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OCTOBER 2019 â„¢

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


COLLEGE STATION, TEXAS 77843-2115

In This Issue Manufactured Housing Land Market Update Northeast Texas Croplands Liability Waivers Texarkana Housing Job Automation Texas Housing Trends Business Entity Brokers

NON-PROFIT ORG. U.S. POSTAGE PAID HOUSTON, TEXAS PERMIT No. 4126


OCTOBER 2019 â„¢

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


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Then have our quarterly research magazine mailed to your home instead of work. It’s easy: Go to the Texas Real Estate Commission’s website (www.trec.texas.gov). Log in to online services in the upper right corner of the homepage. Click on the dropdown box and select “change/verify” contact information. Add your home address as your mailing address.

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OCTOBER 2019

VOLUME 26, NUMBER 4 ™

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

Director, GARY W. MALER Chief Economist, JAMES P. GAINES Senior Editor, DAVID S. JONES Managing Editor, BRYAN POPE Associate Editor, KAMMY BAUMANN Creative Manager, ROBERT P. BEALS II

14 Tanks & Timber

Texarkana’s Economy and Housing Market Eddy Arnold sang about it. So did R.E.M. But there’s more to Texarkana than its musical heritage. Find out what’s driving the economy and home sales in the city Ross Perot once called “the center of the universe.” BY JOSHUA ROBERSON

Graphic Specialist/Photographer, JP BEATO III Graphic Designer, ALDEN DeMOSS Communications Specialist, HAYLEY RIEDER Circulation Manager, MARK BAUMANN Lithography, RR DONNELLEY, HOUSTON

ADVISORY COMMITTEE: Alvin Collins, Andrews, chairman; JJ Clemence, Sugar Land, vice chairman; Troy C. Alley, Jr., DeSoto; Russell Cain, Port Lavaca; Doug Jennings, Fort Worth; Besa Martin, Boerne; Walter F. “Ted” Nelson, Houston; Doug Roberts, Austin; C. Clark Welder, Fredericksburg; and Jan Fite-Miller, Dallas, ex-officio repre­senting 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: Robert Beals II, pp. 1, 10, 14–15, 16, 17; courtesy of Clayton Homes, pp. 2, 3, 4, 5; JP Beato III, pp. 6, 26, 28; Getty Images, pp. 8–9, 18–19, 20, 22–23; courtesy of Red River Army Depot, pp. 14 (second from left). © 2019, Real Estate Center. All rights reserved.

2 The Next Generation

Mainstreaming Manufactured Housing Manufactured homes have been around for years, but they haven’t garnered widespread acceptance like site-built homes. Thanks to financing now available through Fannie Mae and Freddie Mac, that could change. BY HAROLD D. HUNT

6 Gaining Ground

Texas Land Markets Larger, Active, Efficient Texas land use has been expanding beyond agrarian interests since the early part of the 20th century, changing the mix of buyers and, consequently, land-market trends. Here’s where the market is now. BY CHARLES E. GILLILAND

8 Turning Soil

Northeast Texas Croplands Evolve ON THE COVER The sun sets on a private ranch in Mountain Home, Texas

PHOTOGRAPHER JP Beato III

OCTOBER 2019

It’s basic economics: crop production will always be influenced by supply and demand. For a textbook example, look no further than Northeast Texas, where the crop portfolio is once again changing. The twist? Cotton could make a comeback with the help of some innovative thinking. BY ERIN M. KIELLA, JOHN ROBINSON, AND CHARLES E. GILLILAND

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Are Liability Waivers Enforceable? You know those waiver and release forms some recreational businesses make you sign before you so much as step foot on their premises? If you think those don’t carry much legal weight, think again. When properly drafted, they can. BY RUSTY ADAMS

18 Robot Revolution

Automation and the Changing Job Landscape According to sci-fi writer Isaac Asimov’s laws of robotics, a robot can neither harm a human nor disobey a human’s orders. They can, however, perform more and more jobs once handled by people. Welcome to the 21st century. BY LUIS B. TORRES, WESLEY MILLER, AND PADEN VAN

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Tracking Texas Housing Trends Homes come in many types and sizes, from attached to detached, duplexes to apartments, and manufactured homes to boats and RVs. How did Texans’ housing preferences change between 2005 and 2017? We’ll tell you. BY ALI ANARI

26 Covering Your Assets

Business Entities Limit Personal Liability Personal liability risk comes with being a broker, but there are ways to reduce it. Read our guide to creating and maintaining business entities that can help protect your personal assets. BY KERRI LEWIS

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Residential

MAINSTREAMING MANUFACTURED HOUSING

Factory-built homes that meet certain guidelines now qualify for 30-year Fannie Mae and Freddie Mac financing, providing an affordable option to first-time homebuyers looking for new homes. The challenge for builders is overcoming the general public perception of what constitutes a traditional singlefamily home. By Harold D. Hunt

A

A new housing product is making its debut in Texas, and it’s designed to appeal to buyers looking for new construction in the starter-home price range. The new offering is for a specially designed factory-built home eligible for 30-year mortgage financing through programs offered by both Fannie Mae and Freddie Mac (government-sponsored entities, or GSEs). Fannie Mae has named the mortgage initiative for this class of homes “MH Advantage” while Freddie Mac has chosen to market their program under the name “CHOICEHome.” Similar to current manufactured housing (MH), this new generation of factorybuilt homes—known in the industry as “off-site” construction—will be built under the Department of Housing and Urban Development’s “HUD-code” standards. The code was first enacted in 1976 but has been periodically updated. MH built before June 15, 1976, even with modifications or upgrades, does not meet HUD standards and cannot be accepted as compliant with the HUD Code.

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The homes will include a number of upgrades designed to align them more with site-built homes. Both GSEs have established their own minimum specifications for the upgrades to qualify for 30-year financing eligibility, but they are similar. Some of the major specifications involve higher-pitched roofs, drywall throughout, higher-quality cabinetry, and increased energy efficiency. The structures must be attached to permanent foundations and financed with land as real property.

New Appraisal Standards The GSEs have agreed that appraisers should select the best available sales as comparables in appraisal reports. If sales of new offsite-built product are unavailable, this can include sales of site-built, modular, or manufactured homes. According to the Wall Street Journal, the first sale of this class of homes in America occurred in June 2019 in Knoxville, Tenn.

The Journal reported the homebuyer received 4.25 percent conventional financing, paying a purchase price of $195,900 including the lot. Home size was 1,651 square feet, and site-built comparables were reportedly used in the appraisal. The home is on a street containing a mix of MH, modular, and site-built homes just outside the Knoxville city limits. All the homes were either manufactured or site-built by Clayton Homes, the largest builder of MH and factorybuilt housing in America. The MH product is virtually indistinguishable from site-built homes in the neighborhood. Three model homes were on display at the location, showcasing what can be done with different floor plans and lot configurations as well as interior and exterior finishes. Because the product is manufactured in two sections married together, similar to multisection MH, they can be positioned to take advantage of more affordable narrow-frontage lots. The width of both sections together is about 35 feet. Texas is behind Tennessee in the manufacturing of the new MH product. However, several of the homes should be on the ground in Texas by the end of 2019. Any MH builder of HUD Code homes can become eligible to produce the product, and many have already done so. TIERRA GRANDE


the appraisal of MH Advantage-eligible homes. MH Advantage e-training is currently available on Fannie Mae’s website.

Affordable Housing Crunch

At this point, none of the homes have been available long enough to gauge their level of appreciation. However, the GSEs should be able to track both the loan and appreciation performance of these homes over time. Each home will carry a serial number and a sticker denoting whether it is either MH Advantage-eligible or CHOICEHome-eligible. The sticker will signify that the homes are eligible for legacy financing under the same program on resale as long as no disqualifying alterations have been made. The maximum loan-to-value available to borrowers under both programs is 97 percent, a rate similar to site-built homes. Appraising the offsite-built housing will be a new experience for many residential appraisers. Freddie Mac and the Appraisal Institute have teamed up to provide a 7½-hour classroom appraisal course focusing on the CHOICEHome initiative. Meanwhile, Fannie Mae is working with an online course provider to develop a continuing education class for

For decades, Texas has benefited from abundant, affordably priced single-family housing. However, after the Great Recession home price increases began to significantly outpace increases in incomes. The result has been a mismatch between what potential homeowners can afford and what is available for sale in the state’s starter-home segment. The median single-family home price for newly constructed homes sold in Texas through a Multiple Listing Service (MLS) increased almost 47 percent from 2011 to 2019, exceeding $284,000. New homes made up 16 percent of all MLS sales in mid-2019, according to Real Estate Center data. When both new- and existing-home sales through the MLS were combined, the price increase exceeded 61 percent. Meanwhile, the Bureau of Economic Analysis reported that Texas’ per capita personal income had increased by only 23 percent during the same period. Lower income growth in relation to home price growth has resulted in a much tighter supply of starter homes in Texas. The months of inventory for new and existing single-family homes sold through the MLS stood at more than eight months in mid-2011 for both the overall market and the $150,000– $250,000 price range. Supply and demand

are considered to be in balance at approximately six months of inventory. By mid-2019, months’ inventory in the $150,000–$250,000 price range had dropped to less than three months statewide (an even tighter 2.2 months for homes selling within the smaller $150,000–$200,000 price bracket). Overall, months’ inventory had dropped to less than four months.

Offsite-Built Alternative Created In 2018, acting under their respective Duty to Serve plans, the GSEs enlisted help from industry participants to develop a set of standards that MH manufacturers and installers would have to certify were met. The Manufactured Housing Institute (MHI) concurrently conducted research to find out what features could be added to factory-built housing to increase homebuyer interest. MHI is a national trade organization based in Arlington, Va., representing all segments of the factory-built housing industry. MHI asked focus groups whether they would consider buying a multisection offsite-built house as their next home. As they changed photos of the homes to ones with higher-pitched roofs, lower elevations, attached garages, and front porches, acceptance increased from 14 percent to 46 percent. Based on conversations with the GSEs and MH manufacturers, the target price for the new product will be

MANY STILL CONSIDER MANUFACTURED HOMES a poor investment. Manufacturers hope to change that perception through upgrades such as higher-pitched roofs, higher-quality cabinetry, and increased energy efficiency. OCTOBER 2019

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$175,000–$250,000, including land. This price point is meant to directly target the underserved first-time homebuyer market. The MHI research also identified a broader demographic than expected. “The focus groups showed that baby boomers looking for more affordable housing as well as millennials should like the new factory-built product,” said Dick Jennison, MHI president and CEO.

Resistance to Factory-Built Housing Any new housing built to the HUD code will have its critics. A 2009 study published in the Journal of the American Planning Association found that 30 percent of surveyed city planners considered local citizen opposition a significant barrier to HUD-code factory-built housing. A 2011 HUD study detailed numerous barriers to acceptance of HUD-code homes in cities. They included regulatory hurdles such as fire codes and zoning codes. They also included subdivision regulations and architectural design standards. “Manufactured housing is judged and policy is made based off our worst examples, rarely our best,” said DJ Pendleton, executive director of the Texas Manufactured Housing Association (TMHA). Fannie Mae conducted foundational research in 2019 and confirmed that homebuyers typically do not initially consider MH in their home search. Sitebuilt homes are still seen as the “gold standard,” and MH is believed to be a poor financial investment. There is also

little awareness that MH can be purchased with a mortgage. The poor perception of MH leads to weak demand even if MH is a potential solution to the lack of affordable housing stock. Fannie Mae hopes to address the stigma through a regional consumer education campaign that launched in June and runs through November 2019.

HUD Code vs. City Codes The HUD code is “performance-based,” requiring that the whole home be tested to a specific performance standard. In Texas, cities generally regulate site-built housing construction based on a “prescriptive” code such as the International Residential Code (IRC). Standards and

extent of new-home construction and methods of installation. Our industry has constant struggles when it comes to local zoning.” Pendleton believes some greater step by the federal government to protect the placement of manufactured homes inside cities would work. “Any effort by the government to reclassify the new product to preserve zoning parity with other single-family homes would be a step in the right direction,” said Pendleton. “However, the government has generally stayed out of local zoning issues with the exception of discrimination and redlining abuses.” People may not be aware that MH comes with a “statutory warranty” under Texas law that provides a one-year

THE MANUFACTURED HOMES’ $175,000– $250,000 PRICE POINT IS MEANT TO DIRECTLY TARGET THE UNDERSERVED FIRST-TIME HOMEBUYER MARKET. specifications for each component of the construction are described in detail in the IRC. “City councils are more familiar with prescriptive codes, which often leads to the knee-jerk reaction that the HUD code is substandard,” said Pendleton. “The HUD code is federally pre-emptive over state and local law but only to the

warranty on construction and a two-year warranty on the installation. “The warranties are backed by a bond and a recovery fund with the Texas Department of Housing and Community Affairs,” said Pendleton. If they choose to, builders can provide purchasers of new site-built homes with a private warranty. However, nothing in state or city law mandates a builder must warranty a site-built Texas home.

Rigorous Inspections All MH is subject to a stringent inspection process. Manufacturers will contract directly with, and pay for, either a state or private third-party inspection agency. “Federal law mandates a third-party inspection to make sure manufacturers follow an approved design package that meets the HUD code,” said Jimmy Griffith, sales manager at Champion Home Builders Inc. “Inspectors must be in the facility checking the plant’s internal systems at least once during the construction of the house as it goes through the factory. They also review data to make sure plumbing and electrical tests are conducted properly.”

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HUD periodically audits the thirdparty inspections as well. Texas has no mandatory inspection requirement for site-built houses constructed outside incorporated areas. The GSEs have specified that homes be constructed on permanent foundations with masonry perimeter walls. The Fannie Mae MH Advantage program also requires an engineering certification for the foundation.

Regarding Wind Resistance A major concern with all MH is how well they fare in high winds. The HUD code mandates that all MH must be designed and constructed to conform to one of three U.S. wind load zones. Each home will be manufactured to the wind-zone specifications where it will be installed. Texas is in two of the three zones. The highest wind zone, Zone 3, is found only in parts of Louisiana and Florida. According to the MHI, the most recent updates to the wind zones were issued in 2007. A 2014 Insurance Institute for Business & Home Safety wind test found improperly installed attached structures, such as carports and awnings, are what cause about 80 percent of the damage to MH, not structural problems with the home itself.

Sale of Next-Gen Homes Although the new product will be sold as real property, manufacturers will not be allowed to sell a home in Texas from the homebuilding facility to anyone who is not a retailer. “A traditional developer could obtain a retailer’s license by going to Austin, taking a three-day course, passing an exam, and paying a fee,” said Pendleton. “At that point the developer could purchase homes directly, install them in a new OCTOBER 2019

development that allows HUD-code homes, and allow a Texas real estate licensee to sell the homes just like any other site-built product.” Any resale of the homes can be brokered by a Texas real estate licensee. Potential homebuyers and appraisers will expect a finished “turnkey” property, so the GSEs strongly recommend retailers provide installation services, landscaping, and all other finish work such as driveways, sidewalks, and garages.

The Road Ahead In Texas, these new homes will initially be located outside city limits. The current barriers to the placement of HUDcode homes inside most Texas cities are formidable. However, if site-built homes inside a city are no longer profitable, or even available, in the $175,000–$250,000

price range, this new product could provide an alternative to fill that niche. The challenge will be getting city officials and skeptical citizens to accept a HUD-code home with site-built features and amenities. The “image” of what constitutes a traditional single-family home has been formed in people’s minds over decades, and that image has generally not included a factory-built home. With the backing of the GSEs, this new housing alternative will increasingly gain acceptance with lenders and appraisers. Hopefully, the parties that have historically resisted MH in their neighborhoods and cities will at least take the time to inspect this latest offsite-built alternative with an open mind. Dr. Hunt (hhunt@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

FOR MORE INFORMATION A Comparison of MH Advantage and CHOICEHome Requirements and Benefits https://www.manufacturedhomes.com/blog/mh-advantage-choicehomerequirements-benefits/

Fannie Mae MH Advantage https://www.fanniemae.com/manufacturedhomes

Freddie Mac CHOICEHome

http://www.freddiemac.com/singlefamily/duty-to-serve/choicehome.html

MH Advantage participating manufacturers https://www.fanniemae.com/content/list/manufacturer-list

How to Find Your Home’s Wind Zone https://www.claytonhomes.com/studio/how-to-find-your-mobile-home-wind-zone/

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Land Markets

By Charles E. Gilliland

Gaining Ground

Texas Land Markets Larger, Active, Efficient Texas’ decentralized rural land market has become more organized and efficient with numerous participants. Although many of those participants look to year-to-year price changes to identify trends, changes in the total number of acres sold and total dollar volume provide a better leading indicator of land market health. Persistent declines in total dollar volume may presage a decline in prices. By Charles E. Gilliland

Milions of Dollars

Texas’ rural land markets have changed. and $500 million in 2019 dollars for most years prior to 2002. For decades, agrarian interests dominated the state with Since 2003, land market activity has exploded, more than farmers and ranchers ruling land markets. As Texas grew with doubling that sum between 2005 and 2007 and again in 2017 the developing oil industry and expanding nonfarm population, and 2018. After 2003, the dollar volume dropped back to the other potential land users began to invade the market. Recrelong-term range only during the Great Recession and its afterational activities across Texas grew in importance, and invesmath in 2009 and 2010. Since then, it has eclipsed the previous tors, relying on rising values, appeared in increasing numbers. maximum. Through the years, this influx of buyers led to a growing and New Way to Track Market Developments changing land market. What had been a decentralized and Texas land market observers tend to focus on price movements fragmented market began to develop into more organized to identify market developments. Price levels from last year trading as the number of participants grew. influence current market Reflecting these developprices, and rising prices frements, the total dollar volFigure 1. Texas Rural Land Sales, Total Dollar Volume quently portend future robust ume of sales of large proper1,750 activity. Stagnant or falling ties in Texas land markets Large 1,550 prices lead in the opposite reported to the Real Estate Small direction. Falling prices imply Center expanded from $80.7 1,350 Combined the potential erosion of all million in 1966 to $1.3 billion 1,150 land values and signal danger in 2018 (Figure 1). Adding 950 of declining wealth. Consesmall rural land sales swells quently, many focus on price the total to almost $1.6 bil750 trends as a leading indicalion in 2018. However, this 550 tor of market trends, seeing represents only the sales weakening prices as the harreported to the Center, so sta350 binger of lean times ahead. tistics for the entire market 150 However, Center research would range even higher. –50 reveals a possible alternative These totals indicate nomi1966 1972 1979 1985 1992 1998 2005 2011 2018 indicator that could signal nal price growth of more than Source: Real Estate Center at Texas A&M University price movements well before 1,492 percent since 1966. they appear in transactions. Adjusting for differences in Analysis of Texas land market data suggests the total volume the value of money, the 1966 total of $80.7 million was $492 million in 2019 dollars (Figure 2). The real growth amounted to of dollars invested in land begins to recede before prices start to drop. This decline results primarily from a falloff in the 161 percent. Total dollar volume ranged between $400 million

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Dollars per Acre

Millions of Dollars

number of acres traded when potential sellers stick with their troubling. The huge price increase in 2006 compensated for the asking prices despite weakening demand. small acreage decline to register a modest increase that year. The market dynamics suggest that as buyers become resisHowever, the large acreage drop-off in 2007 overwhelmed the tant to current asking prices, potential sellers resist cutting sizable price increase and posted a 15.4 percent decrease in their asking prices. Looking at recent prices paid for compatotal dollar volume. Dollar volume skidded -11.4 percent in rable land, sellers resist pressures to accept less. They remem2008 followed by a collapse of -46.8 percent in 2009. ber the price they paid and Price changes looked fine Figure 2. Texas Rural Land Sales, recall expecting appreciation through 2008, but the volume Nominal vs. Real Total Dollar Volume during their tenure. Instead of side of the market had flashed 1,400 Nominal seeking a deal at a lower price, warning signals as early as Real landowners either remain 2006 with declining numbers 1,200 steadfast in their asking price of sales and again in 2007 1,000 or withdraw their land from with the large drop in total the market. Motivated sellers dollar volume. Those num800 must cut their price to get a bers suggest a large number deal. of market participants had 600 Meanwhile potential buyers individually decided that begin to realize they can buy current prices were too high 400 more than they had anticigiven economic circumpated. As listings expand, stances. Those would-be 200 they can pick among higher buyers refused to purchase at 0 quality offerings with little market prices, leaving land 1966 1974 1981 1989 1996 2004 2011 2019 inventories “on the shelf.” As fear of missing a deal. This Note: Real price in 2019 dollars situation often leaves lesser the subprime fiasco unfolded, Source: Real Estate Center at Texas A&M University properties to languish unsold. further reticence gripped Total acreage moving through the market falls in the declining more market participants until motivated sellers cut asking number of transactions, but typical prices move up, reflecting prices in 2009 and 2010. Total dollar volume and total acres the increased volume of higher quality properties sold. Prices, provided an early warning of troubled waters ahead. measured by a median or mean, appear to remain strong. HowTotal Dollar Volume Not Infallible ever, declines in total acreage and total dollar volume indicate A downturn in total dollar volume does not necessarily pormarkets have softened. tend carnage in the market. For example, in 2001 total dollar Here’s an example. In the aftermath of the Great Recession, volume turned down. That year included the 9/11 attacks, land prices declined in 2009 and again in 2010. Those declines which brought markets to a standstill for a time. However, reflected difficult markets where potential buyers made low that disruption lasted only one year with 2002 posting a return offers anticipating declining prices. Meanwhile, would-be sellto increasing totals. In 1985, ers, many under no impetus a year before Texas’ economic to sell, refused those lower Figure 3. Texas Rural Land Price Per Acre 3,000 meltdown erased a great deal offers and withdrew their of rural land value, weakening land from the market. The 2,500 prices primarily contributed result was a market standoff. to a 4.7 percent retreat of total The number of sales dropped 2,000 dollar volume. A 25 percent dramatically from 5,362 in drop followed in 1986 with an 2005 to 2,407 in 2009 (see additional 10 percent decline the annual sales analysis at 1,500 in 1987. Land prices declined the Center’s rural land data 31.2 percent over those two website: www.recenter.tamu. 1,000 years. Total acres did not edu/data/rural-land/#!/state/ noticeably decline until Texas). Total acres traded col500 1986, but total dollar volume lapsed from 763,851 in 2005 to declined earlier. only 228,505 in 2009. Brokers 0 While total dollar volume suffered, and the 2009 price 1997 2000 2003 2006 2009 2012 2015 2018 does not infallibly foretell drop confirmed the widely Source: Real Estate Center at Texas A&M University future land market trends, acknowledged market turmoil. it does provide a powerful summary of market developments. Reported prices increased substantially every year during Preliminary studies at the Center show a strong link between that period, rising from $1,263 per acre in 2005 to $1,914 per total dollar volume in the past and current land price levels. acre in 2008 (Figure 3). Focusing on prices seemed to indicate All of this suggests that land professionals would do well to that all was well in the market. However, the number of sales note trends in market volume as an indicator of the overall and total dollar volume told another story. health of Texas land markets. Sales began to dwindle in 2006, then fell dramatically the following two years before collapsing in 2009. Combining the Dr. Gilliland (c-gilliland@tamu.edu) is a research economist with the Real price dynamics with the acreage trends by multiplying the Estate Center at Texas A&M University. indicated price by the total acreage (total dollar volume) was OCTOBER 2019

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Land Markets

TURNING SOIL Northeast Texas Croplands Evolve

Northeast Texas’ crop portfolio is changing. The once attractive corn and soybean market is being impacted by price declines, oversupply, and an uncertain trade environment. Meanwhile, cotton is again becoming attractive to growers thanks to new production ideas such as vertical integration. By Erin M. Kiella, John Robinson, and Charles E. Gilliland

F

Northeast Texas’ Changing Crop Portfolio Taking a closer look at nine Northeast Texas counties—Delta, Fannin, Franklin, Hopkins, Hunt, Morris, Lamar, Red River,

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and Titus—the evolution of the crop portfolio is apparent. Until 1975, cotton was an equally competitive crop in the region, accounting for anywhere from 31 to 43 percent of acres planted. From 1975 to 2000, cotton acreage dropped substantially and averaged 6 percent per year as financial conditions made cotton less profitable. During that time, sorghum took over much of the acreage once dedicated to cotton, likely a result of labor constraints and lower expenses associated with sorghum production. The rapid loss of gins in the area also increased transportation costs for cotton producers, further incentivizing the move 70

Figure 1. Crop Acreage, Northeast Texas

60

Cotton Corn and Soybeans

50 Percent

or decades, Texas land prices have largely been determined by recreational users or capital investors. Conventional wisdom regarded farmers and ranchers as a peripheral force in land markets. However, they are a vital, if less visible, part of the market. They continue to buy land, especially acreage most suited to raising crops and livestock. The ebb and flow of commodity markets determining which crops producers grow is a dynamic on display in Northeast Texas (Region 4). Now an innovation in cotton production in the region promises to change cropland markets in a broad swath of Texas and surrounding states. The spike in demand for corn and soybeans throughout the first decade of 2000 had producers introducing corn and soybean production in traditionally less suitable locations. This is especially true for Northeast Texas. The region’s crop portfolio changed from predominantly wheat, sorghum, and cotton to wheat, corn, and soybeans. Today, as the markets for corn and soybeans become riskier, areas with less ideal climates are reverting to more suitable crops.

40 30 20 10 0 1968 1975

1982 1989

1996

2003 2010

2017

Source: USDA National Agricultural Statistics Service TIERRA GRANDE


early 2000s, and the two crops entered the local market as major competitors for acreage. The introduction of Roundup Ready seed technology in the 1990s enabled farms with minimal labor to produce Roundup Ready corn and soybeans. In 2002, corn and soybean acreage increased considerably from a total of 13 percent to an average of 30 percent. The crops used the second-largest amount of acreage in the region. In 2016, they reached a maximum acreage at 58 percent of acres planted (Figure 1), surpassing the historical contender, wheat. Several fundamental factors pushed the region into corn and soybeans. Corn, cotton, and soybeans all had price declines in the early 2000s, but cotton was hit the hardest with a 24 and 38 percent contraction in 1999 and 2001, respectively (Figure 2). Corn and soybean prices during that time declined more modestly with average decreases of 0 and 4 percent, respectively. Further motivating the switch, cotton operating costs increased 10 percent in 2000 and an additional 8 percent in 2001. Corn and soybean costs remained relatively unchanged in the three years prior to 2002 (Figure 3). From 2002 to 2017, acres planted for corn and soybeans averaged a third of the acres planted in the region. By 2016, corn and soybeans accounted for nearly 60 percent of the acres planted. Cotton, as noted, went several years with hardly any acres planted.

600

Figure 3. Historical Operating Costs, Southeast U.S.

Dollars/Planted Acre

500

Corn Cotton Soybeans

400 300 200

away from cotton production. In addition, wheat came to dominate the region’s crop production, accounting for 65 percent of acres planted since 1980. By 2007, so little cotton was planted there that USDA data showed no acreage dedicated to cotton production for the next decade. In general, the region’s soil and climate are not optimal for corn and soybeans, especially without adequate irrigation. Therefore, at lower prices, corn and soybeans did not provide sufficient compensation to cover the risk of producing them. However, their prices reached levels too good to ignore in the

Figure 2. Historical Crop Prices National Average 16

1

Corn and Soybean Dollars per Bushel

14 12 10

0.8 0.6

8 0.4

6 4

0.2

2 0 1962

0 1970 1978 1986 1994 2002 2010 2018

Source: USDA National Agricultural Statistics Service OCTOBER 2019

Cotton Dollars per Pound

Corn Soybeans Cotton

100 0 1976 1982

1988 1994 2000 2006 2012 2018

Source: USDA National Agricultural Statistics Service

R

ecent production numbers hint at a reversion not seen in several decades. Cotton has jumped to 12 percent of production in the region from previously near-zero reported acres. Corn and soybean acreage fell to 35 percent in 2018, contracting 23 percentage points from its high and continuing a negative trend. Prices for all crops have contracted from their peaks in 2011 and 2012. Corn and soybean prices have declined substantially—by 48 and 40 percent, respectively. Cotton, on the other hand, has contracted only 19 percent. It benefited from positive price movements in 2013, 2016, and 2017. Operating costs for each crop have remained relatively stable, increasing on average 3 to 5 percent annually. The year-over-year changes have evolved generally in the same manner for all crops. The once attractive corn and soybean market has proven risky given price declines, oversupplied markets, and the uncertain trade environment. The adverse market has producers considering reverting to previous crop portfolios. Reverting to cotton and wheat production, for which the region’s soil and climate are better suited, reduces the growing risk associated

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with production, and the moderate cost increases and stronger price movements prove promising for producers.

Innovating the Cotton Industry In addition to these factors, an innovation in cotton production and product marketing could change the face of Texas’ cotton industry. In 2015, a cotton gin offering vertical integration (in which multiple steps of a production process are handled by one business rather than several) became operational in Northeast Texas, boosting local demand for production. PPF Gin in Cooper offers cotton producers a risk-reducing structure and an incentive to go back to cotton production. PPF owner Pat Pilgrim transferred a model of vertical integration from poultry production to cotton. Pilgrim learned about the efficiencies and improved quality control of vertical

south as Austin, as far north as Tulsa, and even in Arkansas. PPF employs 60 people and can process 1,100 bales per day. It also has a storage capacity of about 90,000 bales of processed cotton. Pilgrim has no doubt the presence of the gin has encouraged producers to return to cotton. He has seen the number of cotton acres increase substantially. Pilgrim plans to increase the gin’s capacity by about 10 percent per year. Eventually, he will spin thread and produce consumable products such as cotton swabs, cotton balls, and towels. Cotton has for some time been largely an export commodity. Pilgrim believes consumers’ demand to know where their products are grown and made has created a market for processing cotton domestically. This demand may keep cotton production in the region. Reflecting these agricultural production realities, land markets in the nine counties studied showed increased volatility in

USDA DATA SHOW THE AMOUNT of upland cotton planted in Texas declined for the first half of this decade. That trend is reversing thanks in part to new production and marketing strategies being implemented by gins such as PPF Gin in Cooper.

integration from his experience at Pilgrim’s Pride working with his father, Bo Pilgrim. The younger Pilgrim realized the opportunity for vertically integrating the cotton-processing method through his own experiences with inefficiencies in delivering cotton for processing. ilgrim’s program offers contracted growers a predetermined price for cotton while providing planting seed, fertilizer, other chemical inputs, agronomic consulting, picking/hauling, ginning, and warehousing services. According to Texas A&M AgriLife planning budgets (agecoext.tamu.edu/ resources/crop-livestock-budgets/), the most likely (least variable) of these input costs represents at least 50 percent of total cotton production costs traditionally paid by farmers. This represents a substantial sharing of the financial risk of cotton production. Pilgrim also selects the cotton variety planted each season, focusing on the needs of the end product. The majority of the cotton PPF processes comes from about a 100-mile radius around the gin, but some growers farm as far

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price and volume beginning in the 2000s (see figures in online edition of this article at www.recenter.tamu.edu). Although the region is heavily influenced by recreational land purchases from nearby metropolitan areas, those purchases are characterized by smaller acreage sold at higher per-acre values. Agriculturally inspired demand has historically set a floor for land prices. Typically, reduced risk leads to higher average profits. If the integrated marketing approach succeeds for cotton in northeast Texas, participating producers should see a more stable and profitable bottom line. In turn, that would allow them to pay more for farmland, perhaps boosting prices and activity in that market and raising the land-price floor. Dr. Kiella (ekiella@mays.tamu.edu) is an assistant research economist and Dr. Gilliland (c-gilliland@tamu.edu) a research economist with the Real Estate Center at Texas A&M University. Dr. Robinson (jrcr@tamu.edu) is a professor and extension economist with the Department of Agricultural Economics at Texas A&M University. TIERRA GRANDE


Legal Issues

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Liability waivers are intended to protect a party from legal consequences if another party is injured while on the first party’s property. Although many believe such waivers won’t hold up in court, a waiver, if properly drafted, will likely be enforced against an injured party. By Rusty Adams

ENFORCEABLE?

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ife is inherently risky. As a result, much of contract law involves allocating the risk among the parties to a transaction. A common way for this to occur is through what is often called a “liability waiver.” These agreements include releases, in which one party discharges claims for injury, and indemnity agreements, in which one party promises to save and hold another harmless in case of injury or damage. In the real estate context, this often arises when one party enters onto the property of another to engage in some activity. Some examples are horseback riding, exercising, rock climbing, hunting, or jumping in a trampoline park. Many landowners require liability waivers to be signed prior to participating in such activities. Depending on the situation, pre-injury releases might be executed as part of a larger contract, as a separate addendum, or as a stand-alone release. Often, landowners draft them haphazardly or copy and paste them from the Internet, and those entering the premises nonchalantly sign them without reading them. But do they really waive all claims if someone is injured? There is a widespread belief that these waivers are easy to get around if an injury should occur. However, the truth is that a liability waiver, if properly drafted, will likely be enforced against an injured party, preventing him from recovering damages for their injuries.

• ENFORCEABILITY OF LIABILITY WAIVERS Whether included in a larger contract or signed as a separate agreement, a liability waiver is a contract. Most contractual provisions exist to allocate risk among the parties. However, this type of liability waiver is signed prior to a party’s being injured (when the injury is as yet unknown) and OCTOBER 2019

relieves another party of liability, even for that party’s own negligence. Essentially, the signer is saying, “I realize that something bad might happen. I realize that I could possibly hold you legally responsible for it if it does. I’m agreeing not to do that even if it is your fault.” As such, it is considered an extraordinary shifting of risk, and the Texas Supreme Court has developed the doctrine of “fair notice.” To be enforceable, a pre-injury release of liability must satisfy the requirements of the “fair notice” doctrine. The fair notice doctrine has two requirements: the express negligence doctrine and conspicuousness.

• EXPRESS NEGLIGENCE DOCTRINE The express negligence doctrine states that a party seeking indemnity from the consequences of its own negligence must express that intent in specific terms in the contract. Exactly how specific is specific enough? That is something a court must decide based on the facts of the case. This rule was adopted by the Texas Supreme Court in Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex. 1987). In that case, Daniel was a contractor doing construction on Ethyl’s property. A third party was injured when both Ethyl and Daniel were negligent. Ethyl claimed that Daniel had agreed to indemnify Ethyl, even for Ethyl’s own negligence. The contractual provision read: “[Daniel] shall indemnify and hold [Ethyl] harmless against any loss or damage to persons or property as a result of operations growing out of the performance of this contract and caused by the negligence or carelessness of [Daniel], [Daniel]’s employees, subcontractors, and agents or licensees.” The court held that this language was not specific enough, and the waiver was ineffective. Although the waiver referred to “any loss or damage” and “as a result of operations growing out of the performance of this contract,” it referred only to the negligence or carelessness of Daniel—not Ethyl. Therefore, the court reasoned, the contract did not specifically express the intent of the parties that Daniel would indemnify for Ethyl’s negligence. Here are some examples of what has been held sufficient to uphold the waiver. A clause providing indemnification for “any negligent act or omission of [the indemnitee], its officers, agents or employees,” was held sufficiently to define

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To be enforceable, a pre-injury release of liability must satisfy the requirements of the ‘fair notice’ doctrine.

the parties’ intent, as was language requiring indemnity “regardless of any cause or of any concurrent or contributing fault or negligence of [indemnitee].” B-F-W Const. Co. Inc. v. Garza, 748 S.W.2d 611 (Tex. App.—Fort Worth 1988, no writ) In another case, the Texas Supreme Court upheld a waiver stating that [indemnitor] assumed all liability “regardless of whether such claims are founded in whole or in part upon alleged negligence of [indemnitee] . . . [Indemnitor] further agrees to indemnify and hold harmless [indemnitee] and its representatives, and the employees, agents, invitees, and licensees thereof in respect of any such matters.” Enserch Corp. v. Parker, 794 S.W.2d 2 (Tex. 1990) he deciding factor in determining enforceability is whether the waiver specifically states what claims are being released. Is it clear that the releasing party is releasing the other party for claims for that party’s own negligence? Is it clear what activities are covered? If so, it’s likely the waiver satisfies the express negligence rule.

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• CONSPICUOUSNESS According to the courts and applicable statutes, a waiver is conspicuous if a reasonable person against whom it is to operate ought to have noticed it. Another statement of the rule is that “something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it.” Clear as mud, right? Again, when definitions fail, a few examples may help. A printed heading in capitals is considered conspicuous, as is language in larger or other contrasting type or color. However, illegible small print is not sufficient.

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In Littlefield v. Schaefer, 955 S.W.2d 272 (Tex. 1997), the Texas Supreme Court noted that the entry form for a motorcycle race had large type and plenty of room on the front where riders entered their personal information. The release and waiver of liability, however, comprised 30 lines in which the headings were four-point text, and the main text was even smaller and could not be read. The court held that release was as inconspicuous as the pole struck by the rider and, therefore, invalidated the waiver. In Dresser Industries Inc. v. Page Petroleum, 853 S.W.2d 505 (Tex. 1993), release provisions were on the back of a work order in a series of uniformly printed and spaced paragraphs. A provision on the front of the work order incorporated all 18 paragraphs. No headings or contrasting typeface were used. The court determined the release did not meet conspicuousness requirements. On the other hand, language scattered within a larger contract can still be considered conspicuous. In Ranger Ins. Co. v. American Intern. Specialty Lines Ins. Co., 78 S.W.3d 659 (Tex. App.—Houston [1st Dist.] 2002, no pet.), the indemnification provisions were scattered among several paragraphs, but were included in paragraphs with descriptive headings such as “Operator’s Indemnification of Contractor” under a section entitled “RESPONSIBILITY FOR LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY AND ALLOCATION OF RISK,” in larger, bold, capital letters. The Houston court held it to be conspicuous.

• ACTUAL KNOWLEDGE Because the fair notice requirements are designed to make sure the signer knows he is waiving his rights, some courts have held that the requirements do not apply when it is shown that the signer actually knew that he was waiving them. That is, if the evidence shows that the signer had actual knowledge that he was waiving his rights to recover damages for his injuries, then he has waived them, and it does not matter if the fair notice requirements are met. For an example, see Tamimi Global Co. Ltd. v. Kellogg Brown & Root LLC, 483 S.W.3d 678 (Tex. App.—Houston [14th Dist.] 2015, no pet.), citing Dresser, 853 S.W.2d at 508, n.2. The actual knowledge exception only applies to the conspicuousness requirement and not to the express negligence doctrine. An excellent discussion is found in Sydlik v. REEIII Inc., 195 S.W.3d 329 (Tex. App.—Houston [14th Dist.] 2006, no pet.).

• WAIVING GROSS NEGLIGENCE Negligence involves unintentionally falling short of a duty of care legally owed to others. Gross negligence involves violation of a different standard. While gross negligence involves particularly egregious TIERRA GRANDE


conduct, the Texas Supreme Court has held that it is not simply an aggravated form of negligence. Transportation Ins. Co. v. Moriel, 879 S.W.2d 10 (Tex. 1994) Gross negligence basically means a person was aware that his conduct involved extreme risk of serious harm to someone else, and he did it anyway, in actual conscious indifference to the rights, safety, or welfare of others (Tex. Civ. Prac. & Rem. Code § 41.001[11]). Gross negligence, proven by clear and convincing evidence, can be a basis for exemplary damages. ay a liability waiver release claims for the released party’s gross negligence? That question has not been decided by the Texas Supreme Court. Several courts of appeals have dealt with the question, and most have determined that pre-injury releases may not waive claims for gross negligence because such a waiver is against public policy. The idea is that conduct rising to the level of gross negligence is so egregious that liability for it should not be waivable. Cases so holding appear to have been following Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App.—Beaumont 1986, no writ). At least one case cites the Texas Supreme Court case of Mem’l Med. Ctr. of East Texas v. Keszler, M.D., 943 S.W.2d 433 (Tex. 1997) as having cited Golden Triangle with approval. Texas Moto-Plex Inc. v. Phelps, 2006 WL 246520 (Tex. App.—Eastland Feb. 2, 2006, no pet.) (not designated for publication) However, Keszler dealt with a post-injury release, and the Texas Supreme Court upheld the post-injury release of a gross negligence claim. Post-injury releases may release a party from liability for gross negligence. In Newman v. Tropical Visions Inc., 891 S.W.2d 713 (Tex. App.—San Antonio 1994, writ denied), the San Antonio court upheld a release that, under the facts of that case, absolved the defendants from liability for gross negligence. However, the court specifically did not reach the question of whether a pre-injury release of claims for gross negligence violates public policy. Another case holds that a preinjury waiver releasing a party from liability for negligence does not release that party from liability for gross negligence. Van Voris v. Team Chop Shop, 402 S.W.3d 915 (Tex. App.—Dallas 2013, no pet.) Interestingly, none of the cases dealt with a waiver that specifically released claims for “gross negligence.”

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• WAIVER ON BEHALF OF MINOR CHILD The Texas Supreme Court has not yet decided whether a parent may waive liability on behalf of a minor child. The 14th Court of Appeals in Houston held that they may not in Muñoz v. II Jaz Inc., 863 S.W.2d 207 (Tex. App.—Houston [14th Dist.] 1993, no writ). However, that case was decided based on the fact that the waiver was signed by the parents’ adult daughter rather than OCTOBER 2019

the parents themselves. Arguably, this was dictum. In any case, it is not statewide precedent. There is a federal case in which a federal district court predicted that the Texas Supreme Court would not allow a parent to waive liability on behalf of a minor child. Paz v. Life Time Fitness Inc., 757 F.Supp.2d 658 (S.D. Tex., Houston Division 2010). The prediction in this case is what is called an “Erie guess.” It is likely that federal cases arising in Texas would follow this holding. However, the holding is not binding on Texas courts. In the unpublished case of Quiroz v. Jumpstreet8 Inc., 2018 WL 3342695 (Tex. App.—Dallas July 9, 2018, no pet.), a parent argued that a parent cannot waive the claims of a minor child. The court did not agree because, in that case, the parent was the one injured. The mother’s lawsuit included derivative claims on behalf of her minor children for loss of parental consortium and bystander claims for mental anguish. The court held that the mother had waived her claims and, because the claims of the parent were barred by the release, all of the derivative and bystander claims of the children were also barred.

• AMBIGUITY AND AFFIRMATIVE DEFENSE Ambiguities in a release will be narrowly construed against the released party. The existence and enforceability of a liability waiver is an affirmative defense. An affirmative defense is considered a defense of “confession and avoidance.” This means that the defendant is saying, “Even if it can be proven that we were negligent, we are not liable because of the release.” Because it is an affirmative defense, the defendant has the burden to plead and prove that the release is valid and enforceable.

• OTHERWISE UNENFORCEABLE Exercise caution. Even if they meet these requirements, some liability waivers may be held unenforceable because of other applicable statutes or because they are otherwise unconscionable or against public policy. For example, certain provisions in oil and gas contracts are declared by statute to be unenforceable. The same is true of certain construction contracts and motor carriers. These various provisions are very specific and contain exceptions. Nothing in this article should be considered legal advice. For legal advice on a specific situation, consult an attorney. Adams (radams@mays.tamu.edu) is a member of the State Bar of Texas and a research attorney for the Real Estate Center at Texas A&M University.

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Market Profile

&

Tanks Timber

Texarkana’s Economy and Hou Although Texarkana has had little recent household growth, existing-home sales and loan requests have been on the rise the past few years. However, 2019 data show housing activity could begin cooling, following the statewide trend. By Joshua Roberson

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exarkana has a rich industrial history that goes back to its roots as a railroad town. As an industrial city in an increasingly post-industrial economy, Texarkana has had its shares of economic ups and downs over the past century. Its industrial backbone still plays a major role in the region’s economic prosperity and local housing market. While the oil industry has a presence in Northeast Texas, the dominant nonfarm industries within the Metropolitan Statistical Area (MSA), according to the Texarkana Chamber of Com-

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merce, are goods-producing, particularly military-related and paper product manufacturing. This likely explains why recent job-growth trends appeared to have been counter-cyclical to the latest oil boom-and-bust cycle seen in much of the state.

Well-Armored Economy The area’s largest employer by far is the Red River Army Depot (RRAD) and its associated tenants, best known for manufacturing and maintaining a wide variety of military armored vehiTIERRA GRANDE


using Market cles. Despite having the word Army in the name, RRAD serves other military service branches and, according to the Texas Comptroller, employs a predominantly civilian workforce. In addition to providing many jobs, RRAD has a large geographic footprint and economic output. In 2017 its estimated economic output was about $1.5 billion. It’s fitting that paper manufacturing is the other major sector unique to Texarkana, given that Northeast Texas’ land market accounts for about 83 percent of the state’s timber acreage according to the Real Estate Center’s latest regional land market analysis. (For an overview of Northeast Texas’ land market, see “Turning Soil: Northeast Texas Croplands Evolve”). Broadly speaking, manufacturing employment in Texarkana has shrunk considerably over the past 30 years. The latest dip occurred shortly after the Great Recession (GR) and wiped out OCTOBER 2019

almost 15 percent of the manufacturing workforce. Those jobs haven’t bounced back. The mining and logging sector has seen some modest growth in recent years. This may be related to increased logging activity in East Texas. Construction has also increased, sparking a wave of job growth in many service-related industries, including healthcare and retail. Ultimately, as the influence of goods-producing sectors continues to diminish in the local employment market, more service-related jobs will most likely be needed to draw new households to Texarkana.

Arkansas Driving Population Growth The MSA includes its twin city of the same name, located in Arkansas. Given its border location, it should be no surprise

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that many of the households that relocate to Texarkana, Texas, come from across state lines. According to U.S. Census Bureau migration data (Figure 1), most of the migrant inflow to Bowie County (the Texas side of the MSA) comes from cross-border neighbor Miller County. Afterward comes Little River County, Arkansas, followed by a handful of Texas counties, the most notable being Bexar County.

Figure 1. Top 5 Migration Inflows to Bowie County 800 600 400

Miller County, Arkansas

200 0

Little River County, Arkansas

Bexar County, Texas

Cass County, Texas

Jefferson County, Texas

Source: U.S. Census Bureau 2012-16 County-to-County Migration Flows

800

Figure 2. Annual Home Sales Volume, Bowie County, Tex.

700

600

500

400

2010

2011 2012 2013 2014 2015

Source: Real Estate Center at Texas A&M University

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2016 2017 2018

Overall household growth in the MSA’s principal twin cities has been virtually nonexistent based on Census data up to 2017. That’s not to say there hasn’t been any household growth at all. Census tracts to the northwest of Texarkana’s loop have shown net positive growth in household counts. This is also where the bulk of area home sales have occurred.

Most Housing Activity on Texas Side

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fficially, the Texarkana MSA includes counties both in Arkansas and Texas. This means a lot of the public datasets regarding jobs and demographics report on the entire region. However, Center housing data for Texarkana stop at the state line. Based on area demographics, it appears most housing activity occurs on the Texas side in Bowie County. Sales volume in Bowie County surged between 2013 and 2015 (Figure 2). The following year was comparatively slow, but sales picked up in the years afterward. Increase in home activity is also evident from purchase mortgage origination activity. Loan volume improved dramatically in 2015, when loan requests jumped over 10 percent in Bowie County. They’ve had positive growth since then. The boost in home sales occurred right as job growth picked up. The previous eight years—basically since the GR—had been especially tough for the Texarkana area. TIERRA GRANDE


Texarkana MSA (Texas side only) Bowie County

Sales Volume ≤ 25 ≤ 50 ≤ 75 ≤ 100

82

= 5 square miles

151 INTERSTATE

30

59

Wright Patman Lake Sources: U.S. Census Bureau, Texarkana Water Utilities, and Real Estate Center at Texas A&M University

Figure 3. All-Transactions House Price Index, Texarkana (Tex.–Ark.)

Index 1995:Q1 = 100

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I

170 150 130 110 90

1992

1996

2000

2004

2008

2012

2016

2020

Lorem ipsum

Source: U.S. Federal Housing Finance Agency

250

Figure 4. Single-Family Building Permits, Texarkana (Tex.–Ark.)

200 150 100 50 0

2000

2005

Source: U.S. Census Bureau OCTOBER 2019

2010

2015

The inventory of homes began to rise aggressively in 2015 mainly due to a surge of new listings through the Multiple Listing Service (MLS). This surge outpaced the positive sales trend occurring at the same time. Until 2019, home prices were growing at a steady pace. The most noticeable jumps in price growth began in 2016 (Figure 3). This was followed by an almost equal drop in growth in 2017 before returning to a more gradual positive trend. nterestingly, the average marketing period for sold homes was and still is in decline. Given the growing collection of homes available to buy through the MLS, one could reasonably expect the increased competition to cause overall days on market to increase. That may soon change if price growth begins to soften. Single-family permit data from the Census Bureau include the entire Texarkana MSA. From 2000 to 2006 building permits were at their highest, peaking at more than 250 in 2003 with a median value of $113,700. Permit requests lingered for some time after the GR, but they’ve fallen to less than 50 permits since 2015 (Figure 4).

2020

Following Statewide Trends June 2019 year-to-date (YTD) sales are essentially identical to June 2018 YTD sales. Without any new surge, sales growth should level off by the end of the year. Job growth since the start of the year has slowed, signaling a possible end to consecutive years of annual sales volume growth. These trends are occurring at the state level as well. Statewide, June YTD sales are on par with the year before, meaning even Texas’ larger hot markets are starting to cool. Texas job growth also has begun to cool. Texarkana may lie on the Arkansas line, but its housing market orbit is still heavily influenced by Texas. Roberson (jroberson@mays.tamu.edu) is a senior data analyst with the Real Estate Center at Texas A&M University.

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Technology

Automation and the Changing Job Landscape Rapid technological change threatens more than half of Texas’ current employment, but increased productivity is a net benefit on employment and standards of living in the long run. By Luis B. Torres, Wesley Miller, and Paden Van

Robot: A machine capable of carrying out a complex series of actions automatically.

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nce reserved for dystopian literature, the infiltration of robots in human life has never been more apparent. Virtual assistants (e.g., Apple’s Siri and Amazon’s Alexa), autonomous vacuum cleaners, and self-driving cars are no longer fantasies of the future. While the reality of the robot revolution is rosier than ominous prophecies of the past, not all of the consequences are well understood. Industrial mechanization and increased computing power disrupted production processes across the globe during the 1990s. The technology of that era enabled the automation of well defined, repetitive “routine tasks.” Routine tasks can be both cognitive and physical in nature. For example, mathematical computations and record keeping are analytical exercises, while sorting and stacking activities require manual labor. All of these tasks, however, involve methodical repetition of a constant procedure.

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The integration of computers into production processes transformed Texas’ employment distribution. Productivity increases complemented high-skill occupations by making tasks more efficient, elevating both employment and earnings. Rising salaries increased the opportunity cost of household tasks (e.g., cooking and cleaning) while providing more income for recreational and leisure activities. Consequently, the demand for lower-skill service occupations increased. Service occupations (not to be confused with the broader service-providing sector) often require interpersonal communication or task-flexibility. For example, a janitor must be able to maneuver through rooms, open doors, climb stairs, and pick up and discard items, as well as identify areas that need cleaning. These basic actions require little skill and education but are highly variable and thus difficult to automate. As with high-skill jobs, productivity growth made middleskill jobs more efficient; but instead of complementing labor, TIERRA GRANDE


Technology’s Implications for Real Estate

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omputerization (defined as job automation by means of computer-controlled equipment) is transforming the role of real estate agents across the nation. Real estate transactions involve interpersonal communication and multiple moving parts that, until recently, have protected the profession from the early stages of automation. Today, however, online services allow rapid property searches from the comfort of the prospective buyer’s home. New companies and startups are chipping away at traditional practices in the industry in attempts to streamline the transaction process. Consequently, real estate agents and brokers are now in the high-risk category for future automation. This creative destruction, however, will actually benefit those agents and brokers who are the most productive and whose skills are complemented by recent innovations. For example, those who can analyze and absorb data to expand their knowledge of the local market distinguish themselves from those behind the trend. The profession requires a great deal of social interaction. In the residential sector, the homebuying process is more intricate than simply filtering through properties based on a finite number of specifications (e.g., price, school district, square footage). Describing what makes a home a good fit for each individual family can be difficult. Computers are still unable to replace human intuition and instinct in making that assessment. Real estate professionals who can supplement their creativity and social intelligence with the latest technology will be best suited to thrive in the era of computerization. OCTOBER 2019

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MANUFACTURING JOBS, which accounted for just over 7 percent of total Texas employment in July 2019, are among those most at risk of being automated. Only jobs in transportation and material moving rank higher (see figure 1). technology typically replaced it. Struggling to overcome a is voice recognition and response by virtual assistants who widening skills gap, workers who were replaced often fell into seem to learn and become smarter every day. service occupations. In essence, skill-based technology change The striking feature of today’s robots is their ability to polarized the labor force through expansions of both high- and execute nonroutine tasks. Driving through traffic or holding a low-skill jobs at the expense of middle-skill employment conversation requires a great deal of flexibility to respond to (Table 1). changes in the surrounding environment. Judgment is required he employment transition of the 1990s was augmented when making a left turn across oncoming traffic or determinby globalization and the reduction of free-trade barriers. ing which voice to listen to in a crowded restaurant. Many of the middle-skill jobs that were not automated The Robot Revolution is likely to be as disruptive (if not were offshored to capitalize on cheaper labor. As with automamore) than the previous period of mechanization. The determition, globalization complemented high-skill labor, which in nant of automation is no longer “routineness” but “programturn increased the demand for low-skill service jobs. The aggre- mability.” Programming involves organizing the components gate impact of these efficiency gains was positive for Texas, of a task into a well defined algorithm, similar to an instrucwhere consumtion manual ers enjoyed readable by Table 1. Common Occupations by Skill Level lower prices computers. A and maintained Low-Skill Nonroutine Middle-Skill Routine High-Skill Nonroutine programmer global commust specify Welfare Service Worker Grinding/Buffing/Polishing Worker Manager/Administrator petitiveness the robot’s Recreation/Fitness Worker Telephone Operator Police/Detective in its leading actions and Kindergarten Teacher Insurance Adjuster/Examiner Computer Scientist industries (e.g., reactions to Waiter/Waitress Clerk Engineer oil/gas extraceach possible Door-to-Door/Street Salesperson Metal Plater Physician tion, trade/ scenario. In the Sources: David Autor and David Dorn transportation, robot’s eyes, and manufacthese scenarios turing). However, employment disruptions occurred even in come in the form of data. these successful sectors as market forces adjusted. The Great Advancements in machine learning, data mining, and other Recession facilitated further labor-market pangs by addbranches of artificial intelligence enabled the collection of ing cyclical pressure to already elevated levels of frictional massive data sets, or Big Data, necessary to program complex unemployment. tasks. Consider optical character recognition (OCR) technology While the labor market struggled, technology continued that allows transcriptions of handwritten or typed materials. to evolve, leading to a new phase of automation: the Robot Once transcribed into a standard text format, search functions Revolution. The current wave of mechanization increasingly can filter through billions of pages for the specified content. involves the completion of complex tasks previously reserved The usefulness of OCR depends on its ability to accurately for humans. For example, autonomous vehicles are nearly decipher patterns (words). This accuracy improves as the quanindistinguishable from their human-operated counterpart—a tity and variety of its sample text (data) expands. Big Data is futuristic illusion a little over a decade ago. Another example the driver of computerization and robotics.

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Employment Implications

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ewly developed technologies are threatening occupations that were previously immune to automation. Half of total Texas employment is categorized as at high risk for computerization within the next few decades (Figure 1). Most of the state’s labor force is concentrated at the two ends of the distribution. The high-risk jobs are predominantly the low-wage service occupations that expanded during the previous phase of mechanization (Figure 2). Many of these jobs require customer interaction, which had spared them from automation. These interactions, however, do not require high levels of social intelligence. For example, a cashier may facilitate a transaction while hardly speaking to the customer after a courtesy greeting. This is a regular occurrence and is socially acceptable. Consequently, cashier jobs are at high risk to be automated as firms impliment self-check-out processes that mimic these interactions.

Figure 1. Computerization Risk by Job Category, Texas 2.5

Transportation and material moving Production Installation, maintenance, and repair Construction and extraction Farming, fishing, and forestry Office and administrative support Sales and related Service Healthcare practitioners and technical Education, legal, community service, arts, and media Computer, engineering, and science Management, business, and financial

Employment (in millions)

2.0

1.5

1.0

0.5

2018 Average Annual Wage (in thousands)

Figure 2. Computerization Risk by Wage, Texas $100 $80 $60 $40 $20 $0 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Probability of Computerization

1

Sources: Carl Frey and Michael Osborne and Bureau of Labor Statistics

and employment. Higher efficiency decreases prices for the rest of the economy, while workers have additional income to spend on other industries. The more important and less obvious feature is how innovation creates new industries and demand for human labor (Table 2). This component is overshadowed by the immediate threat of technological unemployment, but all of today’s jobs are spawned from yesterday’s innovations. Predicting jobs that will be created decades from now is impossible, so people naturally focus on those that may be lost today. Future occupations are lined up to replace those made irrelevant by innovation, but no one knows what they are at present. For example, the introduction of computers into the workforce replaced many clerks and typists, but it opened up a plethora of new occupations, resulting in exponentially higher employment. Many 19th century jobs require a dictionary to be understood today, while 21st century occupations would have been equally unintelligible as recently as 30 years ago.

Table 2. Common Occupations by Century

0 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Probability of Computerization

1

Sources: Carl Frey and Michael Osborne and Bureau of Labor Statistics

The probability of computerization can also be viewed as a timer, predicting how soon a job will be automated. Occupations at high-risk represent those for which substitutable technology is already developing and being perfected. Given the large proportion of the state’s employment in this category, labor-market adjustments are expected to continue in the foreseeable future. The share of employment with probability of computerization between 0.2 and 0.6 is substantially lower than the tails of the distribution. This suggests an eventual slowdown of technological disruption. Essentially, robots will take the low-skill jobs but be unable to replace more intellectual or socially demanding occupations.

Automation Anxiety and the Future Automation anxiety is a centuries-old concern that has reignited fears of widespread unemployment, but the features that prevailed in other periods of rapid transformation still exist today. Productivity growth directly benefits workers whose skills complement the new technology, pushing up earnings OCTOBER 2019

19th Century

20th Century

21st Century

Blacksmith Chandler Cooper Farrier Miner

Carpenter Cashier Clerk Milkman Secretary

Data Scientist Management Analysts Personal Care Aids Personal Trainer Software Developer

Source: Real Estate Center at Texas A&M University

There is no guarantee, however, that this phase of innovation will propagate into greater employment opportunities. But instead of fearing progress, society should embrace it and facilitate a smoother transition. Investing in high-skill development through re-education and training programs can reduce the skills gap and better position workers to complement new technologies. The skills and tasks least likely to be computerized are those involving creativity, social intelligence, problem solving, and abstract thought. These fundamentally human characteristics are not programmable, and, therefore, are out of the reach of robots. Dr. Torres (ltorres@mays.tamu.edu) is a research economist, Miller (wamiller@tamu.edu) a research associate, and Van a research intern with the Real Estate Center at Texas A&M University.

21


Residential

Tracking Texas Housing Trends Latest U.S. Census Bureau housing data show Texas’ housing supply increased along with demand from 2005 to 2017. Detached homes are the most favored type of homes, followed by manufactured homes. Buildings with 20 to 49 units are the fastest growing segment of the state’s housing stock. By Ali Anari 22

T

he housing sector’s social and economic function is to meet the demand for various types of housing units at affordable prices. Households and individuals in the United States and other advanced countries have the options to own or rent residential units and select the structure, type, size, and locations of their homes based on their preferences and incomes. The current stocks of residential units in Texas and the U.S. comprise various types of homes, such as detached, attached, and multifamily. They are built in response to economic and demographic factors, preferences, and technology as well as to federal and local government policies intended to provide affordable housing. Over time, the volume and composition of TIERRA GRANDE


• buildings with 20 to 49 units are currently the fastest growing segment of the state’s housing stock; and • Texas’ housing occupancy rates, which show which market segments need more or less investment, varied from as high as 90.3 percent for detached homes to as low as 79.1 percent for manufactured homes in 2017.

Texas Housing Stock Texas had 9.6 million households in 2017, about 20.6 percent more than in 2005 (Table 1). The U.S. had 8.1 percent household growth during the same period. To accommodate growing demand for housing driven by population and income growth, the state increased the supply of housing units by 21.1 percent to 10.9 million units between 2005 and 2017. Nationally, the number of units increased 10.3 percent. The U.S. Census Bureau classifies housing into ten groups according to the structure and number of units. Panels A and B of Table 2 show the numbers and market shares of different types of homes on the supply and demand sides of Texas and U.S. housing markets in 2017 as well as their growth rates from 2005 to 2017, the latest year for which data are available. Detached single-family homes are the most favored types of homes in both Texas and the U.S. The state had more than seven million detached homes in 2017, state and national housing inventories change due to changes accounting for 65 percent of the state’s housing stock comin these factors. pared with 61.8 percent for the U.S. Since 2005, the number The Real Estate Center compared long-term trends in the of detached homes in Texas has increased by 21.9 percent supply and demand sides of Texas compared with housing markets with those of the 11.3 percent Table 1. Number of Housing Units and Population nation’s and found: for the U.S. In in Housing Units, Texas, U.S. both Texas and • Texas’ housing supply has Numbers in 2017 2005–17 Growth Rate the U.S., the increased with growing demand, market shares of which has been driven by popuTexas U.S. Texas U.S. detached homes lation and income growth; Households 9,623,874 120,062,818 20.6 8.1 rose in the Great • detached homes are the most Housing units 10,933,375 137,407,308 21.1 10.3 Recession (GR) favored type of homes in Texas, Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University and stabilized accounting for more than around 65 and two-thirds of the state’s hous61.8 percent, respectively. Since recovering from the GR, Texas ing units, followed by mobile (manufactured) homes and has maintained a higher average market share than the U.S. buildings with ten to 19 units; OCTOBER 2019

23


Table 2. Texas Housing Supply and Demand in 2017 and Growth Rates Since 2005 A. Supply = Number of Housing Units Number of Units Structure Detached Attached 2 units 3 or 4 units 5 to 9 units 10 to 19 units 20 to 49 units 50 units or more Manufactured homes Boat, RV, van, etc. Total supplies

Percent of Total

2005–17 Growth Rate

Texas

U.S.

Texas

U.S.

Texas

U.S.

7,105,341 288,964 206,625 348,816 519,410 689,692 407,339 551,962 795,075 20,151

84,733,118 8,056,664 4,914,617 5,990,555 6,424,836 6,065,580 5,056,751 7,537,042 8,500,432 127,713

65.0 2.6 1.9 3.2 4.8 6.3 3.7 5.1 7.3 0.2

61.8 5.9 3.6 4.4 4.7 4.4 3.7 5.5 6.2 0.1

21.9 18.1 10.9 13.3 7.3 15.6 58.4 40.0 11.3 66.7

11.3 14.1 -2.3 4.7 4.0 8.4 18.9 31.4 -2.7 34.3

10,933,375

137,407,308

100.0

100.0

21.1

10.6

B. Demand = Number of Occupied Housing Units Number of Units

Percent of Total

2005–17 Growth Rate

Structure

Texas

U.S.

Texas

U.S.

Texas

Detached

6,417,158

75,478,501

66.7

62.9

20.8

8.4

Attached

255,343

7,256,243

2.7

6.0

15.0

13.1

2 units

174,086

4,109,058

1.8

3.4

13.9

-3.5

3 or 4 units

304,059

5,116,669

3.2

4.3

14.2

4.5

5 to 9 units

436,201

5,510,990

4.5

4.6

8.0

4.0

10 to 19 units

578,928

5,170,044

6.0

4.3

22.0

9.5

20 to 49 units

329,720

4,273,326

3.4

3.6

62.6

18.6

50 units or more Manufactured homes Boat, RV, van, etc.

479,412 628,816 20,151

6,415,499 6,604,775 127,713

5.0 6.5 0.2

5.3 5.5 0.1

37.5 8.0 66.7

27.5 -7.8 34.3

9 ,623,874

120,062,818

100.0

100.0

20.6

8.1

Total demand

U.S.

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

W

ith more than 795,000 units in 2017, manufactured homes make up the second largest segment of Texas’ housing market after detached homes. Manufactured homes accounted for 7.3 percent of total housing units compared with 6.2 percent in the U.S. Since 2005, the number of manufactured homes in Texas has increased by 11.3 percent compared with a 2.7 percent decline for the U.S. In both the state and the nation, the market share of manufactured homes has trended downward since the recovery from the GR. Housing structures of 20 to 49 units constitute the fastest growing segment of Texas’ permanent-structure housing market. Since 2005, this segment has grown by 58.4 percent compared with 18.9 percent in the U.S. The market shares of these buildings have trended upward at both the state and national levels since 2008. Buildings with 50 units or more are the second fastest growing segment of Texas’ permanent-structure housing market. Since 2005, the number of housing structures with 50 or more units has grown by 40 percent compared with 31.4 percent in the U.S. In both the state and the nation, the market shares

24

of buildings with 50 or more units fell in the GR followed by upward trends since 2010. Two-unit structures had the smallest share of the state’s permanent-structure housing market in 2017, accounting for 1.9 percent of the housing inventory. This compared with 3.6 percent for the U.S. The market shares of two-unit buildings are slowly trending downward at both the state and national levels. With a growth rate of 7.3 percent from 2005 to 2017, buildings with five to nine units had the smallest growth rate in Texas. The market shares of those buildings have trended downward since 2005. The 2005–17 U.S. growth rate for that category was 4 percent. The third largest category of Texas’ housing market in 2017 was buildings with ten to 19 units, which accounted for 6.3 percent of the market compared with 4.4 percent for the U.S. From 2005 to 2017, buildings in this category increased 15.6 percent in Texas and 8.4 percent in the U.S., but their market shares have not changed significantly since 2005. Attached homes made up 2.6 percent of Texas’ housing inventory in 2017 compared with 5.9 percent for the U.S. TIERRA GRANDE


Table 3. Housing Occupancy Rates in Texas, U.S. Since 2005, their volume has markets to changes in populaTexas United States increased by 18.1 percent tion, income, and preferences. Structure 2017 2005 2017 2005 in Texas and 14.1 percent Occupancy for detached Detached 90.3 91.1 89.1 91.5 nationally. The market homes rose to 91 percent Attached 88.4 90.8 90.1 90.9 shares of attached homes in in 2014 in the aftermath of 2 units 84.3 82.0 83.6 84.7 both the state and the nation the recovery from the GR, 3 or 4 units 87.2 86.5 85.4 85.5 have remained around their then fell to 90.3 percent in 5 to 9 units 84.0 83.5 85.8 85.7 2005 shares. 2017 (Table 3). Occupancy 10 to 19 units 83.9 79.6 85.2 84.4 uildings with three or of attached homes trended 20 to 49 units 80.9 78.8 84.5 84.7 four units made up 3.2 upward until 2014, reaching 50 or more units 86.9 88.4 85.1 87.8 percent of Texas’ and 91.8 percent, before falling to Manufactured homes 79.1 81.5 77.7 82.0 4.4 percent of the nation’s 88.4 percent in 2017, the highmarkets in 2017. From est rate after detached homes. Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University 2005 to 2017, this category Occupancy rates for twoincreased 13.3 percent in unit buildings increased from Texas, higher than the nation’s 4.7 percent. However, market 80.8 percent in 2007 to 85.7 in 2015 then fell to 84.3 percent shares for neither have changed significantly since 2005. in 2017. Buildings with three to four units peaked at 88.5 The number of boats, RVs, vans, etc. used as homes in Texas percent occupancy in 2015 then trended downward to 87.2 grew 66.7 percent from 2005 to 2017, but their market shares percent in 2017. Occupancy for buildings with five to nine in 2017 were small—0.2 percent in Texas and 0.1 percent in units increased from 80.5 percent in 2010 to 86.9 percent in the U.S. 2016, but decreased to 84 percent in 2017. Buildings with ten Supplies of Texas detached, attached, buildings with 50 units to 19 units had upward trends in occupancy following the or more, and manufactured homes grew faster than demand recovery from the GR, reaching 85.6 percent before falling to for these home types from 2005 to 2017, whereas the demand 83.9 in 2017. for buildings with two to 49 units grew faster than supplies Buildings with 20 to 49 units trended upward until 2015, for these home structures. These changes are reflected in the reaching 84.6 percent occupancy, then fell to 80.9 percent in occupancy rates of these housing segments. 2017. Buildings with 50 units or more have occupancy rates higher than national averages, but the rates have trended Texas Occupancy Rates downward since 2015, falling to 86.9 percent in 2017. ManufacIdentifying trends in housing occupancy rates can help market tured homes have trended downward since 2013, falling to 79.1 participants identify directions of market conditions and make percent in 2017. better-informed forecasts about the demand and supply condiFor figures showing market share and occupancy trends for tions when planning production and sales of housing units. different housing types, read the online version of this article Texas’ occupancy rates for all types of homes trended upward at www.recenter.tamu.edu. after the recovery from the GR but have trended downward in Dr. Anari (m-anari@tamu.edu) is a research economist with the Real recent years. The rise and fall of occupancy rates were mainly Estate Center at Texas A&M University. due to responses of the demand and supply sides of the housing

B

T

he Real Estate Center used 2005–17 annual housing data from the U.S. Census Bureau’s American Housing Survey to analyze Texas and U.S. housing supply and demand. Supplies are measured in total number of housing units. Demand

OCTOBER 2019

About the Study is measured in number of occupied units. Dividing the number of occupied units by the total number of units over time gives the demandto-supply ratio (occupancy rate) over time. The occupancy rate measures the relative strength of the supply

and demand sides of the housing markets and shows changes in market conditions due to changes in supply and demand. Rising occupancy rates indicate growing housing demand relative to supplies. Falling rates suggest the market is cooling due to more units relative to demand. 25


Brokerage

Running a brokerage business through a business entity such as a corporation, LLC, or partnership can help protect the owner’s personal assets from liability associated with brokerage activity. Understanding the different structures and TREC requirements for each is key to establishing and maintaining a successful business entity brokerage. By Kerri Lewis

T

here are several reasons why a real estate license holder would run a brokerage business through a business entity. Chief among them is protecting the owner’s personal assets from liability associated with brokerage activity. Unless the business entity broker is properly formed and maintained, however, liability protection is illusory, and the whole purpose of running a brokerage business through an entity is defeated. This article addresses the types of business entities available, Texas Real Estate Commission (TREC) requirements, and how to properly maintain a business entity license. TREC does not regulate the ownership of a business entity. A broker, sales agent, nonlicense holder, or another business entity can own the company. As long as a qualified designated broker is in charge of all brokerage activity for the entity and the entity meets the other TREC requirements for licensure, anyone can own the entity. Understanding the ownership structure and authority is necessary to provide the proper documentation to TREC when applying for or renewing a license or changing a designated broker.

26

Not All Entities are Equal The Real Estate License Act defines a business entity as a “‘domestic entity’ or ‘foreign entity’ (Section 1.002, Business Organizations Code), qualified to transact business in this state.” The types of entities referenced in the Business Organizations Code that are most commonly used for a business entity broker are corporations (both C and Sub-S types), limited liability companies (LLC), and general and limited partnerships. With the exception of general partnerships, all of these entities are required to file formation documents with the Texas Secretary of State. Determining which type of entity to use depends on the management, tax, liability, continuity, and formality-of-operation preferences of each individual and should be discussed with a legal and tax professional. Understanding each entity’s ownership structure and associated management documents is critical. This is true even if a broker owns 100 percent of the company. Different types of documentation are needed for each entity type (see table). Knowing this information will not only greatly assist a license holder in obtaining and renewing a broker entity license with TREC but in interacting with title companies as well.

TREC Requirements for Business Entity Brokers According to TREC Rule §535.53, a business entity must be qualified to do business in Texas to obtain or renew a broker’s license in Texas. TREC requires submission of a Franchise Tax Account Status page from the Texas Comptroller of Public TIERRA GRANDE


Accounts issued within 21 days prior to the date of application as evidence that the entity meets this requirement. Make sure to file all Franchise Tax Reports and pay any taxes due. A business entity is required to notify TREC no later than the tenth day after the date it receives notice that it is not qualified to transact business in Texas. Should this occur, the entity’s license and the licenses of all sponsored agents will be changed to inactive status until the entity provides proof to TREC that it is qualified to transact business in Texas again. An individual who holds an active Texas real estate broker’s license and who is in good standing with TREC must be designated to act for the business entity in all brokerage activity. An individual broker is not in good standing if the broker: • had a license revoked or suspended, including probated revocation or suspension; • was the designated broker for another business entity that had its license revoked or suspended, including probated, in the past two years; • has any unpaid or past-due monetary obligations to TREC, including administrative penalties and Real Estate Recovery Trust Account payments; or • was the designated broker for another business entity that has any unpaid or past due monetary obligations to TREC that were incurred while the broker was the designated broker for that entity.

designated broker must be a corporate officer. For an LLC, the broker must be a manager or a managing member (or possibly an officer if the LLC’s documentation shows it elected to have officers). For general and limited partnerships, the broker will be a general partner. The business entity must provide documentation to TREC showing the designated broker’s management position to obtain a license or to change the designated broker. The business entity must provide proof that the designated broker owns at least 10 percent of the business entity or, if the designated broker does not own at least 10 percent, proof that the business entity maintains errors and omissions insurance in the amount of at least $1 million per occurrence. Proof of managing authority and ownership are necessary when requesting a change of designated broker. oreign business entities must provide proof of having a broker’s license in the foreign jurisdiction, such as a real estate license history from another state. In addition to filing an application for a business entity broker license (online is the best option), applicants must prove that they meet TREC’s requirements. As explained earlier, all types of entities must prove they are qualified to do business in Texas. Documentation for proof of ownership and managing authority, however, differs by entity type (see sidebar on next page).

F

Comparing Business Entities Entity Corporation

Ownership Structure Shareholders

Formation Documents

Governing Body

Governing Document

Certificate of Formation (Articles of Incorporation)

Board of directors/ corporate officers

Bylaws

Operating Agreement

LLC

Members

Certificate of Formation

Members or manager (choice must be stated in Certificate of Formation)

General partnership

General partners

General Partnership Agreement

General partners

General Partnership Agreement

Limited partnership/limited liability partnership

At least one general partner and limited partners

Limited Partnership Certificate of Formation

General partner

Limited Partnership Agreement

Source: Kerri Lewis

I

f the designated broker becomes inactive, is not in good standing with TREC, or dies, the business entity cannot perform brokerage activities, and all sponsored agents become inactive until a new qualified designated broker is approved by TREC. Therefore, it is critical that the owner of a business entity broker monitors the designated broker’s status and has a succession plan in place so swift action can be taken if the designated broker no longer qualifies to act in that capacity. Succession planning for all entity types and individual brokers will be the subject of an upcoming article. The designated broker must have managing authority for all brokerage activity conducted by the entity. The actual title of the designated broker’s management position will be different based on the type of entity. For a corporation, the OCTOBER 2019

Protecting Owner’s Assets from Civil Liability Even if a business entity satisfies TREC’s requirements for licensure, protection of the owner’s personal assets from civil liability is not guaranteed. To take advantage of the personal liability protection, the business entity must be treated as a separate “person” and not be merely the owner’s “alter ego.” Texas courts have held the individual owner liable for the debts of a business entity where the owner and the business entity were so unified that holding the entity solely liable would cause an injustice. Commingling funds is one of the main reasons a court will “pierce the corporate veil.” For examples, see Watkins v. Basurto, 2011 WL 1414135 (Tex. App.–Houston [14th Dist.] Apr. 14, 2011, no pet.); Doyle v. Kontemporary Builders Inc., 370 S.W.3d 448 (Tex.App.–Dallas

27


2012, pet. denied); and In re Arnette (Ward Family Foundation v.Arnette), 2011 WL 2292314 (Bankr. N.D. Tex. June 7, 2011). There are four steps a business entity owner can take to maintain a separate identity for the entity. • Have a governing document signed by the owners of the entity. Because this document is not required to be filed with the Secretary of State, many people fail to complete this important step. The governing document sets out the governing authority for the entity and how the owners of the entity receive distributions of proceeds, transfer ownership, or act on behalf of the entity. Refer to the table to see which governing documents apply to each entity type. • Establish a separate bank account for the entity, and run all funds received from entity activity through that account. That doesn’t mean the owners can’t subsequently withdraw money from that account. They may, and it is best to do so in accordance with the distribution provisions of the governing document.

• Maintain good entity records. Some types of entities, like corporations, require more formal documentation. Others, like LLCs, are more informal. In all cases, keep separate records for individual owner and entity actions. • Ensure formal documents, letters, and Commission Disbursement Authorization requests to title companies are signed properly. Don’t sign as an individual when it is entity business. Entity signatures will always start with the name of the entity, followed with a “by” line where the authorized person signs on behalf of the entity and shows the title they hold. Bottom line: understanding and maintaining good entity documentation and designated broker structure will help keep license holders in compliance with TREC and provide the risk benefits afforded by the business entity. Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney. Lewis (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former General Counsel for TREC.

The following are examples of documents that will satisfy TREC’s requirements for each entity type.

Proof of Managing Authority Proof of Ownership Corporation • Stock certificates; • IRS schedules K-1, C, or G; or • Corporate resolution or meeting minutes signed by directors or shareholders (This would be used where shares have been transferred and documented in the resolution or minutes. Must include a copy of the Articles of Incorporation and/ or bylaws so TREC can trace the chain of ownership.).

LLC • Operating Agreement or • IRS schedules K-1 or C.

Partnership • Partnership Agreement or • IRS schedules K-1 or C.

28

form name for Articles of Incorporation filed with the Secretary of State.).

Corporation • Corporate resolution or meeting minutes signed by directors (chair or all) or all shareholders (This must include a copy of the Articles of Incorporation, bylaws, or former resolutions or minutes, if necessary, to show who the current directors are or shareholders eligible to sign the resolution or minutes. Pay attention to the title of the resolution and the signatories. TREC has more than once received a resolution of shareholders signed by a director.); • Officers and directors info on the Franchise Tax Account Status page results (This is a quick and easy way to provide the information if the management has not changed recently.); or • Articles of Incorporation or Certificate of Amendment filed with the Texas Secretary of State’s office (Certificate of Formation is the new

LLC • Operating Agreement, signed by all members; • Officers and directors information on the Franchise Tax Account Status page results; • Certificate of Formation or Certificate of Amendment filed with the Secretary of State’s office (These documents show whether the LLC elected to be managed by the members or a manager.); or • Company resolution (This is like a corporate resolution setting out changes in management or other company action agreed to by the members.).

Partnership Partnership Agreement, signed by all partners (This includes limited partners if it is a limited partnership.). TIERRA GRANDE


MarketViewer Texas housing data at your fingertips from Texas Realtors, powered by Real Estate Center analytics. Market Selector

August 2019 Market Statistics - Texas Median Price

Closed Sales

Active Listings

Months Inventory

▲ 4.3% YoY

▲ 4.2% YoY

▲ 4.1% YoY

▲ 0.1 YoY

$245,000

$5,743

115,944

PRICE DISTRIBUTION

4.0

< $100k

$400-499k 6.0%

$500-749k

0.0%

HOME VALUATION STATS 2015

2016

2017

2018

2019

$121.87

Median Home Size

30,000

86

▲ 4.0% YoY

$250K

Closed Sales

$150K

20,000

$100K 10,000

Median Home Price

$200K

Days to Close

Total Days

Median Price/Sq Ft

CLOSED AND MEDIAN PRICE HISTORY

Unchanged from August 2018

Unchanged from August 2018

6.0%

$1M + 1.5%

2.0%

33

17.0% 7.9%

$750-999k 1.6%

4.0%

53

33.6%

$300-399k

8.0%

Days on Market

26.8%

$200-299k

GROWTH TREND FOR CLOSED SALES AND MEDIAN PRICE

TRANSACTION TIME STATS

5.7%

$100-199k

$50K

Unchanged from August 2018

$0K

0 Closed Sales

2,012 sq ft

Median Year Built

2001

Close/Original List

95.7%

Median Price

New features: You can filter data by property type and new vs. existing homes.

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monthly data on median price, closed sales, active listings, days on market, days to close, months inventory, and more.

by state, county, metropolitan area, ZIP code, school district, state and federal political districts, and city council districts.

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and share infographics for your clients.

Available to Texas Realtors at www.texasrealestate.com/marketviewer OCTOBER 2019

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Profile for Real Estate Center

Tierra Grande - October 2019  

The Real Estate Center is the nation's largest publicly funded organization devoted to real estate research. The Center's flagship periodica...

Tierra Grande - October 2019  

The Real Estate Center is the nation's largest publicly funded organization devoted to real estate research. The Center's flagship periodica...

Profile for recenter