TG - Winter 2021

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TEXAS REAL ESTATE RESEARCH CENTER

TEXAS A&M UNIVERSITY

Texas Real Estate Research Center COLLEGE STATION, TEXAS 77843-2115

EST 1971

TEXAS REAL ESTATE RESEARCH CENTER

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TEXAS REAL ESTATE RESEARCH CENTER

Celebrating half a century of helping Texans make the best real estate decisions.

EST 1971

TEXAS REAL ESTATE RESEARCH CENTER Visit us online at www.recenter.tamu.edu or by using the QR code.

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VOLUME 28, NUMBER 1 www.recenter.tamu.edu @recentertx

TIERRA GRANDE MAGAZINE TEXAS REAL ESTATE RESEARCH CENTER

2 | Retreat or Resurgence

7 Keeping It Fair Understanding ADA, FHA Accommodations and Modifications Housing residents come in all types, some with special needs. Laws are in place to help ensure those needs are met. Housing providers need to understand those laws and how they differ from each other. By Kerri Lewis

Which Direction is Texas Housing Headed?

Three words helped define Texas’ single-family housing market in the unconventional year that was 2020: millennials, mortgage rates, and moratoriums. By Joshua Roberson

10 | Lien on Me Payment Protection for Tradesmen Tape measure? Check. Level?

Check. Hammer? Check. But don’t forget about one of the most important tools in the tradesman’s toolbox: the mechanic’s and materialman’s liens. By Rusty Adams

19 | Back to Work How Texas Jobs are Returning Almost one-and-a-half million Texas workers got an unexpected and unwelcome “vacation” in spring 2020. Fortunately, for many it was short-lived. Here’s why.

By Ali Anari

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24 | Downsized Pandemic Diminishes Homebuying Ability As if housing affordability wasn’t already a big enough concern for much of the state, the pandemic made it even harder for some to afford the home they want—or any home at all. By Harold D. Hunt and Clare Losey

28 | Practically Speaking Real Estate Questions Answered Land sakes, the laws that determine what qualifies a property for a so-called “ag exemption” sure are complicated. Your county’s Central Appraisal District can help. By Kerri Lewis and Avis Wukasch

Checking Out Leisure and Hospitality Industry’s Struggle COVID-19 was a nightmare guest for the state’s leisure and hospitality industry in 2020, virtually shutting down hotels, restaurants, and entertainment venues and putting hundreds of thousands out of work. The sector is still recovering from the labor pains. By Luis Torres, Paige Silva, and Griffin Carter Executive 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 Graphic Specialist/Photographer, JP BEATO III Graphic Designer, ALDEN DeMOSS Communications Specialist II, HAYLEY RIEDER

ADVISORY COMMITTEE: Troy C. Alley, Jr., DeSoto, chairman; Alvin Collins, Andrews, vice chairman; Russell Cain, Port Lavaca; JJ Clemence, Sugar Land; 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.

TG (ISSN 1070-0234) is published quarterly by the Texas Real Estate Research 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 Texas Real Estate Research 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.

Circulation Manager, MARK BAUMANN

PHOTOGRAPHY/ILLUSTRATIONS: Getty Images, pp. 1, 7, 8-9, 10-11, 12-13, 14-15, 18, 19, 22, 24, 27; Robert Beals II, pp. 2-3, 6; JP Beato III, pp. 4-5, 20, 23.

Lithography, RR DONNELLEY, HOUSTON

© 2021, Texas Real Estate Research Center. All rights reserved.

ON THE COVER: Snowy pecan orchard, Burleson County. Photographed by Robert Beals II. WINTER 2021

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Residential

Retreat or Resurgence Which Direction is Texas Housing Headed?

Despite the toll the pandemic took on the Texas economy, the state’s housing market is faring well overall. Sales continue to rise, and new construction is up. While homeowners are confident about being able to pay their mortgages, renters, who generally have fewer financial resources, are less certain.

By Joshua Roberson

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High Demand for Texas Housing

Texas housing has been in strong demand in the wake of the pandemic and shelter-in-place restrictions. Home sales had an impressive surge in June and July. By the end of summer, year-to-date sales had roared back, and the market was poised for another consecutive year of annual sales growth (Figure 1). How has demand managed to be so robust despite chaos in the overall economy, and how long could it last?

Before COVID, the U.S. economy was in great shape by almost any metric. National unemployment rates

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Sales (Thousands)

ears from now, what will people remember about the had dwindled to historic lows, and labor participation was on COVID-19 pandemic? Social tensions? Hand-washing the rise. The tightening slack in the labor market resulted in jingles? Those following the economy will perFigure 1. Texas Cumulative Home Sales haps recall the housing market’s surprising resiliency.

Few expected such a rapid recovery in the housing 300 market, especially after the last recession caused by the mortgage market collapse. Unlike last time, the housing 2019 market may end up the economic hero of 2020.

2020 200

100

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Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Sources: Texas Realtor Data Relevance Project and Texas Real Estate Research Center at Texas A&M University TG

Median Current Dollars (Thousands)

Figure 2. U.S. Real Median Household Income (2019 CPI-U-RS adjusted dollars)

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66

63

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57 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Sources: U.S. Census Bureau and Texas Real Estate Research Center at Texas A&M University

a significant boost in real income growth in 2019 (Figure 2).

Texas was among the states leading economic growth for most of the decade. No wonder many Texas households were as prepared as possible for the economic headwinds brought on by the pandemic.

Millennials Make Their Move Bottomed-out mortgage rates ignited a “now or never” mentality for many potential homebuyers. One demographic, in particular, benefited from the low rates. After much anticipation, the long-awaited wave of millennial homebuyers rolled in, and just in time.

Actually, a growing number of millennials had already begun entering the housing market in recent years, but their potential had not yet been fully realized. Then last year the National Association of Realtors reported that older millennials (those born in the WINTER 2021

1980s) made up the largest age cohort of buyers in 2019, claiming a quarter of all home purchases. Over half of these were first-time buyers. As millennials continued to form families and earn more, home-sale expectations were primed for a big year in 2020. That was before the COVID pandemic.

Fortunately, data from throughout the year suggest millennials lived up to expectations. According to Realtor.com as well as other industry experts, millennials were responsible for the largest share of primary home purchase mortgages in 2020. In fact, their share has grown sharply as Gen Xers’ and baby boomers’ shares have diminished. This bodes well for Texas’ housing outlook provided the trend continues.

Texas has a larger proportion of millennials than the nation as a whole (Figure 3), and not only in its four largest metros.

Cities such as El Paso, Killeen-Temple, and Lubbock have millennial populations that are higher than the national average, and most of those metros are having better home sales in 2020 than they did in 2019.

Figure 3. Texas, U.S. Population By Age Cohort Under 5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85 and over

0.0%

2.0% Texas

4.0% U.S.

6.0%

8.0%

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

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Sales Sizzle or Fizzle?

Figure 5. Texas Mortgages Past Due

Percentage

Unfortunately, pushing mortgage rates down to historic lows could be like pouring lighter fluid on a fire. In other words, without a steady supply of home listings to fuel the market, sales growth could fizzle out soon after the initial burst.

At current supply and demand levels, homes are flying off the market at escalating prices.

The aggregate supply of homes in Texas is 7.5 beginning to resemble the most intense submarkets, such as Austin and North Dallas, during the heights of the past decade. In August 5.0 2019, the supply of homes was almost four months. A year later it was only two and a half months. Additionally, half the homes sold in 2.5 Texas were on the market fewer than 22 days.

quarter. Percentages for both the 30-59 and the 60-89-dayspast-due groups also trended downward in the third quarter, which could signify another dip for the 90-day group in the fourth quarter.

Mortgage Payment Peril

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hile many homeowners have jumped 0.0 on the opportunity to buy or refi2015 2016 2017 2018 2019 2020 2021 90 days or more nance at favorable rates in 2020, 60-89 days others have fallen seriously close to losing 30-59 days their homes. The Coronavirus Aid, Relief, and Sources: Mortgage Bankers Association, Haver Analytics, and Texas Real Estate Research Center Economic Security (CARES) Act provided a at Texas A&M University safety net against both foreclosures and evictions. So far this year in Texas, CARES has U.S. CENSUS BUREAU DATA show renters occupied 38 successfully curtailed an onslaught of foreclosures. percent of Texas homes in 2019 (this includes all housing Late payments were a different story. Nationally, loans in units, not just single-family). A recent survey indicated renters are less confident than homeowners about being forbearance peaked in mid-May and have, for the most part, able to pay housing expenses because of been in steady decline since then, according to data provider economic stress caused by COVID-19.

Black Knight.

For all its merits, the CARES Act was always going to have limitations. Despite stimulus payments, many Texas homeowners fell behind on their mortgages payments even as foreclosures plummeted (Figure 4). According to data from the Mortgage Bankers Association, the percentage of delinquent Texas home loans jumped significantly in second quarter 2020, eclipsing the previous high from Hurricane Harvey in 2017.

The biggest spike in the second quarter was in payments that were 90 or more days past due (Figure 5). However, the percentage for that category actually trended downward in the third

Figure 4. Texas Foreclosures Started

Percentage

0.3

0.2

0.1

0.0 2015

2016

2017

2018

2019

2020

2021

Sources: Mortgage Bankers Association, Haver Analytics, and Texas Real Estate Research Center at Texas A&M University

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Making Sense of Rents

Figure 6. Home Rental Price Index Year-Over-Year Growth

3.0 Index Growth (Percent)

Even with overall delinquencies on the rise, most Texas homeowners seem confident in their ability to pay their mortgages and perceive a minimal risk of foreclosure, according to weekly findings from the U.S. Census Bureau’s Household Pulse Survey (HPS).

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1.0 While Texas homeowners have been fairly upbeat, the same can’t be said of renters.

HPS data indicate renters were more likely 0.0 than homeowners to suffer under the economic pressure brought on by COVID–1.0 19, both in the immediate aftermath and beyond. In general, renters earn less, save 2015 2016 2017 2018 2019 2020 2021 less, and have less income stability than Austin-Round Rock Houston-The Woodlands-Sugar Land Dallas-Fort Worth-Arlington San Antonio-New Braunfels homeowners, which means they have Sources: Texas Realtor Data Relevance Project and Texas Real Estate Research Center at Texas A&M fewer safety measures to weather the University storm. It’s no wonder renters are less confident than homeowners in being able to pay housing expenses and avoid eviction. As the recession has Strangely enough, much of the available rental data doesn’t progressed, an increasing number of renter households have reflect this doom and gloom. Rental activity through the fallen behind on their payments.

Multiple Listing Service (MLS), which mainly includes singlefamily rental housing, has suffered negative shocks in rental inventories, but properties are still moving fiercely and rents are growing strong after a brief setback during the shelter-athome restrictions (Figure 6). ingle-family renters have a lot in common financially with their homeowner counterparts. Most single-family rental homes are larger than multifamily rentals, at least by bedroom count, according to the Census Bureau. Extra space typically requires higher incomes and, in some cases, renters may end up paying more than homeowners for the same square footage, especially with mortgage rates spiraling downward.

In fact, in many housing markets throughout the state, the total cost of renting rivals overall homeowner costs. According to Census Bureau estimates, the largest housing expense cohort in Texas for both homeowners and renters is between $1,000 and $1,500 (Figure 7). Single-family properties are believed to dominate these estimates, which include total expenses, not just rent or mortgage payments.

Renters who participate in the HPS are often connected by their income differences. For example, those with lower incomes generally have more work-hour disruptions and more difficulty paying rent. They also tend to be young, single households, which are not as likely to buy or rent single-family dwellings.

In the current interest rate environment, higher-earning renters are likely tempted to buy a home. Unfortunately, many others have the same idea, making the home-search process incredibly competitive. If an existing home can’t be found, then perhaps a new one will do, which may be why the construction industry is booming.

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Construction Comeback Homes are in short supply, making builders the most unlikely of beneficiaries in the post-COVID economy. Despite starting off with intense pessimism, current homebuilder sentiment couldn’t be better according to polling from the National WINTER 2021

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SINGLE-FAMILY BUILDING PERMITS in Texas backtracked 1 percent in September 2020 but remained on a strong upward trajectory after reaching an all-time high in August. Zonda data showed more than 27,100 single-family homes broke ground in the Texas Urban Triangle in the third quarter, surging 6.1 percent.

Association of Homebuilders (NAHB). New-home construcindustry, for example. After an acute market imbalance, how tion is regarded as a leading factor for economic recovery. long will it take for oil demand and prices to stabilize and MLS sales of new single-family homes in August were unexbring back jobs? A stalled recovery could have wide-reaching ceptional compared with June and July. But, like existing home negative effects, such as soft housing demand, throughout sales, new-home sales had much ground to cover during the much of Texas. The lumber industry, meanwhile, is seeing summer to recover, creating an unfair comparison. Year-overlumber prices escalate because of major supply chain disrupyear growth has still been good since August, and year-to-date tion. Will severe price hikes in soft lumber hinder new home sales are on track sales momentum, to exceed 2019. or will the market Figure 7. Texas Housing Payments With the arrival absorb the current of colder months, price? So far, the Less than $500 what lies ahead for market appears to $500 to $999 homebuilders, and have absorbed the will there be enough higher lumber costs $1,000 to $1,499 demand to keep the because of strong momentum going in $1,500 to $1,999 demand.

2021?

The amount of Even though time it will take $2,000 to $2,499 MLS new-home for households to $2,500 to $2,999 sales are less likely bounce back is also to include either cause for concern. $3,000 or more custom home sales Many renter houseor sales from some holds are still in 0 10 20 30 Percent major homebuilders, financial distress Homeowner Renter the overall newand nowhere near home outlook still recovery. Efforts Sources: U.S. Census Bureau and Texas Real Estate Research Center at Texas A&M University looks promising. have been made at Statewide, building permits have been on the rise since July. both the state and local levels to protect renters from losing Assuming these permits follow through, they could give the their homes, including allocating $176 million in federal funds state a much-needed economic boost. Nationally, foot trafto provide rental assistance in Texas. fic of prospective buyers remained unusually high late into This leads up to a very important question. How will either the homebuilding season, according to NAHB data. Houston, the economy or housing market handle itself without governwhich is leading the charge, could especially use the boost after ment assistance? For most of the pandemic both have been a rough year in the oil patch. under the protective wing of various government interventions. Many economists project that the U.S. will not even Life After COVID begin recovery until well into 2021, but even those projections How Texas, the nation, and the world face continuing COVIDare uncertain. Texas will need to wait to find out if its housing related challenges will have major implications on the state’s market is in retreat, resurgence, or possibly both. economy and housing market.

Roberson (jroberson@mays.tamu.edu) is a senior data analyst with the Texas First, how and when will certain industry sectors iron out Real Estate Research Center at Texas A&M University. the economic shocks brought on by the virus? Take the oil

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Residential

Keeping It Fair Understanding ADA, FHA Accommodations and Modifications

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Both the Fair Housing Act and the Americans with Disabilities Act protect people with disabilities against housing discrimination. However, there are differences between the laws, including what is covered and who pays for changes. Real estate professionals need to understand how each law works. By Kerri Lewis Several laws prohibit housing discrimination against people with disabilities, with the two major federal civil rights laws being the Fair Housing Act (FHA), which became law in 1968 and was amended in 1988 to include people with disabilities, and the Americans with Disabilities Act (ADA), which was enacted in 1990.

Although these laws have been in place for over 30 years, people with disabilities continue to experience the highest rate of discrimination in housing transactions. According to the National Fair Housing Alliance’s (NFHA) 2019 Fair Housing Trends Report, the number of housing discrimination complaints in 2018 increased by 8 percent to 31,202, the highest since NFHA began producing the report in 1995.

Complaints of discrimination based on disability represent 56.3 percent of these.

NFHA’s full report is online. Scan the QR code to access it.

The FHA and the ADA share the goal of preventing discrimination by requiring reasonable accommodations and modifications to allow individuals with disabilities to have the full use and enjoyment of their dwelling and any associated common areas. However, there are significant differences between each law, including who pays for changes. Understanding these WINTER 2021

differences will help license holders and their clients avoid discrimination complaints and possibly costly fines.

What is Considered a Disability Under the Law? The FHA and ADA have similar definitions for “disability,” although the FHA uses the term “handicap” instead of disability. Both acts define a person with a disability as an individual with a physical or mental impairment that substantially limits one or more major life activities, an individual who is regarded as having such an impairment, or an individual who has a record of such an impairment.

The federal interpretation of what constitutes a physical or mental impairment is broad and includes most any ailment or condition as long as it “substantially limits” a “major life activity.” This includes alcohol or drug addiction so long as it does not involve current illegal drug use.

The U.S. Department of Justice’s (DOJ) Civil Rights Division has interpreted a major life activity to be “those activities that are of central importance to daily life, such as seeing, hearing, walking, breathing, performing manual tasks, caring for one’s self, learning, and speaking.” They interpret “substantially limits” to mean “the limitation is ‘significant’ or ‘to a large degree.’”

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What is Covered?

The FHA covers almost all public and private housing transactions and prohibits housing providers from discriminating against housing applicants or residents because of their disability or the disability of someone associated with them. Examples of discrimination against a person with a disability would be when the owner, landlord, property manager, property owners’ association (POA), or real estate license holder: • refuses to sell or rent to that person; • refuses to make reasonable accommodations in rules, policies, or services; • refuses to allow a reasonable modification of the premises; or • imposes different terms, conditions, or deposits on that person.

The ADA’s reach is more narrow. It provides that places of “public accommodation” in governmental, public, and private facilities must meet specific accessibility standards to accommodate individuals with disabilities. These standards are set out in the ADA Accessibility Guidelines (ADAAG).

Types of Accommodations, Modifications

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easonable accommodation. The DOJ and the U.S. Department of Housing and Urban Development (HUD) have issued a joint statement that provides technical assistance regarding reasonable accommodations and the rights and obligations of housing providers and individuals with disabilities. Scan the QR code to access this useful resource.

They define a “reasonable accommodation” as “a change, exception, or adjustment to a rule, policy, practice, or service that may be necessary for a person with a disability to have an equal opportunity to use and enjoy a dwelling, including public and common-use spaces.” A housing provider must make a requested reasonable accommodation if there is a nexus between the requested accommodation and the individual’s disability. Here are some examples.

An apartment complex has a “no pets” policy. The policy is waived for a blind person so her guide dog can live with her.

A property manager’s policy requires tenants to pay rent at the property manager’s office in person each month. A tenant has a mental disability that causes him to fear leaving his own premises. The policy is altered to allow this tenant to have a friend drop off his rent check to the property manager.

Reasonable modification. The DOJ and HUD have also issued a joint statement that provides technical assistance regarding reasonable modifications and the rights and obligations of housing providers and individuals with disabilities. That statement can be accessed by scanning the QR code.

This statement says a reasonable modification is “a structural change made to existing premises, occupied or to be occupied by a person with a disability, to

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afford such person full enjoyment of the premises. Reasonable modifications can include structural changes to interiors and exteriors of dwellings and to common and public-use areas.”

Again, there must be an identifiable relationship between the requested modification and the individual’s disability; otherwise, the housing provider does not have to allow it.

Examples of a reasonable modification are: • installing visual doorbells or fire alarms for a tenant who is hearing impaired, or • installing a ramp for access to a POA’s community clubhouse that has several steps, so a homeowner in a wheelchair can enjoy that amenity.

Public accommodation.

The ADA applies only to a “public accommodation,” which is defined as any of the 12 categories of businesses or facilities listed in the ADA that are open to the public. Although residential housing is not one of those categories, many of the listed categories, such as places of exercise or recreation, public place of gathering, libraries, or laundromats, are found in apartment complexes, residential subdivisions, or condominium complexes.

The ADA requires these places of public accommodation to maintain certain accessibility features to allow individuals with disabilities equal access. A private homeowner’s community is not subject to the ADA unless the common facilities are open to the public. This distinction is important because there is a difference in who pays depending on whether an accommodation or modification falls under the FHA or ADA.

Who Pays?

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nder the FHA, the housing provider is responsible for any cost associated with a reasonable accommodation unless the housing provider can prove that would cause an undue financial or administrative burden. The housing provider cannot charge the individual with a disability additional fees or rent because of the accommodation. The cost of a reasonable modification, on the other hand, is borne by the individual with the disability. The housing provider can request proof of financial ability to pay for a significant modification and require individuals to pay for the removal of the modification when they move out. The housing provider is TG

usually responsible for maintenance of the modifications made to common areas.

However, if an individual requests a modification that the housing provider should have already made under the ADA, the housing provider is responsible for the cost. The ADA requires the housing provider to pay for all modifications for public accommodations.

To illustrate how a fact pattern can change who pays for the modification under these acts, consider a scenario where a POA owns and maintains a community pool. If the pool is available

A SIGNIFICANT NUMBER OF TEXAS RESIDENTS rely on special accommodations and modifications to enjoy public spaces such as swimming pools.

According to U.S. Census Bureau American Community Survey data, the state had almost 3.2 million disabled residents in 2017, accounting for 11.4 percent of the total population. More than 82 percent of those residents were 65 and older.

ADA requirements, on the other hand, are proactive. Housing providers who have public accommodations must meet the ADA standards for accessibility whether a request is made by an individual with a disability or not.

Inquiries and Action

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nce a housing provider receives a request, what inquiries can the provider make, and what is “reasonable”?

The housing provider may request additional information regarding the request only if the disability is not obvious or the relationship between the disability and the requested accommodation or modification is not clear. Although housing providers may ask for documents to confirm that the disability falls under the FHA’s definition of “handicap” or “disability,” they may not request medical records or specific details of the disability. The housing provider may also ask for an explanation from the requester or documentation from a third party regarding how the requested accommodation or modification will help the requester overcome an effect of his disability.

In their joint statement, the DOJ and HUD note that an accommodation request is considered reasonable unless “it would impose an undue financial and administrative burden on the housing provider or it would fundamentally alter the nature of the provider’s operations. The determination of undue financial and administrative burden must be made on a case-by-case basis involving various factors, such as the cost of the requested accommodation, the financial resources of the provider, the benefits that the accommodation would provide to the requester, and the availability of alternative accommodations that would effectively meet the requester’s disability-related needs.”

A housing provider who claims that an accommodation is not reasonable is encouraged to work with the requester to find an alternative accommodation that is acceptable to both parties.

Who Enforces? only to that community’s homeowners, then a homeowner in a wheelchair who requests a modification for a pool lift chair will have to pay for it, because the modification falls under only the FHA. However, if the POA rents the pool out to members of the public for private events, allows general membership, or holds public swim meets at the pool, then it could be considered a public accommodation under the ADA. In this case, the POA would be required to pay for the installation of the pool lift chair.

Reactive vs. Proactive Accommodations FHA accommodation provisions are reactive. That means housing providers are not required to make any reasonable accommodation or modification unless requested by a person with a disability. Housing providers should be aware that there are no formal requirements for any such request. No specific words need to be used, and the request is not required to be in writing (although this is always the best practice).

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The DOJ enforces the ADA, and the DOJ and HUD are jointly responsible for enforcing the FHA. HUD has certified that the Texas Fair Housing Act is substantially similar to the FHA, so complaints in most of Texas are received and enforced by the Texas Workforce Commission’s (TWC) Civil Rights Division.

Fair Housing complaints from Austin, Corpus Christi, Dallas, Fort Worth, and Garland are handled by each city’s fair housing office. Housing providers should be aware of any additional requirements imposed by their local jurisdiction.

Individuals can also file a civil lawsuit in federal district court.

Both HUD and TWC try to facilitate a resolution where possible between the housing provider and the individual with the disability. This practice benefits both parties since litigation takes time and money, and fines for housing providers who do not follow the law can be substantial.

Lewis (kerri@2oldchicks.com) is a member of the State Bar of Texas and former general counsel for TREC.

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Legal Issues

LIEN ON ME Payment Protection for Tradesmen Texas law provides two types of mechanic’s and materialman’s liens—constitutional and statutory—to help ensure tradesmen are paid for work done on real properties. Rules for both are set out in Chapter 53 of the Texas Property Code. By Rusty Adams

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ometimes the hardest part of business is getting paid.

The business of building, repairing, and remodeling real properties is no exception. Quitting the job doesn’t often encourage a property owner to pay, and undoing the work—even if possible—is counterproductive. That’s why Texas law affords tradesmen a method of protecting themselves and collecting for their work. This protection is known as the mechanic’s and materialman’s lien.

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WHAT’S A LIEN?

A lien is a charge against property to secure payment of a debt or performance of an obligation. It is not title to property, and a lienholder does not have ownership rights. Rather, it is an equitable interest that gives its holder the right to have satisfaction out of the property to secure the payment of a debt.

Simply put, a lien on the property is an encumbrance that the property owner must deal with. Like other liens—mortgages and tax liens, for example—a mechanic’s and materialman’s lien could ultimately result in a foreclosure and forced sale of the property to satisfy the lien.

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CONSTITUTIONAL AND STATUTORY MECHANIC’S LIENS

Texas has two types of mechanic’s liens—constitutional and statutory. All Texas mechanic’s liens have their source in Article XVI, Section 37 of the state constitution, which says, “Mechanics, artisans, and material men of every class shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon or material furnished therefor; and the legislature shall provide by law for the speedy and efficient enforcement of said liens.” The legislature fulfilled that constitutional mandate by passing the mechanic’s lien statutes, found in Chapter 53 of the Texas Property Code.

A constitutional lien is self-executing. It arises out of the language of the constitution itself and requires no filing or action on the part of the contractor. However, it applies only to contractors and suppliers in direct contractual privity with the property owner. A subcontractor does not have a constitutional lien.

In addition, contractors and suppliers, including subcontractors, have a statutory mechanic’s lien, which may be

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perfected (perfection is discussed later in this article) by following the rules set out in Chapter 53. The statutory mechanic’s lien affords substantially more protection in that it protects against subsequent purchasers. Chapter 53 sets out the rules of the statutory lien in great detail. This article addresses the more common situations, but it is not exhaustive.

A person has a lien if he labors or furnishes labor or materials, including specially fabricated materials, for construction or repairs to a house, building, or improvement (Tex. Prop.

Code § 53.021). Improvements include, but are not limited to, clearing, draining, or fencing of land; wells, cisterns, tanks, reservoirs, or artificial lakes or pools made for supplying or storing water; pumps, windmills or other machinery used to supply water for stock, domestic use, or irrigation; and planting, pruning, or maintaining orchards (Tex. Prop. Code § 53.001[2]).

A person who specially fabricates material has a lien, even if the material is not delivered (Tex. Prop. Code § 53.021[b]).

Material is specially fabricated if it is fabricated for use in the construction or repair so as to be reasonably unsuitable for use elsewhere (Tex. Prop. Code § 53.001[12]).

A person also has a lien for architectural or engineering design services or surveying or for landscaping, dirt work, or demolition services done under or by virtue of a written contract with the owner or the owner’s agent (Tex. Prop. Code § 53.021).

The lien extends to the house, building, fixtures, or improvements. In a city or town, the lien extends to each lot on which the house, building, or improvement is situated or on which the labor was performed. Outside a city or town, the lien extends to up to 50 acres on which the house, building, or improvement is situated or on which the labor was performed. The lien does not extend to abutting sidewalks, streets, and utilities that are public property (Tex. Prop. Code § 53.022).

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WHAT IS PERFECTION?

To get the full protection of the lien, the person claiming the lien must perfect the lien in accordance with the statutes.

Generally speaking, this means the claimant must: • give the appropriate preliminary notices, • make the appropriate filing, and • give notice to the property owner.

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Preliminary Notices Original contractors do not have to give preliminary notices.

However, before a residential construction contract is signed, they must give the disclosure statement required by Tex. Prop. Code § 53.255. Before commencing work, they must provide a list of all subcontractors and suppliers to be used (Tex. Prop. Code § 53.256). Special notices are required for contractual retainage and specially fabricated materials (Tex. Prop. Code §§ 53.057-53.058, 53.252-53.253).

Additionally, if the property is a homestead, a written contract between the original contractor and owner must be filed with the county clerk before any work is done on the homestead. If the owners are a married couple, both spouses must sign (Tex. Prop. Code § 53.254). hen labor or materials are provided and remain unpaid, original contractors are not required to give pre-lien notice to be protected by the constitutional lien. However, they must comply with the affidavit requirements to protect themselves against third parties.

Subcontractors and those supplying materials who have a contract with the original contractor are commonly called first-tier subcontractors. For nonresidential property, firsttier subcontractors must send a required notice to the owner, with a copy to the original contractor, by the 15th day of the third month following each month work was performed and unpaid. This is required for perfection of the lien, and it requires the owner to retain funds (Tex. Prop. Code § 53.056[c]). For residential property, the notices must be sent to both the owner and original contractor by the 15th day of the second month, and special language is required if the property is a homestead (Tex. Prop. Code § 53.252). Separate notices are required to perfect liens on contractual retainage claims and specially fabricated materials (Tex. Prop. Code §§ 53.057-53.058, 53.252-53.253). Second-tier and lower parties (subcontractors who contracted with someone other than the original contractor) on nonresidential projects must send notice to the original contractor by the 15th day of the second month after each month labor or materials were provided. If still unpaid, notice must be sent to the owner and original contractor by the 15th day of the third month following each month in which work was performed and unpaid (Tex. Prop.

Code § 53.056[b]).

To authorize the owner to retain funds, the notice must state, “If the claim remains unpaid, the owner may be

W

11

personally liable, and the owner’s property may be subjected to a lien unless: (1) the owner withholds payment from the contractor for payment of the claims; or (2) the claim is otherwise paid or settled” (Tex. Prop. Code § 53.056).

If the property is a homestead, Tex. Prop. Code §53.254(g) says the notice must include the following: IF A SUBCONTRACTOR OR SUPPLIER WHO FURNISHES MATERIALS OR PERFORMS LABOR FOR CONSTRUCTION OF IMPROVEMENTS ON YOUR PROPERTY IS NOT PAID, YOUR PROPERTY MAY BE SUBJECT TO A LIEN FOR THE UNPAID AMOUNT IF: (1) AFTER RECEIVING NOTICE OF THE UNPAID CLAIM FROM THE CLAIMANT, YOU FAIL TO WITHHOLD PAYMENT TO YOUR CONTRACTOR THAT IS SUFFICIENT TO COVER THE UNPAID CLAIM UNTIL THE DISPUTE IS RESOLVED; OR (2) DURING CONSTRUCTION AND FOR 30 DAYS AFTER COMPLETION OF CONSTRUCTION, YOU FAIL TO RETAIN 10 PERCENT OF THE CONTRACT PRICE OR 10 PERCENT OF THE VALUE OF THE WORK PERFORMED BY YOUR CONTRACTOR. IF YOU HAVE COMPLIED WITH THE LAW REGARDING THE 10 PERCENT RETAINAGE AND YOU HAVE WITHHELD PAYMENT TO THE CONTRACTOR SUFFICIENT TO COVER ANY WRITTEN NOTICE OF CLAIM AND HAVE PAID THAT AMOUNT, IF ANY, TO THE CLAIMANT, ANY LIEN CLAIM FILED ON YOUR PROPERTY BY A SUBCONTRACTOR OR SUPPLIER, OTHER THAN A PERSON WHO CONTRACTED DIRECTLY WITH YOU, WILL NOT BE A VALID LIEN ON YOUR PROPERTY. IN ADDITION, EXCEPT FOR THE REQUIRED 10 PERCENT RETAINAGE, YOU ARE NOT LIABLE TO A SUBCONTRACTOR OR SUPPLIER FOR ANY AMOUNT PAID TO YOUR CONTRACTOR BEFORE YOU RECEIVED WRITTEN NOTICE OF THE CLAIM. Specially fabricated items also have special notice requirements (Tex. Prop. Code § 53.058).

Filing Affidavits The claimant must file an affidavit with the county clerk in the county where the property is located. The affidavit must contain: • a sworn statement of the amount of the claim; • the name and last known address of the owner or reputed owner; • a general statement of the kind of work done and materials furnished by the claimant and, for a claimant other than an original contractor, a statement of each month in which the work was done and materials furnished for which payment is requested; • the name and last known address of the person by whom the claimant was employed or to whom the claimant furnished the materials or labor; • the name and last known address of the original contractor;

12

TG

• a description, legally sufficient for identification, of the property sought to be charged with the lien; • the claimant’s name, mailing address, and, if different, physical address; and • for a claimant other than an original contractor, a statement identifying the date each notice of the claim was sent to the owner and the method by which the notice was sent.

The claimant may attach to the affidavit a copy of any applicable written agreement or contract and a copy of each notice sent to the owner (Tex. Prop. Code Ann. § 53.054).

To be effective against subsequent purchasers and creditors, the contract must contain a property description.

A lien affidavit for homestead property must contain the following notice conspicuously printed, stamped, or typed in a size equal to at least ten-point boldface or computer equivalent at the top of the page: “Notice: THIS IS NOT A LIEN. THIS IS ONLY AN AFFIDAVIT CLAIMING A LIEN” (Tex. Prop. Code § 53.254[f]).

A lien on a homestead requires strict compliance with the requirements of Chapter 53.

For nonresidential property, the affidavit must be filed on or before the 15th day of the fourth calendar month after the day on which the indebtedness accrues. For residential property, the affidavit must be filed on or before the 15th day of the third calendar month after the day on which the indebtedness accrues (Tex. Prop. Code § 53.052).

The day on which the indebtedness accrues for an original contractor is the last day of the month in which either the owner or the original contractor terminates the contract in writing, or the last day of the month in which the original contract is completed, finally settled, or abandoned. For a subcontractor, the indebtedness accrues on the last day of the last month in which the labor was performed or the material furnished (Tex. Prop. Code § 53.053). However, for the subcontractor’s lien to attach to retained funds, the affidavit must be filed within 30 days after the work is completed (Tex. Prop. Code § 53.103).

Notice of Filing The claimant must give notice of the filing of the affidavit by registered or certified mail within five days after filing to the property owner and the original contractor (Tex. Prop. Code § 53.055). All notices, including the preliminary notices, must be given by registered or certified mail (Tex. Prop. Code §§ 53.055, 53.056).

N

NOBODY’S PERFECT

Those requirements can be a lot to handle, so when the contractor has failed to protect itself by perfecting a statutory lien, the constitutional lien can sometimes serve as a backup.

While the statutory lien provides more protection, the lien set out in the constitution is self-executing against the original

owner of the property in favor of the original contractor. There are no filing requirements, and no additional action is required.

However, the constitutional lien is not self-executing in respect to the liens of derivative claimants (i.e., subcontractors do not have a constitutional lien), and it is not binding on subsequent purchasers of the property who purchase without actual or constructive notice of the constitutional lien (see Apex Fin. Corp. v. Brown).

R

ENFORCING THE LIEN

Often, the notice or the filing of the lien affidavit is all that is necessary to resolve the debt on the property. If the debt is paid or settled after the filing of a lien affidavit, the owner should make sure a release is recorded (Tex. Prop. Code § 53.152, 53.157).

In case further collection action is needed, Texas mechanic’s liens may only be enforced by judicial foreclosure (Tex. Prop.

Code § 53.154). In other words, a lawsuit has to be filed to force the sale of the property so a lienholder can be paid.

A suit to enforce the lien must be filed within the appropriate time limits. For nonresidential properties, it must be initiated by the later of two years after the last date on which the lien claimant could file a lien, or one year after termination, completion, or abandonment of the work. For residential property, the deadline is the later of one year after the last date on which the lien claimant could file a lien, or one year after termination, completion, or abandonment of the project (Tex. Prop. Code § 53.158). Constitutional liens may be enforced up to four years from when the debt accrued (see Hoarel Sign Co. v. Dominion Equity Corp.).

B

WHICH LIEN HAS PRIORITY?

Generally, mechanic’s liens have priority over all other liens not attached prior to the inception of the mechanic’s lien (Tex. Prop. Code § 53.123; also see MBank El Paso Nat. Ass’n v.

Featherlite Corp.). Subcontractors, laborers, and materialmen with mechanics’ liens have preference over other creditors of the original contractor (Tex. Prop. Code § 53.121) and are on equal footing with each other, regardless of the filing date of the lien affidavits (Tex. Prop. Code § 53.122). Special priority rules exist for architects, engineers, surveyors, landscapers, and demolition workers.

This overview of mechanic’s lien law does not cover all details of the law. Mechanic’s lien law is highly technical and contains many traps for the unwary. For specific advice, consult an attorney who is familiar with the rules.

Adams (radams@mays.tamu.edu) is a member of the State Bar of Texas and a research attorney for the Texas Real Estate Research Center at Texas A&M University.

Cases Cited in this Article Apex Fin. Corp. v. Brown, 7 S.W.3d 820, 830 (Tex. App.—Texarkana 1999, no pet.).

Hoarel Sign Co. v. Dominion Equity Corp., 910 S.W.2d 140, 144 (Tex. App.—Amarillo 1995, writ denied).

MBank El Paso Nat. Ass’n v. Featherlite Corp., 792 S.W.2d 472 (Tex. App.—El Paso 1990, writ denied).

WINTER 2021

13

Texas Economy

The nature of the leisure and hospitality industry has made it particularly vulnerable in a year of social distancing and stayat-home orders. Projections show the supersector could suffer a 15.7 percent net job loss in Texas by the end of 2020.

By Luis Torres, Paige Silva, and Griffin Carter

T

he COVID-19 crisis has had a severe impact on the economy, causing second quarter 2020

gross domestic product (GDP) to plunge 31.4 percent on a seasonally adjusted annualized rate. While the pandemic affected every economic sector, the leisure and hospitality industry was hit especially hard.

Part of the service-providing industries supersector, leisure and hospitality consists of the arts, entertainment, and recreation (AER) and accommodation and food services (AFS) sectors (Table 1).

This industry demands a high degree off

14

15

100

Cumulative Jobs Lost (Thousands)

direct interaction with consumers, making it particularly vulnerable in a pandemic that required social distancing and shelter-in-place measures. Based on the U.S. Bureau of Labor Statistics’ American Time Use Survey and Dallas Federal Reserve estimates, around 8.4 percent of leisure and hospitality workers can work from home.

Unsurprisingly, businesses have been forced to lay off workers as consumer spending in this contact-intensive service industry has dramatically fallen, in some cases to zero, making it one of the hardest-hit sectors in terms of jobs lost. At the state level, the industry lost 592,000 jobs in March and April alone, a historically high number. By the end of October, the state had regained about 369,000 of those jobs, bringing cumulative (net) job losses to around 223,000 (see figure). That’s still an astonishing number, especially when compared with the previous two national recessions—the 2001 Dot-com crash and 2008-09 Great Recession—when the leisure and hospitality sector actually gained jobs.

During the ten-year economic expansion before the pandemic, leisure and hospitality jobs represented on average 10.3 percent of total nonfarm jobs but only 3.4 percent of 2019 state GDP. This indicates the supersector is more important for creating jobs than it is for generating output.

Not All Jobs Created Equal

Cumulative Leisure and Hospitality Jobs Lost in Texas During National Recessions

0 –100 2001 Recession

–200

Great Recession

–300

2020 Shelter-in-Place Orders

–400 –500 –600

1

3

5

7

9

11

13

Months into Recession

15

17

19

Sources: Bureau of Labor Statistics and authors’ calculations

Table 1. Leisure and Hospitality Supersector Components Arts, entertainment, and recreation (NAICS 71)*

Accommodation and food services (NAICS 72)*

• Performing arts, spectator sports, and related industries • Accommodation (e.g., hotels) To measure the level of (e.g., movie theaters) • Food services/drinking places concentration and possible exposure to the downturn • Museums, historical sites, and similar in leisure and hospitality, • Amusement, gambling, and recreation location quotients (LQ) are estimated based on employ- Based on North American Classification System (NAICS) definitions Source: U.S. Census Bureau ment for the supersector and both the AER and At the Metropolitan Statistical Area (MSA) level, employAFS sectors and their respective subsectors. The LQ compares ment in Austin and especially San Antonio has been impacted Texas’ share of jobs with the corresponding national share. The to a greater degree by the shutdown and partial reopening United States is used as a benchmark of diversity because it is of the leisure and hospitality supersector. In addition, the a mix of all industries in all regions. An LQ greater than one in degree of concentration changed at both the state and MSA a given industry represents specialization. It also means there’s levels after the pandemic hit the economy. The faster (slower) a higher concentration of workers for that industry in that reopening of the economy by the state and local governments region than there is in the nation. An LQ equal to one means compared with the rest of the country explains the increase Texas and the nation are equally specialized in that particular (decrease) in specialization. industry.

Employment shares and the number of LQs greater than Wage Implications one show the biggest economic impact on Texas’ leisure An analysis by the Dallas Federal Reserve using American and hospitality supersector was within the food services and Community Survey data suggested that nearly one in five drinking places subsector (Tables 2 and 3). This shows the leisure and hospitality workers reported incomes below the important role reopening restaurants and bars will play in job federal poverty line in 2017. This supports the assertion the recovery.

16

TG

Table 2. Employment Share and Location Quotient for December 2019

Leisure/Hospitality Arts, Entertainment, and Recreation Accommodation and Food Services

United States

Texas

Austin

Houston

DFW

San Antonio

11.0%

10.8%

12.0%

10.5%

10.5%

13.0%

0.98

1.09

0.95

0.95

1.18

1.1%

1.9%

1.2%

1.7%

1.8%

0.70

1.19

0.76

1.07

1.14

9.5%

10.6%

9.2%

8.8%

11.3%

1.04

1.14

1.01

0.97

1.24

0.4%

0.7%

0.4%

0.5%

0.4%

1.26

2.01

1.23

1.54

1.39

0.2%

0.3%

0.2%

0.3%

0.2%

2.01

2.96

1.78

2.30

1.96

0.8%

0.9%

0.8%

0.9%

1.2%

0.70

0.79

0.69

0.81

0.99

1.0%

1.2%

0.9%

0.9%

1.5%

0.77

0.92

0.68

0.67

1.08

8.4%

8.8%

8.3%

7.9%

9.9%

1.09

1.13

1.07

1.03

1.28

1.6% 9.1%

Lei/Hosp Subsectors

Arts, Entertainment, and Recreation

Performing Arts, Spectator Sports, and Related Industries

0.3%

Museums, Historical Sites, and Similar Institutions

0.1%

Amusement, Gambling, and Recreation Industries

1.2%

Accommodation Accommodation and Food Services

Food Services and Drinking Places

1.3% 7.7%

Note: Shaded boxes denote LQ greater than one, indicating specialization/concentration.

Sources: Bureau of Labor Statistics, JobsEQ, and authors’ calculations.

Table 3. Employment Share and Location Quotient for June 2020

Leisure/Hospitality Arts, Entertainment, and Recreation Accommodation and Food Services

United States

Texas

Austin

Houston

DFW

San Antonio

8.7%

9.7%

9.8%

9.0%

9.4%

12.1%

1.05

1.06

0.97

1.03

1.27

0.9%

1.8%

0.9%

1.6%

1.7%

0.55

1.11

0.54

1.00

1.08

8.9%

9.9%

8.5%

8.0%

10.6%

0.98

1.09

0.94

0.88

1.17

0.4%

0.6%

0.4%

0.5%

0.4%

2.02

3.21

1.95

2.50

2.22

0.2%

0.3%

0.2%

0.3%

0.2%

2.49

3.70

2.19

2.86

2.45

0.6%

0.8%

0.7%

0.9%

1.1%

0.77

1.04

0.92

1.07

1.36

0.9%

1.2%

0.8%

0.9%

1.4%

0.98

1.32

0.84

0.93

1.51

8.0%

7.8%

7.8%

7.0%

9.0%

1.03

1.01

1.00

0.91

1.17

1.1% 7.6%

Lei/Hosp Subsectors

Arts, Entertainment, and Recreation

Performing Arts, Spectator Sports, and Related Industries

0.2%

Museums, Historical Sites, and Similar Institutions

0.1%

Amusement, Gambling, and Recreation Industries

0.8%

Accommodation Accommodation and Food Services

Food Services and Drinking Places

0.9% 6.6%

Note: Shaded boxes denote LQ greater than one, indicating specialization/concentration.

Sources: Bureau of Labor Statistics, JobsEQ, and authors’ calculations.

WINTER 2021

17

AS OF MARCH 2020, Texas had more than 5,000 hotels employing a total of more than 658,000 workers, according to the American Hotel & Lodging Association.

supersector is among the most vulnerable to the pandemic and the state’s widening income gap.

In October 2020, leisure and hospitality workers earned an average of $14.67 an hour in Texas compared with $17.12 nationally. That’s well below the average $27.11 per hour earned by Texas’ other private sector workers.

On average, the state’s leisure and hospitality workers earn $412.23 weekly, which comes out to around $21,436 annually.

Given these earnings, workers in this sector who have lost their jobs due to the pandemic will struggle financially.

Residential Market Implications

Reopening and Beyond In September 2020, the Texas Governor allowed restaurants to begin operating at 75 percent capacity and bars at 50 percent in all but 13 of Texas’ 254 counties. Further waves of infections could hinder and even reverse the opening of this industry, affecting the path to recovery.

Based on the Dallas Federal Reserve’s projected 5.6 percent year-over-year decline in Texas nonfarm employment in 2020, and assuming restaurants and bars continue operating at 75 percent and 50 percent capacity, respectively, leisure and hospitality jobs could fall 15.7 percent to around 1.19 million by the end of December 2020. It will take time for leisure and hospitality to return to its pre-pandemic levels. A full recovery is unlikely until late 2021 at the earliest.

Because the majority of leisure and hospitality workers are renters, the apartment market has felt the impact of job layoffs in this supersector.

Income constraints make single-family homeownership difficult for leisure and hospitality workers. For example, a 10 percent down payment on a $150,000 home is $15,000, more than half what a leisure and hospitality worker earns annually. Lowering the payment would increase the monthly mortgage. Then, of course, there are closing costs, property taxes, and insurance to consider. For these reasons, only a double-income leisure and hospitality household would likely be able to afford homeownership. Single workers, meanwhile, are more apt to be renters.

Because the majority of leisure and hospitality workers are renters, the apartment market has felt the impact of job layoffs in this supersector. The market benefited from both the federal

18

government’s initial bolstering of unemployment insurance and the eviction moratorium. However, as federal unemployment benefits expire and the leisure and hospitality industry stays only partially reopened, the outlook for the apartment market remains an area of concern.

Dr. Torres (ltorres@mays.tamu.edu) is a research economist, Silva (psilva@ tamu.edu) a research associate, and Carter a research intern with the Texas Real Estate Research Center at Texas A&M University.

TG

Texas Economy

Back to Work How Texas Jobs Are Returning

Boosted by both a recovering national economy and recovering oil prices, Texas has recouped more than half of the jobs it lost in March and April 2020. By Ali Anari

WINTER 2021

Figure 1. Texas, U.S. Nonfarm Jobs in COVID-19 Recession

160,500

Texas (left axis) U.S. (right axis)

150,000 140,500

Thousands

13,500

Thousands

D

uring the COVID-19 economic recession, Texas lost more than 1.4 million nonfarm jobs, dropping from a peak of 13 million in February 2020 to a trough of 11.6 million in April 2020, or 10.8 percent loss of total nonfarm employment (Figure 1). Over the same period, the U.S. lost 22.2 million nonfarm jobs (14.5 percent).

The recession’s intensity varied widely across Texas Metropolitan Statistical Areas (MSAs), from a 5.5 percent loss in Sherman-Denison to 14.9 percent in Midland (Table 1). The Texas Real Estate Research Center found three main factors that explain the recession’s severity across MSAs: • relative share of employment in the leisure and hospitality and other services industries;

130,000

13,000 12,500 12,000 11,500 Jan

Feb

Mar Apr

May

Jun

2020

July

Aug

Sept Oct

Nov

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University

19

TEXAS LOST MORE THAN 1.4 MILLION NONFARM JOBS during the COVID-19 recession, but regained 59.8 percent of them

by November. The state's manufacturing industry, for example, was back to nearly 96.4 percent of its pre-pandemic employment level.

Table 1. Texas MSAs Ranked by Employment Decline Rate in COVID-19 Recession Decline Rate (Percent)

Rank

MSA

1 2 3 4 5 5 7 8 9 10 11 12 13 14 15 16 17 17 19 20 21 22 23 24 25

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

-5.5 -7.8 -7.9 -8.5 -8.9 -8.9 -9.3 -9.5 -9.8 -9.9 -10.1 -10.8 -10.8 -11.0 -11.2 -11.3 -11.4 -11.6 -11.6 -12.0 -12.1 -12.5 -12.7 -12.8 -13.1 -13.3

26

Midland

-14.9

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University

20

• correlations between the growth rates of the state’s metropolitan jobs and U.S. jobs; and • the price of West Texas Intermediate (WTI) oil.

These factors have reversed. As a result, MSAs are regaining lost jobs.

Texas Job Losses by Industry Job losses varied across the state’s industries in the pandemic recession, from as small as 2.5 percent for financial activities to 41.4 percent in leisure and hospitality industry (Table 2).

The latter, composed mainly of hotels and restaurants, bore the brunt of the recession followed by other services, mining and logging, and education and health services.

Leisure and hospitality jobs accounted for 10.6 percent of total nonfarm jobs in March 2020. Metros with larger shares of leisure and hospitality jobs, such Austin-Round Rock and

Table 2. Texas Industries Ranked by Employment Decline Rate in COVID-19 Recession Rank

Industry

Decline Rate (Percent)

1 2 3 4 5 5 7 8 9

Financial activities Manufacturing Government Trade, transportation, warehousing, utilities Information Professional and business services Education and health services Mining, logging, construction Other services

-2.5 -5.2 -5.3 -7.6 -7.9 -8.2 -10.1 -10.3 -19.5

10

Leisure and hospitality

-41.4

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University TG

Table 3. Texas, Texas MSA Shares of Jobs by Industry, March 2020 Region Texas

MLC

MAN

TTU

INF

FA

PBS

EHS

LHS

OS

GOV

7.9

7.0

19.7

1.6

6.3

14.2

13.7

10.6

3.5

15.4

MSA Abilene

7.4

4.4

18.7

1.7

5.6

8.7

21.0

10.6

3.9

18.0

Amarillo

6.0

11.5

21.2

1.0

5.6

7.5

13.7

11.0

4.1

18.5

Austin-Round Rock Beaumont-Port Arthur

6.4

5.7

16.6

3.5

6.1

17.9

11.5

11.4

4.4

16.6

12.2

13.5

19.6

0.6

3.5

8.5

12.9

9.6

3.7

15.9

Brownsville-Harlingen

2.1

4.5

16.8

0.5

3.4

8.7

29.6

11.4

2.2

20.8

College Station-Bryan

6.1

5.0

13.3

1.1

3.1

8.0

10.4

13.5

2.6

37.1

Corpus Christi Dallas-Plano-Irving

12.0

4.4

17.1

0.8

4.3

9.9

16.8

13.1

3.3

18.3

5.7

6.9

19.6

2.6

9.4

19.4

11.9

9.7

3.1

11.5

El Paso

5.4

5.1

20.8

1.5

4.1

11.4

14.9

11.5

2.8

22.5

Fort Worth-Arlington

7.0

9.3

24.1

1.0

6.3

11.2

13.1

11.2

3.8

13.0

Houston-The Woodlands-Sugar Land

9.8

7.2

19.9

1.0

5.3

16.1

13.1

10.4

3.8

13.4

Killeen-Temple

4.9

5.2

18.7

0.9

4.4

8.3

16.7

10.7

3.5

26.7

Laredo Longview

3.1

0.6

30.7

0.7

3.6

9.3

16.3

10.4

2.2

23.0

15.5

9.6

19.1

1.1

4.8

8.9

15.8

9.2

3.3

12.8

Lubbock

6.1

3.2

20.0

1.7

5.1

8.8

14.8

13.5

4.2

22.7

McAllen-Edinburg-Mission

3.0

2.3

19.6

1.1

3.2

6.5

29.8

9.7

2.1

22.6

Midland

34.0

3.7

19.9

0.9

4.2

9.9

5.9

9.6

3.6

8.4

Odessa

25.6

6.1

23.2

1.0

4.2

6.1

6.5

10.8

4.4

12.2

San Angelo

8.1

6.5

20.2

1.0

5.3

7.7

15.8

12.7

3.4

19.4

San Antonio-New Braunfels

6.3

4.8

16.9

1.8

8.6

13.2

15.5

12.8

3.7

16.3

Sherman-Denison

5.9

11.5

17.8

1.0

5.1

6.3

23.5

11.2

2.0

15.5

Texarkana

4.6

9.0

22.3

0.5

3.6

7.0

15.9

11.6

3.4

22.0

Tyler

6.1

4.7

22.2

1.3

4.2

9.4

23.3

10.5

3.6

14.7

10.0

5.1

26.2

0.7

3.9

6.4

14.9

11.0

4.2

17.6

Waco

Victoria

6.6

13.1

17.4

0.8

5.9

10.1

16.9

10.1

2.9

16.4

Wichita Falls

4.9

8.8

17.9

1.3

4.4

7.8

18.9

10.8

3.7

21.6

Notes: MLC=mining, logging, construction, MAN=manufacturing, TTU=trade, transportation, utilities, INF=information, FA=financial activities, PBS=professional and business services, EHS=education, health services, LHS=leisure and hospitality, OS=other services, GOV=government.

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University

San Antonio-New Braunfels, suffered more in the recession (Table 3).

Correlations Between Texas, U.S. Labor Markets

accounted for 34 percent of nonfarm employment in Midland and 25.6 percent in Odessa. Consequently, these petroplexes bore the brunt of falling oil prices.

E

60

Figure 2. Price of West Texas Intermediate Crude Oil

50 Dollars

conomically, the U.S. suffered more than Texas in the pandemic recession, and Texas MSAs with economies that closely correlate with the U.S. economy suffered more than MSAs with economies that do not.

Correlations between Texas MSAs and U.S. job growth rates varied from more than 83 percent for Fort Worth-Arlington, San Antonio-New Braunfels, Dallas-Plano-Irving, and AustinRound Rock to less than 50 percent for Laredo, Midland, College Station-Bryan, and Odessa (Table 4).

40 30

Oil Prices Take a Hit

20

Price of WTI crude oil fell from $57.50 per barrel in January 2020 to $16.61 in April 2020 (Figure 2). Texas metros with larger shares of mining jobs suffered more in the pandemic recession due to the price collapse. In March 2020, mining jobs

10 Jan

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Feb

Mar

Apr

Source: Haver Analytics

May

June

2020

July

Aug Sept

Oct Nov

21

Table 5. November 2020 Texas MSA Jobs as Percentages of Pre-Pandemic Levels

Table 4. Texas MSAs Ranked by Correlation with U.S. Employment Growth Rate

Rank

MSA

Correlation Coefficient (Percent)

Rank

MSA

Recovery Indicator (Percent)

1

Waco

99.5

1

Fort Worth-Arlington

91.0

2

Texarkana

99.2

2

San Antonio-New Braunfels

88.8

3

Sherman-Denison

98.8

3

Dallas-Plano-Irving

88.1

4

Tyler

98.2

4

Austin-Round Rock

83.8

5

Austin-Round Rock

98.1

5

Lubbock

77.8

6

Dallas-Plano-Irving

97.2

6

Houston

77.1

7

College Station-Bryan

97.1

7

Tyler

76.2

7

Abilene

97.1

8

Wichita Falls

74.0

9

Fort Worth-Arlington

96.4

9

El Paso

73.7

10

Lubbock

96.2

10

Corpus Christi

72.5

11

Killeen-Temple

96.0

11

Amarillo

70.2

Texas

95.6

12

Waco

69.7

12

San Antonio-New Braunfels

95.5

13

Sherman-Denison

68.8

12

Wichita Falls

95.5

14

McAllen-Edinburg-Mission

68.0

14

El Paso

95.4

15

San Angelo

64.3

15

McAllen-Edinburg-Mission

94.6

16

Brownsville-Harlingen

61.9

16

Houston

94.3

17

Killeen-Temple

60.9

17

Brownsville-Harlingen

94.1

18

Victoria

54.1

18

Victoria

94.0

19

Longview

53.1

19

Amarillo

93.6

20

Texarkana

53.0

20

Beaumont-Port Arthur

93.4

21

Abilene

51.7

21

Longview

93.3

22

Beaumont-Port Arthur

50.0

22

Laredo

92.9

23

Laredo

49.3

23

San Angelo

92.4

24

Midland

37.3

24

Corpus Christi

92.3

25

College Station-Bryan

35.7

25

Odessa

89.0

26

Odessa

35.6

26

Midland

88.0

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University

TEXANS RETURNING TO WORK for the first time since the pandemic began faced a changed work environment.

To protect returning employees and customers against COVID-19, businesses implemented new safety policies, including mandatory face masks and social distancing.

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BY NOVEMBER 2020, Waco was leading Texas MSAs in job recovery, recouping 99.5 percent of the jobs it had lost since April.

By November 2020, oil prices hovered around $40, not sufficient to stimulate overall economic conditions.

Table 6. November 2020 Texas Jobs by Industry as Percentages of Pre-Pandemic Levels

Regaining Texas Jobs On March 5, President Trump signed an $8.3 billion emergency aid package to help combat the coronavirus and its adverse economic impacts. The Federal Reserve stepped in by: • lowering the Federal funds rate to its zero lower bound; • helping ensure interest rates will remain low; • lowering long-term interest rates by purchasing massive amounts of long-term Treasury securities and mortgagebacked securities; • providing short-term low interest rate loans to security firms (primary dealers); and • offering Money Market Mutual Fund Liquidity Facility, repurchase agreement (repo) operations, and direct lending to banks, state and local governments, and other credit facilities. rom April to November 2020, the nation gained 12.3 million jobs because of actions by the U.S. government and the Federal Reserve and because of people’s willingness to return to work. The gain accounted for 55.4 percent of jobs lost in the pandemic recession. Texas gained 844,200 jobs (59.8 percent of jobs lost in the recession) but remains more than 474,200 jobs below the year-ago level.

The latest job recovery indicator for Texas, defined as the ratio of the number of jobs in November 2020 to the number of jobs in April 2020 (seasonally adjusted and expressed as a percentage) stood at 95.6 percent (Table 5). The state’s transportation, utilities, warehousing and financial activities industries have recovered more than their job losses, and job recovery indexes among the rest of Texas industries currently vary from

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Industry

Recovery Index (Percent)

Transportation, utilities, warehousing

101.7

Financial activities

101.2

Professional and business services

99.3

Government

97.2

Manufacturing

96.4

Trade

95.8

Construction

95.3

Education and health services

95.0

Information

93.6

Other services

93.4

Leisure and hospitality

86.0

Mining and logging

81.1

Sources: Texas Workforce Commission and Texas Real Estate Research Center at Texas A&M University

as high as 99.3 percent for the professional and business services industry to 81.1 percent for the mining industry (Table 6).

National job gains are helping Texas MSA economies that track closely with the U.S. economy. Meanwhile, oil price recovery is helping metros with larger shares of mining jobs. As of November 2020, Waco ranked first in job recovery followed

by Texarkana, Sherman-Denison, Tyler, Austin-Round Rock, and Dallas-Plano-Irving. Midland had the smallest job recovery followed by Odessa, Corpus Christi, San Angelo, and Laredo.

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

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Residential

Downsized

Pandemic Diminishes Homebuying Ability The recent economic downturn spurred by COVID-19 has decreased incomes for many households. This could diminish their ability to purchase homes they could have afforded before the pandemic.

By Harold D. Hunt and Clare Losey

O

wner-occupied affordability is currently one of the most important issues in housing. In light of COVID-19, concerns over housing affordability have grown. Economic uncertainty and decreases in household income because of layoffs may limit some households’ ability to purchase a home.

According to the National Association of Realtors, 86 percent of households in 2019 relied on mortgage financing to purchase a home. Because of this, evaluating a household’s ability to qualify for a mortgage loan and understanding the impact of economic downturns on the potential of households to attain homeownership is important.

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Evaluating Mortgage Applicants

qualify for a mortgage loan, the odds of receiving a loan decrease as the multiMortgage lenders evaluate applicants’ plier increases, particularly when the creditworthiness based on a range of multiplier exceeds 4.0. The multiplier criteria, such as the applicant’s employfor the majority of mortgage loans ment and credit histories, the presence Quantifying Owner-Occupied typically measures between 3.0 and 4.0 of a co-applicant, the number of depenAffordability except in extremely high-priced markets, dents, and the age of the applicant (and such as San Francisco or New York, ffordability measures the relaco-applicant). where buyers may be forced to pay six tionship between housing costs However, the three most important to eight times their income (double the and household income. The criteria are the applicant’s wealth, typical multiple). majority of borrowers rely on mortincome, and credit score. Known as Home-price-to-income multipliers gage financing to purchase a home, so borrowing constraints, these criteria measures of owner-occupied affordability for different combinations of the LTV are measured through the loan-to-value and DTI ratios are shown in Table 1. typically use the mortgage payment to (LTV) and debt-to-income (DTI) ratios They assume a mortgage interest rate represent housing costs. The mortgage and the credit score. Lenders are primarof 3 percent. Borrowers with an LTV payment incorporates the borrower’s ily concerned with the borrower’s ability ratio exceeding 80 percent usually pay LTV and DTI ratios, interest rate, propto repay the mortgage loan (i.e., the odds private mortgage insurance (PMI) as well erty taxes, and insurance. the borrower will default on the loan) to compenand his decisate for the sion to prepay Table 1. Home Price-to-Income Multiplier additional risk the loan, posed to the Loan-to-Value Ratio which lowers Back-end lender. PMI the cumulaDTI 80% 85% 90% 95% 96% 96.5% 97% 98% 99% 100% costs vary but tive interest 20% 1.99 1.89 1.84 1.8 1.79 1.79 1.78 1.77 1.76 1.76 generally add the lender 25% 2.36 2.3 2.25 2.24 2.23 2.23 2.22 2.21 2.2 2.49 an additional could have 28% 2.79 2.65 2.58 2.52 2.51 2.5 2.49 2.48 2.47 2.46 0.5 percent. collected.

30% 2.99 2.84 2.77 2.7 2.69 2.68 2.67 2.66 2.65 2.63 The addiGenerally 35% 3.48 3.31 3.23 3.15 3.13 3.13 3.12 3.1 3.09 3.07 tional costs of speaking, 40% 3.98 3.78 3.69 3.6 3.58 3.57 3.56 3.55 3.53 3.51 homeownerhigher LTV 43% 4.28 4.06 3.96 3.87 3.84 3.83 3.81 3.79 3.78 3.85 ship, includand DTI ratios 45% 4.48 4.25 4.15 4.05 4.03 4.02 4.01 3.99 3.97 3.95 ing taxes, and lower 50% 4.98 4.73 4.61 4.5 4.48 4.46 4.45 4.43 4.41 4.39 insurance, and credit scores 55% 5.47 5.2 5.07 4.95 4.92 4.91 4.9 4.88 4.85 4.83 utilities, are decrease an 5.29 5.27 60% 5.97 5.67 5.53 5.4 5.37 5.36 5.34 5.32 assumed to applicant’s Source: Authors' calculations be 6 percent creditworof the home’s thiness (i.e., annual value estimate.

One of the most often used measures increase the risks the applicant poses Holding the DTI ratio constant as the of owner-occupied affordability is the to the lender). Typically, the LTV and LTV ratio increases from left to right, the home-price-to-income multiplier, which DTI ratios are lower and the credit score multiplier decreases (i.e., the maximum represents the ratio between home price higher among borrowers qualifying for home price affordable to a particular and household (or family) income. While conventional loans, while the ratios are household based on their fixed income there is no maximum multiplier beyond higher and the credit score lower among decreases). Meanwhile, holding the LTV which a household will be unable to borrowers with government-insured mortgages (Federal Housing Administration, or FHA, Veterans Affairs, or VA, or Rural Housing Service, or RHS/FSA, loans).

A

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ratio constant as the DTI ratio increases from top to bottom, the multiplier increases (indicating that the maximum home price affordable to a particular household increases).

To maximize the home price affordable to them, borrowers would have to decrease the LTV ratio (increase the downpayment) while increasing the DTI ratio (increase the mortgage debt or “front-end” debt relative to total household debt or “back-end” debt). However, borrowers can only reach a certain level of indebtedness beyond which the lender would be unwilling to originate a mortgage loan. Furthermore, increasing the downpayment may not be possible.

The typical conventional loan is generally assumed to have LTV and DTI ratios of 80 percent and 25 percent, respectively, which in this instance equates to a multiplier of 2.49. The LTV and DTI ratios for an FHA loan are assumed to be 96 percent and 43 percent, respectively, for a multiplier of 3.85. In other words, average borrowers with a conventional loan could afford a home priced at 2.49 times their income, while average borrowers with an FHA loan could afford a home priced at 3.85 times their income.

Conventional mortgages made up 75 percent of all home purchase originations for owner-occupied, one-to-four-bedroom, single-family properties in 2018 and 2019. FHA mortgages made up 15 percent. Department of Veterans Affairs (VA), Rural Housing Service (RHS), and Farm Service Agency (FSA) mortgages constitute the other 10 percent of such originations.

The maximum home price affordable to conventional and FHA borrowers at home price-to-income multipliers of

2.49 and 3.85, respectively, is calculated in Table 2. Compared with conventional mortgages, FHA financing greatly increases the maximum home price affordable to a household. For example, a household with an annual income of $60,000 could afford a $149,292 home with a conventional mortgage or Table 2: Maximum Home Purchase Price a $230,914 home with an FHA mortgage. That approximate Home Price Affordable $81,000 differential impacts a household’s ability to purchase Income Conventional Loan FHA Loan a home, particularly in Austin, $150,000 $373,231 $577,285 Dallas-Fort Worth, Houston, and $145,000 $360,790 $558,042 San Antonio, where home prices $140,000 $348,349 $538,799 are generally higher. $135,000 $335,908 $519,556

COVID-19 and Household Income

$130,000 $125,000 $120,000 $115,000 $110,000 $105,000 $100,000 $95,000 $90,000 $85,000 $80,000 $75,000 $70,000 $65,000 $60,000 $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000

W

hile COVID-19 has adversely impacted the overall economy, certain sectors have had greater declines in average weekly earnings than others (Table 3). From February to July 2020, the three hardest hit sectors in Texas were manufacturing (5.5 percent decline in average weekly earnings); trade, transportation, and utilities (4.3 percent decline); and leisure and hospitality (4.3 percent decline).

In 2019, the average weekly earnings for manufacturing amounted to $1,225; for trade, transportation, and utilities, $815; and for leisure and hospitality, $396. This equates to annual before-tax earnings of $63,700 in manufacturing; $42,380 in trade, transportation, and utilities; and $20,592 in

$323,467 $311,026 $298,585 $286,144 $273,703 $261,262 $248,821 $236,380 $223,939 $211,498 $199,056 $186,615 $174,174 $161,733 $149,292 $136,851 $124,410 $111,969 $99,528 $87,087 $74,646 $62,205 $49,764 $37,323 $24,882 $12,441

$500,313 $481,071 $461,828 $442,585 $423,342 $404,099 $384,857 $365,614 $346,371 $327,128 $307,885 $288,642 $269,400 $250,157 $230,914 $211,671 $192,428 $173,185 $153,943 $134,700 $115,457 $96,214 $76,971 $57,728 $38,486 $19,243

Source: Authors' calculations

Table 3: Texas Average Weekly Earnings in Dollars (Not seasonally adjusted)

Date

Total Private

Private GoodsProducing

Construction

Mfg.

Private ServiceProviding

Trade, Transp & Utilities

Finc.

Activities

Prof. & Bus. Services

Educ. & Health Services

Leisure & Hospitality

Other Services $832.12

Feb 2020

$975.23

$1,273.74

$1,194.38

$1,242.77

$911.06

$850.66

$1,252.10

$1,200.91

$820.85

$406.84

Mar 2020

$973.06

$1,289.85

$1,224.47

$1,241.93

$903.75

$852.76

$1,243.38

$1,183.12

$804.67

$388.53

$835.55

April 2020 May 2020

$963.14 $960.69

$1,222.09

$1,168.43

$1,171.76

$904.49

$817.38

$1,203.08

$1,172.75

$775.05

$395.78

$890.29

$1,227.65

$1,190.88

$1,175.24

$902.31

$810.49

$1,203.33

$1,174.53

$803.88

$414.12

$859.53

June 2020

$953.00

$1,230.60

$1,206.10

$1,167.09

$894.24

$803.05

$1,202.44

$1,168.40

$811.19

$406.00

$824.54

July 2020

$960.33

$1,227.66

$1,194.32

$1,174.50

$904.38

$814.45

$1,216.29

$1,180.43

$826.98

$389.34

$836.87

Cumulative % Chg. Feb ’20 - July ’20

-1.5%

-3.6%

0.0%

-5.5%

-0.7%

-4.3%

-2.9%

-1.7%

0.7%

-4.3%

0.6%

Source: Haver Analytics

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Table 4: Decrease in Max Home Price Affordable for Every $5,000 Decrease in Household Income for Given DTI, LTV Loan-to-Value Ratio

Back-end DTI

80%

85%

90%

95%

96%

96.5%

97%

98%

99%

100%

20%

($9,953)

($9,452)

($9,217)

($8,994)

($8,950)

($8,929)

($8,907)

($8,865)

($8,823)

($8,781)

25%

($12,441)

($11,814)

($11,521)

($11,242)

($11,188)

($11,161)

($11,134)

($11,081)

($11,028)

($10,976)

28%

($13,934)

($13,232)

($12,904)

($12,591)

($12,530)

($12,500)

($12,470)

($12,411)

($12,352)

($12,293)

30%

($14,929)

($14,177)

($13,825)

($13,490)

($13,425)

($13,393)

($13,361)

($13,297)

($13,234)

($13,171)

35%

($17,417)

($16,540)

($16,130)

($15,739)

($15,663)

($15,625)

($15,588)

($15,513)

($15,439)

($15,366)

40%

($19,906)

($18,903)

($18,434)

($17,987)

($17,900)

($17,857)

($17,814)

($17,729)

($17,645)

($17,562)

43%

($21,399)

($20,321)

($19,816)

($19,336)

($19,243)

($19,197)

($19,150)

($19,059)

($18,968)

($18,879)

45%

($22,394)

($21,266)

($20,738)

($20,235)

($20,138)

($20,089)

($20,041)

($19,945)

($19,851)

($19,757)

50%

($24,882)

($23,629)

($23,042)

($22,484)

($22,375)

($22,322)

($22,268)

($22,162)

($22,056)

($21,952)

55%

($27,370)

($25,992)

($25,346)

($24,732)

($24,613)

($24,554)

($24,495)

($24,378)

($24,262)

($24,147)

60%

($29,858)

($28,355)

($27,651)

($26,981)

($26,850)

($26,786)

($26,722)

($26,594)

($26,468)

($26,342)

Source: Authors' calculations

leisure and hospitality. Should the cumulative decline in average weekly earnings from February to July hold for all of 2020, annual earnings will decline by $3,504 in manufacturing; $1,822 in trade, transportation, and utilities,; and $885 in leisure and hospitality.

Impact of Income Decline on Affordability

T

he decrease in the maximum home price affordable to a particular household based on a $5,000 decrease in household income is shown in Table 4. For example, for a household with a $60,000 income that obtains financing for a conventional mortgage (LTV ratio of 80 percent and DTI ratio of 25 percent), the maximum affordable home price would decrease by $12,441 for every $5,000 decrease in income.

Assuming FHA financing (96 percent LTV and 43 percent DTI), the maximum home price affordable to that same household would decrease by $19,243 for every $5,000 decrease in income.

The values can be computed for a $10,000, $15,000, or $20,000 decrease in household income simply by multiplying each value by two, three, or four, respectively.

Similarly, the values could be computed for a $1,000 decline in household income by dividing each value by five.

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With the LTV ratio held constant as the DTI ratio increases, the decline in the maximum home price affordable for every $5,000 drop in household income becomes more severe. For example, a household with a LTV ratio of 96 percent sees an $8,950 decline at a DTI of 20 percent versus a $20,138 decline at a DTI of 45 percent.

Conversely, holding the DTI ratio constant as the LTV ratio increases causes the drop in the maximum home price affordable for every $5,000 decrease in household income to lessen. A household with a DTI ratio of 30 percent will see a $14,929 decline at an LTV ratio of 80 percent versus a $13,361 decline at a 97 percent LTV ratio.

Households that have a decline in income could compensate for the loss by reducing their downpayment (maximizing their LTV ratio) and their ratio of monthly mortgage debt relative to total debts (minimizing the DTI ratio). The former will prove easier to accomplish than the latter.

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

27

Q. Where can my clients find out what is required to get an agricultural exemption?

A. Information on ag exemptions for property taxes can be obtained from the Central Appraisal District (CAD) in the county where the property is located or from the Texas Comptroller of Public Accounts. License holders should not opine as to what qualifies for an ag exemption.

Q. I have a buyer for some acreage in the country. What do I tell my client about rollback taxes?

A. Change in Use of Land taxes, popularly referred to as rollback taxes, are triggered when land classified as open

space agricultural use is sold or is no longer used for agricultural purposes. If the land is no longer used for agricultural purposes, a one-time rollback tax will be assessed, and the land will be assessed at market value for property taxes going forward. License holders should not attempt to calculate the amount of rollback taxes. The local CAD is the best resource for this information.

What the Law Says Actually, an ag exemption is not an exemption at all. It is a different method of valuation that results in lower property taxes for qualified land. These alternate appraisal methods are provided for by the Texas Constitution, Article VIII, Sections 1-d and 1-d-1, and are addressed by Subchapters C and D of the Texas Tax Code. In addition, the comptroller promulgates rules pursuant to those statutes. They are found in Title 34, Chapter 9 of the Texas Administrative Code. However, the Degree of Intensity Standards for the number of livestock or

amount of crops required per acre varies by county. Land used for qualified agricultural purposes is appraised at its value based on the land’s capacity to produce agricultural products (productivity value) instead of its market value (Tex. Tax Code §23.41). For rollback taxes, the lookback period for a change in use out of agricultural production is three years, and the annual interest rate charged on the difference in taxes between the market value and agricultural use value is 5 percent (Tex. Tax Code §§23.55[a] and 23.76[a]).

For Example Rick Stephens took a listing on a 100-acre tract that had been in agricultural use for many years. A potential buyer contacted Rick and wanted to put an RV park on the property. The buyer asked Rick, “Could you calculate the rollback tax liability if I do this RV park on this property?” Rick, an experienced farm

and ranch broker, replied, “No, sir, I am not able to do that service for you. However, here is the contact information for the central appraisal district for our county. Call and ask for the chief appraiser, and he can give you an estimate of those taxes.” Rick did not want the liability for a miscalculation or misinformation.

Best Practice Always ask about your client’s intended use when looking at rural property. Recommend they visit with the local CAD office before entering into a contract or during the option period to find out whether their intended use qualifies for

an agricultural exemption or would trigger rollback taxes.

Clients may change their mind about the type of property they want to find or their intended use if they know rollback taxes will be assessed.

Bonus Question Q. My client is purchasing a ranch and will run cattle. Does the property’s existing ag exemption transfer to the new owner if there is no change in use?

A. No. A new owner must reapply with the local CAD for the special tax valuation commonly known as ag exemption.

Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney.

Lewis (kerri@2oldchicks.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission (TREC). Wukasch (avis@2oldchicks.com) is a broker and former TREC chair.

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, t i a w ore! t u B e’s m ther

Visit the Texas Real Estate Research Center’s website for these online exclusives.

Finding a Representative Interest Rate for the Typical Texas Mortgagee Freddie Mac’s 30-year fixed rate is generally considered the national benchmark for mortgage interest rates. However, a Texas Real Estate Research Center study provides a more representative interest rate for the typical Texas mortgagee.

On the Border: Appraising LRGV Land Impacted by Wall Construction Whether the border wall has impacted Lower Rio Grande Valley land values is a subject of much contention among appraisers.

The United States Department of Justice provides data and analysis that can help ensure more uniform land appraisals for that region.

Read both articles at www.recenter.tamu.edu or by using the QR codes.

TEXAS A&M UNIVERSITY

Texas Real Estate Research Center Helping Texans stay informed about issues affecting the entire state.

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