself from Regions 3 and 7 by having more acreage dedicated to orchards and sorghum production. It contains about a third of the state’s orchards and grows 42 percent of the state’s sorghum. San Antonio is in the region. lose to 90 percent of Region 7’s land is used either as pasture or for wildlife management. The region has about a third of the state’s wildlife management land and about a quarter of the state’s orchard acreage, but 80 percent of the land is pasture, 69 percent of which is native pasture. Austin and the region’s scenic landscapes make the region popular for recreational land uses. Timber is grown mainly in Regions 4 and 5 (Northeast Texas and Gulf CoastBrazos Bottom, respectively), with Region 4 accounting for roughly 83 percent of the state’s timber production. Region 5, meanwhile, is 71 percent pasture and is responsible for 100 percent of the state’s rice production, 66 percent of peanut production, and 63 percent of oat production. Both regions have major metropolitan areas (Dallas in Region 4 and Houston in Region 5), which tend to affect local rural land markets.
C
Capturing Texas Land Regions’ Inherent Qualities When regions are established successfully, transaction characteristics such as price per acre and average acreage sold tend to be consistent.
18
TIERRA GRANDE
While these characteristics don’t align completely, patterns should arise indicating unique markets exist. or example, as noted, native pasture dominates both Regions 2 and 7, but the transaction characteristics in each region differ substantially. Because of its location and lower land productivity, Region 2 (Far West Texas) generally yields smaller prices per acre and larger tracts per purchase. Land sales for Region 7 (Austin-WacoHill Country), however, tend to have smaller acreage sales with larger per-acre prices because the area is optimal for recreational use because of its proximity to metropolitan areas. Last year, the number of acres per sale averaged 6,923 in Region 2 and 218 in Region 7. Similarly, Region 2 land on average sells at a lower price than Region 7 land. Last year, Region 2 land averaged $791 per acre while Region 7 averaged $3,466. The differences in land use and proximity to potential buyers shape the land’s dollar and acre profiles. Another way to gauge the consistency of a region’s sales transactions is by looking at the coefficient of variation (CV), which is the standard deviation of the data divided by the mean. The coefficient of variation measures the average variability of a data series relative to its mean. The table shows each region’s CV for both prices paid and number of acres sold in a transaction. Region 2 has the largest CV with 33 percent variation around the mean for price per acre and 26 percent variability in the acres sold per transaction. In other regions, such as Region 4, there is as little as 12 percent variability around the priceper-acre mean and 5 percent variability around the mean acreage sold. Texas’ rural land submarkets are a result of the state’s size and geographical diversity. According to several measures, the seven land market regions defined by the Center have successfully captured the inherent qualities of each submarket, ensuring greater accuracy in reporting of Texas land market trends.
1
F
3
In 2002, the Real Estate Center delineated Texas into seven distinct rural land regions using countywide historical land market data and input from land experts. Focusing on data at the regional rather than statewide level has enabled the Center to more precisely monitor land market trends. JULY 2018
4
2
7 5
1 Panhandle and South Plains 2 Far West Texas
6
3 West Texas 4 Northeast Texas 5 Gulf Coast-Brazos Bottom 6 South Texas 7 Austin-Waco-Hill Country
Source: Real Estate Center at Texas A&M University
Number of Transactions by Texas Land Region 9,000 Region 1 Region 2 Region 3 Region 4 Region 5 Region 6 Region 7
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
1972
1977
1982
1987
1992
1997
2002
2007
2012
2017
Source: Real Estate Center at Texas A&M University
Dr. Kiella (ekiella@mays.tamu.edu) is an assistant research scientist with the Real Estate Center at Texas A&M University.
THE TAKEAWAY
Land Market Regions
Coefficient of Variation (CV) Values for Texas Land Regions CV Price/Acre (Percent)
CV Acres/Transaction (Percent)
Region 1
22
4
Region 2 Region 3 Region 4 Region 5 Region 6 Region 7
33 13 12 17 16 13
26 8 5 8 11 4
Source: Real Estate Center at Texas A&M University
19
Residential
Out of Reach? Texas Affordable Housing By Luis B. Torres and Wayne Day
Home price growth has outpaced disposable income growth since the end of the housing market collapse, causing housing affordability to decline nationally, including in Texas. What does housing affordability look like across the entire income distribution spectrum? How has it varied in recent years? How does it vary among the major metros? 20
TIERRA GRANDE
G
enerally speaking, housing affordability refers to the proportion of housing that is affordable at various income levels or to the proportion of households that can afford housing at various price points. More often, affordability indexes depict whether the median income is enough for a household or family to qualify for a mortgage on the medianpriced home. The Real Estate Center follows this measurement and produces a quarterly median-based affordability index for the state, all metro areas, and select counties. While the index serves as a useful measure, it does not paint the entire affordability picture because incomes and home prices extend above and below the median to varying degrees over time and across MSAs.
the median square footage of new single-family homes in the United States was 2,467 compared with 1,525 in 1973. Similarly, new homes in the southern U.S.—which includes Texas—jumped from a median size of 1,555 square feet in 1973 to 2,517 in 2015. Meanwhile, the average number of persons per household declined from approximately 3.1 in 1970 to 2.65 in 2016 nationally, and from 3.2 to 2.86 in Texas. The inventory of owner-occupied, entry-level homes decreased as a proportion of total housing stock as well as inventory available for sale. From 2005 to 2013, the national stock of owner-occupied starter homes (less than 2,000 square feet) decreased by more than one million while the stock of renter-occupied starter homes increased by almost two million. This was largely because investors took advantage of forecloHome Price Trends sure and short-sales during the financial crisis and converted Housing has been impacted by changes in income distribution homes to rentals. Beyond starter homes, housing shifted from resulting from technology changes and offshoring of jobs. Just owner-occupied to renter-occupied status (see table). as income distributions have varied over the Because of economic factors such as high years (see sidebar), so have housing values land values, high construction costs, and Percent of Renterand price distributions. Research shows more stringent financing, developers prefer Occupied Homes there are proportionally more higher-priced building larger, expensive homes rather than than lower-priced homes. The variance in United States Texas lower-priced, entry-level homes. As a result, home values decreased from 1930 to 1970 there are fewer lower-priced new homes on 2016 36.9 38.9 but increased after 1970 as income distrithe market, making older, smaller, existing 2013 36.5 38.2 bution gaps widened. This wider range of homes the only low-priced housing option. 2005 33.1 35.3 home values is mainly because of varying Source: U.S. Census Bureau American Housing Affordability in Texas land-use restrictions within cities, which Housing Survey Housing affordability is not consistent for increase land values. Construction costs all households. It can vary according to remain fairly constant within cities. household composition, financial situation, ability to obtain Despite average household sizes shrinking, new homes financing, housing prices, interest rates, and other determinants. have gotten larger and, as a result, more expensive. In 2015,
Income Distribution Trends
A
wareness of growing income distribution gaps has increased throughout the world, including in the U.S. Changes in income distribution are evident at the extreme ends of the distribution but more so in the middle. Demand for low-skill, low-pay and high-skill, high-pay workers has increased while demand for middlewage, middle-skill white-collar and blue-collar jobs has contracted, generating U.S. job polarization. The loss in middle-skill jobs has forced workers without a college education into lowskill, low-paying jobs. Job losses in the manufacturing sector have impacted middle-skill workers, most of whom are middle-aged and not college-educated. They are
JULY 2018
relegated to low-skill, low-paying jobs. Additionally, real wages have risen for highly educated workers while remaining stagnant or declining for less-educated workers. Automation and off-shoring has replaced many “routine” tasks previously performed by middle-skill workers. Increased trade has also resulted in middle-skill job losses but to a lesser extent. Goods once produced domestically are now being imported. Previous research compared household incomes from 1976 to 2015 as these structural shifts in the job market occurred. Research found incomes shifted more toward upper-income levels (over $100,000) and shrunk proportionally in the middle ($35,000 to
$100,000) and lower (less than $35,000) income-level cohorts. This shift favors homeownership. Those earning over $100,000 have higher homeownership rates than those at lower-income levels. Other research shows that income growth in the lower cohorts has not kept up with growth in the upper cohorts. From 1976 to 2015, growth for the bottom quintile was about 25 percent versus 83 percent at the highest quintile. While more households earned over $100,000 in 2015 than in 1967 (in 2015 dollars), households earning under $25,000 make up the fastest-growing income cohort from 2005 to 2015, according to the Joint Center for Housing Studies.
21
Figure 1. Texas Price-to-Income Ratio at Percentile (by Year)
Home price can be viewed as a multiple of household income at a given percentile (Figure 1). The vertical axis represents the ratio of house price to household income for the same percentile shown on the horizontal axis. For example, in 2016, the 40th percentile house price was $182,500, and the 40th percentile household income was approximately $44,350, yielding a price-to-income ratio of 4.1. This means that the 40th percentile house price is 4.1 times the 40th percentile household income. Generally, this ratio is smaller at higher income percentiles than at lower ones. Price changes in Texas were muted following the financial crisis until the end of 2011, while the nation experienced declines. Texas prices gained momentum starting in early 2012 and increased at a faster rate than income growth. The ratio between prices and income increases each year. The ratio is higher at lower income percentiles (Figure 1).
Ratio of Home Price to Income at Percentile
Interest Rates a Factor
Percent of Affordable Homes
7
T
22
6 5 4 3 2 10
20
30 40 50 60 70 Household Income Percentile
80
90
Source: Calculations by author
Figure 2. Texas Housing Affordability by Household Income (by Year)
100 80
2010 2011 2012 2013 2014 2015 2016
60 40 20
0 10 40 70 100 130 160 190 200 Household Income (in thousands of 2016 dollars) Source: Calculations by author
Figure 3. Texas Housing Affordability Curve (by Year)
100 House Price Percentile
A
ffordability is not just the relationship between housing prices and incomes. Interest rates are also a factor. They declined from 2011 to 2012, increased in 2013 and 2014, then decreased again in 2015 and 2016. While the first figure simply presented a ratio of housing price to income, the next two incorporate prevailing interest rates and estimate the proportion of housing sold that was affordable at any given income level. Estimates show how much of the for-sale housing inventory is affordable for each level of income (Figure 2). Household income is presented in increments of $10,000 and inflationadjusted to 2016 dollars for annual comparison. From 2011 to 2012, the proportion of affordable houses increased, greatly influenced by effective interest rates dropping nearly 90 basis points. In subsequent years, however, home prices soared and affordability decreased despite declining interest rates. With builders focusing more on high-end housing, the proportion of housing not affordable to lower-income households has increased. While the proportion of affordable housing increases with income, the marginal proportion of housing that becomes affordable decreases as income increases. For example, in 2016, as income increased from $40,000 to $50,000, almost 15 percent more homes became affordable. A shift from $90,000 to $100,000 opened up only an additional 2 percent. he Housing Affordability Curve (Figure 3) also shows the proportion of housing inventory affordable to a particular income level, but it uses percentiles rather than dollars. Some housing affordability proponents argue that, in an ideal world, each income percentile would have a proportionate amount of affordable housing stock (demonstrated by the line “Income=Housing”). For example, the 20th percentile could afford 20 percent of the housing inventory, the 60th percentile could afford 60 percent, etc. However, this is not the case in the real world. For all years, the amount of affordable housing available to those earning above the 20th percentile income level exceeded the ideal. In 2011 and 2012, this was also true for households below the 20th percentile income level. After 2013, affordability began to erode for lower-income earners as the housing price distribution shifted to more
2010 2011 2012 2013 2014 2015 2016
80 60 2010 2011 2012 2013 2014 2015 2016 Income = Housing
40 20 0 0
10
20 30 40 50 60 70 80 Household Income Percentile
90
100
Source: Calculations by author
expensive housing; a decrease in lower-priced, entry-level new construction; and higher prices overall.
At the Metropolitan Level Applying this analysis to the major Texas metros and oil metros (Midland and Odessa) for 2016 (Figures 4 to 6), Fort Worth-Arlington’s and San Antonio-New Braunfels’ affordability measures outperformed the state. Affordability for DallasTIERRA GRANDE
Figure 4. 2016 Home Price-to-Income Ratio (by Metro)
10
Texas Austin-Round Rock Dallas-Plano-Irving Fort Worth-Arlington Houston-The Woodlands-Sugar Land Midland Odessa San Antonio-New Braunfels
Ratio of Home Price to Income at Percentile
9 8 7 6 5 4 3 2 1 10
20
30 40 50 60 70 Household Income Percentile
80
90
Source: Calculations by author
Figure 5. 2016 Housing Affordability by Household Income (by Metro)
Percent of Affordable Houses
100
Keeping Texas Affordable
80 60
Texas Austin-Round Rock Dallas-Plano-Irving Fort Worth-Arlington Houston-The Woodlands-Sugar Land Midland Odessa San Antonio-New Braunfels
40 20
0 10 40 70 100 130 160 190 200 Household Income (in thousands of 2016 dollars) Source: Calculations by author
Figure 6. Housing Affordability Curve (by Metro)
House Price Percentile
100
W
hile Texas as a whole remains relatively affordable, certain markets have felt affordability pressure from home prices outpacing incomes and from the expectation of rising interest rates. Long-term changes in income and home price distributions have resulted in different affordability landscapes for various markets. Fewer affordable homes were available for households at the lower end of the income distribution than at the upper end. These trends suggest continual erosion of affordability from the bottom of the income distribution up. To alleviate affordability pressure for potential lower-income homebuyers, incomes need to catch up with home prices and/or more entrylevel housing needs to be built or return to the for-sale market from the rental market. Otherwise, Texas residents may be relegated to rental opportunities over home purchases. Dr. Torres (ltorres@mays.tamu.edu) is a research economist with the Real Estate Center at Texas A&M University and Wayne Day is a Ph.D. Urban and Regional Science student at Texas A&M University.
80 60
Income = Housing Texas Austin-Round Rock Dallas-Plano-Irving Fort Worth-Arlington Houston-The Woodlands-Sugar Land Midland Odessa San Antonio-New Braunfels
40 20 0
Plano-Irving and Houston-The Woodlands-Sugar Land was near or slightly below that of Texas. Austin-Round Rock was the least affordable among the “Texas Triangle” metros. While Austin-Round Rock had some of the highest income levels in the state, it also had the greatest affordability pressure due to higher housing costs. Of the two oil metros, Odessa had the greatest affordability due to lower house prices and relatively high incomes from oil field activity. Midland affordability benefited mainly from having the highest income levels in the state; its housing prices were on par with the other major metros. Charts for these metros are available in the online version of this article. They include annual series similar to those presented here for Texas.
0
10
20 30 40 50 60 70 80 Household Income Percentile
Source: Calculations by author
F
or this article, affordability was measured using methodology from Gan and Hill (2009), which characterizes affordability across the entire income and housing price distribution. Household income came from the U.S. Census Bureau’s American Community Survey (ACS) program. ACS data are not provided JULY 2018
90
100
THE TAKEAWAY Although Texas’ housing market as a whole remains relatively affordable, a recent shift from lower-priced, entrylevel new homes to more expensive homes has reduced affordability for lower-income earners in some markets. To alleviate this pressure, incomes need to catch up with home prices, and more entry-level housing needs to either be built or return to the for-sale market from the rental market.
About the Calculations in ten percentile intervals; thus, the intervals were estimated through linear interpolation. If needed, income data were inflation-adjusted using the personal consumer expenditure index from the Bureau of Economic Analysis. Real estate sales price data were obtained from the Center. Mortgage terms assumed 20 percent
down payments, monthly payments, and 30-year amortization. Effective annual interest rates were from the Federal Housing Finance Agency. The state, Austin, Midland, and Odessa used the state rate. Dallas and Fort Worth used the Dallas-Fort Worth rate. Houston and San Antonio each used its own.
23
Residential
Dirt Isn’t Cheap . . . Land’s Impact on Home
24
TIERRA GRANDE
Anymore Prices By Ali Anari and James P. Gaines
R
Rising land prices in Texas have played a role in the state’s overall rise in housing prices, but to what extent? Real Estate Center research finds that market forces on both the demand and supply sides of the state’s housing markets have contributed to the state’s rising home prices since the Great Recession (GR). On the demand side are higher growth rates for the state’s economy. On the supply side are land prices, which are increasing and making up a growing percentage of a home’s overall price. Land accounted for 20.4 percent of the cost of a single-family Texas home in 2016, less than the nation’s 33.5 percent and less than the corresponding shares in the largest states by population. At the metro level, Dallas had the largest share of land as a percentage of home cost (29.4 percent), followed by Houston (25.1 percent), Fort Worth (22.4 percent), and San Antonio (15.2 percent). Data were not available for Austin.
Comparing State, National Prices At least as far back as 2005, Texas residents have been enjoying more affordable homes than U.S. residents as a whole as well as those in states with the largest populations (Figures 1 and 2). Median prices of Texas homes trended upward from $106,000 in 2005 to $161,500 in 2016. That’s lower than the corresponding nationwide median prices of $167,500 to $205,000, but the price gap has narrowed since 2011 (Figure 1). The narrowing gap between Texas and U.S. median home prices has been mainly due to Texas’ higher price growth rates since
Thousands of Dollars
250
Figure 1. Median Home Price, Texas and U.S.
200 150 Texas U.S.
100
50 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: American FactFinder and Real Estate Center at Texas A&M University
Thousands of Dollars
600 500
Figure 2. Median Home Price, Texas, California, Florida, and New York Texas
California
Florida
New York
400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: American FactFinder and Real Estate Center at Texas A&M University
JULY 2018
25
SINCE THE GREAT RECESSION, land cost as a percentage of home price has trended upward in Texas, accounting for about a fifth of the total cost of a home in first quarter 2016. That’s still less than the shares for the U.S. and the largest states by population.
T
26
12
Figure 3. Annual Median Home Price Growth Rates, Texas and U.S.
Percent
8 4 0 Texas U.S.
–4 –8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: American FactFinder and Real Estate Center at Texas A&M University
Figure 4. Home Price Indexes Annual Growth Rates (FHFA), Texas and U.S.
15 10
Percent
2007 (Figure 3). Home price indexes published by the Federal Housing Finance Agency (FHFA) and Lincoln Institute of Land Policy also show that Texas home price growth rates have been higher than the nationwide averages since the GR (Figures 4 and 5). Texas’ median home prices as percentages of national median prices trended upward from 61.6 percent in 2005 to 78.8 percent in 2016 (Figure 6). The state’s median price was 33.8 percent of California’s, 53.4 percent of New York’s, and 81.7 percent of Florida’s prices in 2016 (Figure 6). exas’ more affordable home prices have played a key role in the state’s economic growth, attracting more people from other states and resulting in more demand for goods and services, higher economic growth rates, and more jobs attracting more people. Since 2005, Texas has outpaced the U.S. in employment growth and gross domestic product output in real terms in all years (except recently because of lower oil prices and Hurricane Harvey) (Figures 7 and 8). However, that same economic growth is largely responsible for the state’s home price growth rate outpacing the nation’s. Texas’ home prices have been comparatively low mainly because of its abundant supply of low-cost land and efficient land-acquisition process (regulations affecting costs of land acquisition and preparation such as costs of title to a property, zoning requirements, covenants and deed restrictions, easements and right-of-way restrictions, costs of surveying and boundary markers and so forth). Historically, land cost as a percentage of home price for an average-size, single-family home in Texas has been lower than
5 0 Texas U.S.
–5 –10
2002
2004
2006
2008
2010
2012
2014
2016
2017
Sources: Federal Housing Finance Agency and Real Estate Center at Texas A&M University
TIERRA GRANDE
12
Figure 5. Home Price Indexes Annual Growth Rates (Lincoln Institute), Texas and U.S.
Percent
8 4 0
–4 Texas U.S.
–8 –12
2002
2004
2006
2008
2010
2012
2014
2016
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
Percent of Home Prices
100
Figure 6. Texas Home Prices as Percentages of U.S., California, Florida, and New York Home Prices
80 60 40 20 U.S. California Florida New York 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: American FactFinder and Real Estate Center at Texas A&M University
W
Figure 7. Annual Nonfarm Employment Growth Rates, Texas and U.S.
4
50
2
40
0
30
Texas U.S.
–4
10 0
2002
2004
2006
2008
2010
2012
2014
2016
2017
8
100
6
80
4
2003
2005
2007
2009
2011
2013
2015
Figure 10. Land Prices as Percentage of Home Prices, Texas, California, Florida, and New York Texas
California
Florida
New York
2009
2011
60
Percent
Percent
Figure 8. Annual Growth Rates of Gross Domestic Product in Real Time, Texas and U.S.
2001
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
Sources: Texas Workforce Commission and Real Estate Center at Texas A&M University
2
40
0 Texas U.S.
–2 –4
Texas U.S.
20
–2
–6
Figure 9. Land Prices as Percentage of Home Prices, Texas and U.S.
Percent
Percent
national averages and much lower than California, New York, and Florida (Figures 9 and 10). Land costs accounted for 14.1 percent of Texas home prices in second quarter 2000 compared with 34.4 percent for the U.S. Those percentages trended downward in the GR, falling to a trough of 5 percent for Texas and 24.8 percent for the U.S. in third quarter 2011. They trended upward in the aftermath of the recovery, reaching 20.4 percent (Texas) and 33.5 percent (U.S.) in first quarter 2016. Texas’ upward trend since 2011 has been similar to California’s but less steep than Florida’s. New York had a mild downward trend. Despite growing shares of land costs, Texas had the lowest land share cost in first quarter 2016 compared with California (61.1 percent), Florida (31.4 percent), and New York (31.2 percent). hen land price growth outpaces home price growth, land cost accounts for a larger portion of overall home cost. To investigate growth rates of land prices in relation to home prices, the Center computed the ratios of land price indexes to house price indexes for Texas, U.S., California, Florida, and New York (the indexes being equal to one in second quarter 2000). The ratios for both the U.S. and Texas trended downward in the GR, falling to 0.27 for Texas in fourth quarter 2011 and to 0.77 for the U.S. in second quarter 2011 (Figure 11). Since 2012, they have trended upward, reaching 1.14 and 1.04 for Texas and the U.S., respectively. Texas had a steeper upward trend than the nation, surpassing the U.S. in 2015. Texas’ upward trend paralleled
2002
2004
2006
2008
Source: U.S. Bureau of Economic Analysis
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2010
2012
2014
20 2016
0
2001
2003
2005
2007
2013
2015
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
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Figure 11. Ratios of Land Price Index to Home Price Index, Texas and U.S.
1.6
50
Texas U.S.
0.8 0.4
2001
Fort Worth San Antonio
30 20
2003
2005
2007
2009
2011
2013
0
2015
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
Texas
California
Ratio
Florida New York
0.8
2001
2003
2005
2007
2009
2011
2013
2015
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
1.6
Figure 14. Ratios of Land Price to Home Price Indexes, Houston, Dallas, Fort Worth, and San Antonio Houston
1.2
Dallas
Fort Worth San Antonio
Ratio
Figure 12. Ratios of Land Price to Home Price Indexes, Texas, California, Florida, and New York
1.2
0.8
0.4
0.4
0.0
0.0 2001
2003
2005
2007
2009
2011
2013
2015
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
Florida’s trend (Figure 12). California’s trend was less steep than Texas’ trend, while New York experienced a mild downward trend.
Comparing Texas Metros Historically, Dallas’ land shares of home prices have been the highest among the state’s largest metros (Figure 13). Fort Worth’s land shares were larger than Houston’s shares before
About the Data The Center’s study used the Lincoln Institute of Land Policy’s information on prices of owner-occupied residential units, and values and price indexes for land, structures, and housing units in the U.S. and each of the 50 states. The Institute’s method for computing the costs of the land component of home prices is to deduct costs of home construction from home prices. The datasets used in this study run from second quarter 2000 to first quarter 2016.
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Dallas
10
0.0
1.6
Houston
40
Ratio
Ratio
1.2
Figure 13. Land Prices as Percentage of Home Prices, Houston, Dallas, Fort Worth, and San Antonio
2001
2003
2005
2007
2009
2011
2013
2015
Sources: Lincoln Institute of Land Policy and Real Estate Center at Texas A&M University
the GR, but Houston’s shares have exceeded Fort Worth’s shares since the recovery. San Antonio’s land shares of home prices have historically been the lowest of the four metros. Land shares of home prices for the four metros trended down before and during the GR but have trended up since the end of 2011. Houston’s land-share trend has been steepest, increasing from 7.1 percent in fourth quarter 2011 to 25.1 percent in first quarter 2016, followed by Fort Worth (5 to 22.4 percent), Dallas (14 to 29.4 percent), and San Antonio (5 to 15.2 percent). The ratios of land price index to home price index for these metros trended down before and during the GR but have trended up since 2012 (Figure 14). Houston had the steepest rise (0.31 in fourth quarter 2011 to 1.18 in first quarter 2016) followed by Fort Worth (0.13 to 0.60), Dallas (0.36 to 0.79), and San Antonio (from 0.15 to 0.49). Dr. Anari (m-anari@tamu.edu) is a research economist and Dr. Gaines (jpgaines@tamu.edu) the chief economist with the Real Estate Center at Texas A&M University.
THE TAKEAWAY Rising land costs contribute to rising home prices. As land costs increase, they account for a larger portion of a home’s overall price. In 2016, land accounted for an average of 20.4 percent of the cost of a home in Texas. That’s less than the average for the nation and mostpopulated states. TIERRA GRANDE
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