TG - Spring 2021 by Texas Real Estate Research Center

SPRING 2021

TEXAS REAL ESTATE RESEARCH CENTER

TG_28-2.indd 2

3/31/21 8:11 AM

TEXAS A&M UNIVERSITY

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

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

In This Issue Property Tax Appraisals 2021 Tax Proposals Fixture Lease Addendum Texas Housing Inventory Rural Land Rush 2020 Housing Market Review Chapter 313 Q&A: Option Fees

EST 1971

TEXAS REAL ESTATE RESEARCH CENTER

TG_28-2.indd 1

3/31/21 8:11 AM

SPRING 2021

TEXAS REAL ESTATE RESEARCH CENTER

TG_28-2.indd 2

3/31/21 8:11 AM

CALLING ALL

Are you an experienced Texas real estate licensee? Do you write well? The Texas Real Estate Research Center is looking for writers to contribute to its blog. We want to help new licensees address problems they’re most likely to encounter or questions they are most likely to be asked. Email your original writing sample to info@recenter.tamu.edu. If published, you will get a byline that includes your name and the name of your real estate firm.

iii

TG_28-2.indd 3

3/31/21 8:11 AM

SPRING 2021

VOLUME 28, NUMBER 2 www.recenter.tamu.edu @recentertx

TIERRA GRANDE MAGAZINE TEXAS REAL ESTATE RESEARCH CENTER

2 | Dost Thou Protest Too Much?

7 Should It Stay or Should It Go? Required TREC Addendum Addresses Fixture Leases Property improvements such as solar panels or a security system can be a terrific selling point for a house, but they often come with third-party leases attached. TREC’s new contract addendum covers such situations. By Kerri Lewis

Options for Arguing Property Tax Appraisals Few things raise one’s hackles more than a property tax increase, but there is a process for airing one’s grievances. Following that process is essential. So is keeping a cool head. By Rusty Adams

Strong 2020 Housing Market Moves into Uncertain 2021 If you asked a Magic 8 Ball what’s in store for the housing market this year, it would likely say “ask again later.” Chalk that up to a mix of economic unknowns clouding the forecast. By Joshua Roberson

4 | Taxing Matters

23 | Take It to the Limit

Proposed Tax Developments Could Hit Real Estate Hard A new administration in the White House means new tax proposals. Here are some of the major changes planned and how they could affect the real estate industry. By William D. Elliott

Benefits and Costs of Chapter 313 Tax Limitations Property taxes pay for government services, but they can discourage good jobs that come with investment. Are tax incentive programs like Chapter 313 a good response? By Adam Perdue

10 | In Short Supply

28 | Practically Speaking

Low Housing Inventory’s Effect on Low-Income Buyers Texas’ high housing demand means little when there are simply too few homes for sale in certain price brackets. Just ask the many first-time buyers looking to enter the market. By Harold D. Hunt and Clare Losey

18 | How Long Can It Last?

Real Estate Questions Answered Option fees are a standard part of real estate contracts, but TREC has specific rules on how and to whom that fee is paid. Understanding the intricacies can save licensees and their clients some headaches. By Kerri Lewis and Avis Wukasch

See Ya Later, Next-Door Neighbor Urban Buyers Stampede to Rural Texas If ‘Green Acres’ taught us anything, it’s that “farm livin’ is the life” for some people. That was certainly true in 2020, when many Texas city dwellers packed up and headed to the country. By Charles E. Gilliland

Executive Director, GARY W. MALER 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; Russell Cain, Port Lavaca; JJ Clemence, Sugar Land; Doug Foster, Lockhart; Vicki Fullerton, The Woodlands; Doug Jennings, Fort Worth; Besa Martin, Boerne; Walter F. “Ted” Nelson, Houston; Rebecca “Becky” Vajdak, Temple; and Barbara Russell, Denton, 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 (top), 2-3, 7, 8, 18-19, 22, 23, 25, 26-27; JP Beato III, pp. 1 (bottom), 12, 16-17; Robert Beals II, pp. 10, 14-15; Alden DeMoss, pp. 4-6.

Lithography, RR DONNELLEY, HOUSTON

ON THE COVER: Longhorns at La Pistola Cattle Company in Bryan. Photographed by JP Beato III. SPRING 2021

TG_28-2.indd 1

3/31/21 8:11 AM

Property Taxes

Texas’ property tax system includes a number of options available to property owners unhappy with their property tax appraisal. However, taxpayers should be aware of pitfalls in the protest process. By Rusty Adams

In the Spring a livelier iris changes on the burnish’d dove; In the Spring a young man’s fancy lightly turns to thoughts of . . . property taxes? ith apologies to Alfred Tennyson, “the seasons bring the flower again” in Texas too. Longer, warmer days mean the opening of swimming pools and ballparks. Prairies are covered with bluebonnets, Indian paintbrushes, primroses, and other wildflowers. Even the prickly pear gets in on the act. And, of course, springtime in Texas means it’s time for property tax appraisals. On receiving a notice of appraised value, a property owner may become quite dismayed. As he sees the dollar amount on which the district says he should be taxed, “tears from the depth of some divine despair rise in the heart, and gather to the eyes.” “I’ll protest!” he cries. “I’ll take it to court!” And certainly he has a right to do so. However, the property owner should be aware of the protest process and certain pitfalls, lest he ride headlong “into the jaws of Death.” One such pitfall is the requirement of exhaustion of remedies. If a property owner does not exhaust his administrative remedies, he may not get his day in court.

A Brief Word About Texas’ Property Tax System Real property and certain other property are taxed by local taxing entities such as counties, cities, school districts, and other special districts. Property taxes are ad valorem taxes, which means that tax liability is determined by applying the tax rates to the appraised value of the property, less certain exemptions. Each taxing entity sets its own tax rate, subject to certain limits, and taxes are collected by the county tax assessor-collector, commonly referred to as the “tax office.”*

TG_28-2.indd 2

Within each county, property appraisal is conducted by a separate office called the appraisal district (Potter and Randall Counties share an appraisal district). In each district, property appraisal is the final responsibility of the chief appraiser. Each year, each central appraisal district conducts property tax appraisals. Pursuant to the Texas Tax Code, a notice of appraised value must be sent to the property owner if the appraised value increases, if an exemption is canceled or reduced, or if a property is added to the appraisal roll. The chief appraiser has until May 1 (April 1 for homesteads), or as soon as practicable thereafter, to mail the notice.

Protesting an Appraisal If a property owner** disagrees with the appraisal, he may

file a protest. The notice of protest must be filed within 30 days from the date the notice was delivered or by May 15, whichever is later. This deadline applies to disputes over the appraised value. “Rollback taxes” due to changes in land use must be protested within 30 days. Other protests have other deadlines, set forth in Texas Tax Code § 41.44. There is no required form for the notice, but the taxpayer should use Form 50-132, which is prescribed by the state comptroller’s office and is available at the appraisal district office. It is important that the taxpayer pay the portion of the taxable value of the property that is not in dispute. Failure to do so forfeits the right to have the protest heard. The same is true throughout the process (Tex. Tax Code §§ 25.26, 41.4115, 41A.10, 42.08). An informal meeting with an appraiser often occurs before the Appraisal Review Board (ARB) hears the protest. If the appraiser and the taxpayer are able to agree on a fair value, the process ends there. A warning: Taxpayers arriving at the appraisal district “flashing all their sabres bare” are less likely to succeed in obtaining an agreement. Bluster and threats rarely prove successful. Instead, taxpayers should be amiable, respectful, and prepared with the information an appraiser TG

3/31/21 8:11 AM

SOAH hearing, the decision is final and may not be appealed to the courts. Similarly to the ARB protest and the arbitration process, a property owner appealing to the district court must pay the amount of taxes required by Texas Tax Code § 42.08, which is the lesser of (1) the amount of taxes due on the portion of the taxable value of the property that is not in dispute; (2) the amount of taxes due on the property under the order from which the appeal is taken; or (3) the amount of taxes imposed on the property in the preceding tax year. Failure to do so forfeits the property owner’s right to a final determination of the appeal.

Exceptions to Exhaustion of Remedies Doctrine

needs to change his opinion of the property’s value. For an excellent discussion of this process, read “Property Tax Value Protest: Successfully Negotiating With Assessors” by Texas Real Estate Research Center Research Economist Dr. Charles Gilliland. It is every bit as true now as it was in 1998 when it was written. If the property owner and the appraiser are unable to reach an agreement, the protest will be heard by the ARB, an independent group of citizens appointed by the board of directors of the appraisal district or, in some counties, by an administrative judge. Before the hearing, the property owner and the appraisal district must exchange copies of the evidence they intend to offer at the hearing. While the ARB hearing is not a court proceeding, it is an evidentiary hearing. Just like a court proceeding, the property owner should come prepared to present evidence of the value of the property (e.g., purchase price, rent rolls, recent appraisals, etc.). The property owner is asking the ARB to change the appraised value, and should be able to give them the information they need to support that decision.

What if Taxpayer Disagrees with ARB’s Decision? nce the ARB hears the protest and reaches a decision, it must send a written order by certified mail. If the taxpayer is unhappy with the ARB’s decision, he may appeal (1) through the State Office of Administrative Hearings (SOAH), (2) through arbitration, or (3) to the state district court. Deadlines for the appeals are calculated from the date the written order is received. For a SOAH hearing, the deadline is 30 days. For binding arbitration or the district court, the deadline is 60 days. Arbitration is an alternative method of dispute resolution in which an impartial third party hears the case and issues a decision. SOAH hearings are available only when the ARB determination of value is greater than $1 million and certain other criteria are met. Once a case goes to binding arbitration or a SPRING 2021

TG_28-2.indd 3

ailure to exhaust administrative remedies is jurisdictional. This means that the court cannot hear an appeal or grant any relief. It has no power to do so. The rationale behind the doctrine is simple: When the law provides administrative avenues for parties to resolve disputes, they are required to use them before resorting to the courts. There are exceptions to the exhaustion of remedies doctrine. Exhaustion of remedies is not required when an injunction is sought and irreparable harm would result; when the appraisal district cannot grant the requested relief; when the issue presented is purely a legal question rather than a factual one; when certain constitutional issues are involved; and when the appraisal district acts or purports to act outside its statutory powers. Again, taxpayers beware: Whether or not these exceptions apply are fact-specific inquiries. Take care to attempt all available options before proceeding to court, or the taxpayer may find himself “wild with all regret.” For further explanation of the remedies available to taxpayers, resources are available on the state comptroller’s office website. In particular, Publication 96-295 describes remedies available to taxpayers. Nothing in TG should be considered legal advice. For advice on a particular situation, consult an attorney. Adams (r_adams@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.

* It is a common misconception that the appraisal

district and the tax office are one and the same. They are two separate offices. Don’t go to the tax office to protest an appraisal, and don’t go to the appraisal district to pay taxes. Likewise, neither of them houses the records dealing with titles to properties; those records are kept by the county clerk.

** A property owner may, of course, appeal the prop-

erty’s value. If a lease contract requires a tenant to pay the property taxes, the tenant may make the appeal, but only if the property owner does not. If the lease requires the tenant to pay the property taxes, the property owner must send the tenant a copy of the notice of appraised value. Such a tenant may request that the appraisal district send the notice of appraised value directly to the tenant (Tex. Tax Code § 41.413). 3

3/31/21 8:11 AM

Taxes

President Joe Biden has proposed tax changes that could significantly impact real estate professionals. Among them are increasing the maximum income tax rate, changing how longterm capital gains are taxed, increasing the corporate income rate, and repealing Section 1031 exchanges. By William D. Elliott

he presidential election in November 2020 and the accompanying congressional elections presented diametrically opposed points of view on many issues, including taxation. How these competing visions play out in the first months of 2021 will occupy center stage as the most important current tax development. Real estate professionals, particularly investors and developers, need to be mindful of impactful tax legislation. After all, higher taxes are a risk to be considered along with numerous other risks. Behind the façade of the pending questions of tax reform is the eternal question of who is to be taxed. The late Senator Russell Long of Louisiana, who served as chair of the Senate finance committee from 1966 to 1981 and influenced most tax legislation of the latter half of the 20th century, made one of the wittier statements about taxation: “Don’t tax you, don’t tax me, tax that fellow behind the tree.”

•

• •

•

Tax Rule Changes to Watch President Joe Biden’s proposed tax plan has many parts, but those most potentially impactful to real estate professionals and investors are: • Increasing the maximum income tax rate. This would increase the top individual income tax rate for taxable incomes above $400,000 from the current maximum tax rate of 37 percent to 39.6 percent. • Removing the cap on Social Security taxes. Social Security taxes would be imposed on taxpayers earning more

TG_28-2.indd 4

•

than $400,000. Presently, they’re imposed only on the first $137,700 of income. Changing how long-term capital gains are taxed. This would tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million. Presently, capital gains are taxed at 20 percent. Repealing Section 1031 like-kind exchanges. Eliminating step-up basis for inherited property. Presently, the cost basis for inherited property is the fair market value of the property at the time of the owner’s death. This means someone who inherits property does not pay a capital gains tax on the appreciation inherent in the property at death. This would change under Biden’s tax plan. Limiting itemized deductions. Itemized deductions under the proposal would be limited or capped at 28 percent of their value even though the maximum tax rate is proposed to be 39.6 percent for those earning over $400,000. Thus, the proposal creates a gap between the tax benefit of the itemized deduction and the income tax rate, at least for higher earners. This proposed limit on itemized deductions would not affect business deductions, rental properties, or real estate expenses for investors. Increasing corporate income tax rate from 21 to 28 percent. This would not affect those operating under a partnership or LLC not taxed as a corporation. Lowering estate and gift tax exemptions to $3.5 million. The exemption is presently $11.7 million, so this represents a significant increase in the estate and gift tax. TG

3/31/21 8:11 AM

The goal for eliminating these and other tax breaks is to raise tax revenue to pay for Biden’s domestic agenda goals, such as bolstering childcare and care for the elderly. Nevertheless, enactment of these tax reforms would have a major impact on real estate business and investing. Some of the proposed changes have the potential to be more disruptive than others. Eliminating the lower capital gains tax rates and merging capital gains and ordinary income into one tax rate would be particularly disruptive. The estate and gift tax changes, such as eliminating the stepped-up basis at death and taxing unrealized appreciation at death, would have a long-term impact on the estate plans of real estate professionals. Like-kind exchanges have been a significant planning choice for those disposing of real estate, so repealing Section 1031 would be painful. All in all, the entire list of tax reforms, if enacted, would be acutely felt in the real estate sector.

Dodging the Bullet: Congressional Gridlock The anticipated Democratic sweep of both houses of Congress did not unfold quite as the pundits predicted early in the election cycle. The Georgia U.S. Senate election on Jan. 5 gave the Democrats only a slight majority, so the chances of Biden succeeding in enacting his entire tax plan are problematic. Some may hope for congressional gridlock, thinking it will mean no major tax legislation changes and no tax increases. Real estate professionals should take a more nuanced view of the risk of tax legislation resulting in higher tax rates. “Congressional gridlock” is too simplistic of a notion. While the Democrats will have a slight edge in their effort to enact their tax plan, the path is far from clear. A bipartisan tax bill is not impossible to imagine. Former President Barack Obama enacted tax legislation during his second term when Republicans controlled Congress. While Biden and the Democrats do not have a blank check to enact all of their tax legislation, they might have sufficient power to enact certain parts. Some tax issues might lend themselves to a majority agreement. Repeal of Section 1031 like-kind exchanges is a good example of a tax issue that might not have broad popular appeal apart from the real estate community and, therefore, might be vulnerable to enactment.

Applicable Federal Rate Month

Annual Compounding

Jan. 2020 Feb. 2020 March 2020 April 2020 May 2020 June 2020 July 2020 Aug. 2020 Sept. 2020 Oct. 2020 Nov. 2020 Dec. 2020 Jan. 2021 Feb. 2021

1.69% 1.75% 1.53% 0.99% 0.58% 0.43% 0.45% 0.41% 0.35% 0.38% 0.39% 0.48% 0.52% 0.56%

Source: Internal Revenue Service

Parents or grandparents who loan money to trusts for children or grandchildren to enable their family trusts to make strategic investments should keep in mind that they can do so at a virtually zero interest rate cost. Why accumulate wealth only to incur an estate or gift tax on transferring the wealth to family when you can use low-interest loans to create the wealth at the family trust level? However, the rates are starting to rise, so the opportunity afforded by the extraordinarily low interest rates is fading.

Partnership Tax Audits Another current development that is important to the real estate community is the IRS’ increasing push to audit more partnerships and LLCs that are taxed as partnerships. The IRS is already recruiting agents for this purpose. This is important because the partnership and LLC are the single, dominant form of business entity used in the U.S., and that’s especially so in real estate.

Golden Moment for Wealth Transfers Next to the political fight over who to tax and how much, the biggest current development in tax law is the rock-bottom Applicable Federal Rate (AFR), which in January 2021 was 0.52 percent and in February 2021 was 0.56 percent for midterm loans (see table). The AFR is the minimum interest rate allowed for private loans by the Internal Revenue Service (IRS). It is used to determine, among other things, the gift tax for loans to family. From a tax-planning perspective, this is the golden moment for wealth transfers using low interest rates as the centerpiece strategy. Consider the eye-popping drop in AFR (again, midterm loans) throughout 2020, as shown in the table. Tax planning using low-interest loans is non-controversial, non-aggressive, and plain vanilla planning, but it is hugely effective. About the only issue is whether the loan is a true loan, as opposed to a gift. SPRING 2021

TG_28-2.indd 5

3/31/21 8:11 AM

The audit rate for partnerships has been low—less than 1 percent—largely because the rules for partnership audits are complicated. In 2015, when the Bipartisan Budget Act was enacted, the rules for audits of partnerships and entities taxed as partnerships changed along with the rules for determining who is required to pay the tax that results from any corresponding audit adjustments. Those new rules became effective after Dec. 31, 2017. The new centralized partnership audit rules enable the IRS to audit a partnership tax return and assess the partnership with any tax owing. This change eliminated the need for the IRS to audit and collect tax from individual partners. Because of these changes, many expected the audits of partnerships to increase. This appears to be happening in 2021. Instead of waiting for a partnership tax audit, get prepared by being proactive. For example: • Review the partnership agreement to determine how a tax audit would apply. • Update the agreement as necessary, especially being sure that the old “Tax Matters Partners” provisions have been replaced with the new rules for “Partnership Representative.” Among the provisions in the new audit regime that should be considered for an updated partnership agreement are the appointment, removal, and replacement of the Partnership Representative; the general duties and, specifically, the obligation to provide notice to partners of a tax audit; the Partnership Representative’s authority to resolve the audit; the Partnership Representative’s release from liability; and the new audit regime’s election-out rules.

Concern Over Effective Dates Another thing to watch for is the effective date of proposed legislation. For example, the prospect of an estate tax increase retroactively taking effect Jan. 1, 2021, is a concern for many. Rather than being driven by fear of an early effective date of seismic legislation, a better strategy might be to test any tax planning against the metric of “does it make sense?” Clients

TG_28-2.indd 6

who were considering tax planning at the end of 2020 should continue planning in first quarter 2021. Whatever the risk of sweeping tax reform in 2021—whether it results in a 2 percent, 20 percent, or even just 0.2 percent tax increase—there will be a narrow time frame in which to hedge against that risk—perhaps just the first quarter.

Unwinding the Planning Many people began planning wealth transfers in late 2020 for fear of dramatic tax legislation, but they have doubts about parting with a substantial portion of their wealth. Because there is a danger of moving too much wealth too soon, the question arises: Is there a way to undo a tax-planning strategy adopted in late 2020? A few fundamental questions to consider: • If you have to jump through a lot of hoops to undo the planning, then why are you planning in the first place? • Will transferring wealth keep you from being able to pay bills? If so, then the transfers should not be made. • Have you taken care of yourself before considering transferring wealth to your children?

Be Proactive, Minimize Tax Risk Biden’s proposed tax plan, amazingly low IRS approved interest rates, and the anticipated increase in tax audits of partnerships and LLCs each serve the purpose of pointing to tax risk (and opportunities) confronting the more active real estate professionals and investors. The tax risk is quite real and, without proactive planning, could lead to higher taxes. For those who do not dawdle, however, the opportunities are significant. Tax laws are complicated, so be sure to consult a tax accountant or tax attorney before making financial decisions. Elliott (bill@etglawfirm.com) is a Dallas tax attorney, Board Certified, Tax Law; Board Certified, Estate Planning & Probate; Texas Board of Legal Specialization; and Fellow American College of Tax Counsel. TG

3/31/21 8:11 AM

Legal Issues

Should It Stay or Should It Go? Required TREC Addendum Addresses Fixture Leases

The Texas Real Estate Commission now requires an addendum on contracts for properties that have a fixture lease. The addendum allows the parties involved in the sales transaction to address issues associated with the lease early in the transaction process rather than later. By Kerri Lewis According to a Texas Real Estate Commission (TREC) requirement that took effect April 1, if a fixture lease is on a property for sale, a new contract addendum must now be attached to the contract as part of the transaction. No, this is not an April Fool’s Day joke. It is the result of many months of deliberation by the Broker-Lawyer Committee and TREC acknowledging a lack of direction for parties to a transaction in which a fixture lease exists on the property. The new Addendum Regarding Fixture Leases will make parties aware of and enable them to address the many special issues that arise with fixture leases at the time of contract rather than weeks before closing. A copy of the addendum is provided at the end of this article.

What is a Fixture?

A fixture is an improvement to real property, generally some type of personal property, that is affixed or fastened in some way that makes it become a permanent part of the real property. A fixture conveys with the real property unless specifically excluded in the contract. There have been many real estate disputes about what is or is not a fixture. In Logan v. Mullis, 686 S.W.2d 605 (Tex. 1985), the Texas Supreme Court set out three factors that are relevant in determining whether personal property has become a fixture that conveys with the real property: (1) the mode and sufficiency of annexation, either real or constructive; (2) the adaptation of the article to the use or purpose of the realty; and (3) the intention of the party who annexed the personal property to the realty. SPRING 2021

TG_28-2.indd 7

The first factor considers how the personal property is attached to the real estate and whether its removal will result in damage to the real property. A cabinet that is nailed into the wall studs would be considered a fixture, whereas a free-standing refrigerator merely plugged into an outlet would not. A flat bathroom mirror glued to the wall would be a fixture, while a framed mirror hanging on the wall with a picture hook would not. The second factor considers whether the personal property was customized for the real property. A sub-zero refrigerator built into kitchen cabinetry is an example. An outdoor grill built into back porch masonry is another. Courts give the third factor the most weight. What was the intention of the party who attached the item to the realty? The first two factors usually supply the evidence of this third factor. Paragraph 2 of TREC-promulgated contracts refers to fixtures as being “permanently installed and built-in items” and lists many examples, including wall-to-wall carpet, mirrors, security equipment, light fixtures, and landscaping.

What is a Fixture Lease? A fixture lease is an agreement with a third party who leases personal property to a homeowner that is attached to the real property in some way. The most common types of fixture leases are solar panel leases (attached to the roof), security system leases (wired into the walls, doors, and windows), propane tank leases (attached by gas lines to the house and powers household systems), and water softener leases (attached by water lines to the house).

3/31/21 8:11 AM

What Happens to a Fixture Lease When the Home is Sold?

stress the importance of getting a copy of all fixture leases ready prior to going under contract. This is important for two reasons. First, as already mentioned, the client will want to review The leased fixture property is not owned by the homeowner, the terms of the lease (preferably with an attorney) to see what so it does not automatically convey under the improvements options are available to them. Second, as set out in Paragraph B provision of Paragraph 2 B of the TREC contracts. What hapof the addendum, if the fixture lease is not delivered before or pens to the leased fixture property on the sale of a home is at the time of the contract, the seller will have an obligation to determined as much by the terms of the fixture lease as the deliver the lease to the buyer within five days of the effective desires of the parties. This bears repeating: What happens to date, and the buyer will have a right to terminate the contract the leased fixture property is largely determined by the terms within seven days after receiving a copy of the lease and have of the fixture lease. the earnest money refunded. If the seller does not deliver the Each fixture lease is different, and the higher the cost of lease after five days, the buyer may declare the seller in default the leased property (read: solar panels), the more complex any time before delivery up to closing and seek remedies under the terms for buyout or assignment of the lease. Most fixture default Paragraph 15. This includes termination and return of leases will have some provisions that deal with the sale of the the earnest money. underlying realty. In general, they Be sure to read and understand allow the seller to move the prophow Paragraph A of the addendum erty under the fixture lease to their works. All subsections of Paragraph new home, assign the fixture lease A should be filled out. They are not to the buyer, or pay off the remainan either/or proposition like the der of money owed under the lease. first two paragraphs of the AddenEach one of these options dum Regarding Residential Leases. raises questions and concerns. The body of Paragraph A sets out For instance, if the fixture propwhich type of fixture leases exist on erty is taken by the seller, who the property. is obligated to repair any damage Paragraph A(1) states that the to the real property caused by the buyer shall assume and the seller removal? If the fixture property shall assign all of the fixture leases and lease are to be assumed by the checked except _______________. The leased fixture property is not buyer, does the lessor have the If a buyer does not want to assume right to approve or reject the buyer? owned by the homeowner, so it does a fixture lease, the type of fixture If the buyer is approved, is there lease must be written in this blank. not automatically convey under the an assignment fee? If the buyer is The second blank in this subsection improvements provision. rejected, does the seller have to pay allows the parties to negotiate a cap off the lease in full at closing? If on how much the buyer will pay the the buyer does not assume it, can lessor for assignment of the lease or the seller be required to remove the property and repair any leases. Both parties agree to sign required lessor documents for damage? If the seller just leaves the property, does the lessor the assignment. How much is paid and what documents have to have the right to remove the leased property? If so, who is be signed will be determined by the terms of the fixture lease. responsible for repairing any damage caused by the removal? Paragraph A(2) addresses whether the seller will or will not Fixture leases were required to be delivered to buyers in for(one of those boxes must be checked) remove leased fixtures mer TREC contracts under the general lease provision in former covered by leases the buyer does not assume. It also states Paragraph 10 B(2), but no specific negotiated contract terms were that the seller will repair any damage caused by the removal set out in the promulgated contracts to deal with the questions of the leased fixtures. If the leased fixtures are not removed, raised above. Addressing those issues was the main purpose for the fixture lease will control what rights the lessor has to the adding the Addendum Regarding Fixture Leases. leased fixtures. Note that this paragraph does not address who completes repairs if the lessor removes the leased fixtures. Using TREC’s New Fixture Lease Addendum Again, this would be controlled by the fixture lease. The most important part of this one-page addendum is conFinally, Paragraph C states that there will be no liens or tained at the bottom of the page in the notice. It states that security interests against leased fixtures on leases the buyer “Seller and Buyer should consult with the lessor and their does not assume. This means the seller will have to pay off attorneys regarding the assignment, assumption, or terminaany sums due for termination of the fixture lease, either before tion of any Fixture Lease.” Fixture leases, especially solar panel closing or out of sales proceeds at closing. This could be quite a leases, can be complicated, and both parties need to understand sum for solar panel leases and is another good reason the seller the terms of the lease before a decision can be made as to should review the lease and understand the options before listassumption or termination. Keep in mind license holders caning the property for sale. not interpret the terms of a fixture lease for their clients, nor Nothing in this publication should be construed as legal can they give advice as to whether their client should assume advice for a particular situation. For specific advice, consult an or terminate a lease. Both of these actions would constitute the attorney. unauthorized practice of law. Lewis (kerri@2oldchicks.com) is a member of the State Bar of Texas and A listing agent should discuss the existence of any fixture leases with sellers at the listing appointment. The agent should former general counsel for TREC.

TG_28-2.indd 8

3/31/21 8:11 AM

SPRING 2021

TG_28-2.indd 9

3/31/21 8:11 AM

Residential

In Short Supply Low Housing Inventory’s Effect on Low-Income Buyers

Table 1. Number of Homes Affordable with Financing by Price Range, MSA (2019) Maximum Home Price Range

AustinRound Rock

DallasFort WorthArlington

HoustonThe WoodlandsSugar Land

San AntonioNew Braunfels

Conventional Financing 0 to $12,441 $12,442 to $24,882 $24,883 to $37,323 $37,324 to $49,764 $49,765 to $62,205 $62,206 to $87,087 $87,088 to $124,410 $124,411 to $186,615 $186,616 to $248,821 $248,822 to $373,231 $373,232 and above

306 722 1,078 1,488 1,897 5,063 9,189 35,754 106,758 168,776 161,247 492,278

876 2,976 8,870 16,011 23,320 65,203 136,506 359,598 377,306 442,371 334,903

2,453 5,696 12,278 20,822 29,672 75,764 162,215 448,807 342,417 309,557 229,027

779 2,312 4,900 9,432 14,717 41,964 82,415 168,656 128,486 112,553 69,143

1,767,940

1,638,708

635,357

FHA Financing 0 to $19,083 $19,084 to $39,606 $39,607 to $59,409 $59,410 to $79,212 $79,213 to $99,016 $99,017 to $138,622 $138,623 to $198,031 $198,032 to $297,047 $297,048 to $396,062 $396,063 to $594,093 $594,094 and above

641 1,716 2,655 3,895 4,451 10,510 46,539 170,925 108,211 88,534 54,201

2,068 13,044 30,942 48,046 61,149 166,053 366,167 523,776 269,053 195,392 92,255

5,118 18,434 39,979 57,058 70,014 211,360 433,194 423,234 181,195 118,760 80,362

1,887 7,486 18,936 30,751 39,930 94,045 161,257 159,264 63,256 41,338 17,207

492,278

1,767,940

1,638,708

635,357

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

TG_28-2.indd 10

3/31/21 8:11 AM

A shortage of homes, particularly in the lower price ranges, has constrained affordability, especially for lowerincome households. The financial pressures the pandemic has imposed on these households have further diminished their

COVID-19’s effects on the nation’s labor market have bled over into the housing market, impacting not only current homeowners, but potential buyers as well. According to the Congressional Research Service, young workers, women, workers with low educational attainment, part-time workers, and racial and ethnic minorities were hit especially hard by the pandemic. Workers in industries that provide in-person services have also faced disparately high unemployment rates. As a result, their home-purchasing power has likely been diminished despite historically low mortgage interest rates. These groups comprise a significant share of traditional first-time buyers seeking affordable homes. Most assessments of owner-occupied housing affordability focus singularly on estimating the demand for homeownership. For instance, the Housing Affordability Index produced by the National Association of Realtors measures the ability

homebuying potential. By Harold D. Hunt and Clare Losey

of a family earning the median income to afford the median-priced home with a conventional loan. However, by failing to consider the availability of housing in the buyer’s price range, it offers an incomplete assessment of purchase affordability. Without the availability of affordable homes, demand matters little. For this study, American Community Survey data were used to measure the proportion of renter households in each income category in Texas’ major Metropolitan Statistical Areas (MSAs). CoreLogic appraisal data, combined with estimates of the maximum home price affordable to households by income and loan type (conventional or Federal Housing Administration [FHA]), were used to quantify the supply of homes affordable to each income category. This analysis presents several limitations. CoreLogic data reflect the total supply of homes within each “price” range (where prices reflect appraisal district values), rather

Table 2. Demand/Supply Comparison for Renter Households with Financing (2019) AustinRound Rock

Renter Household Income

Dallas-Fort WorthArlington

Houston-The WoodlandsSugar Land

San AntonioNew Braunfels

% of Owner% of Owner% of Owner% of OwnerOccupied Occupied Occupied Occupied % of Renter Units % of Renter Units % of Renter Units % of Renter Units Households Affordable Households Affordable Households Affordable Households Affordable

Conventional Financing Less than $5,000 $5,000 to $9,999 $10,000 to $14,999 $15,000 to $19,999 $20,000 to $24,999 $25,000 to $34,999 $35,000 to $49,999 $50,000 to $74,999 $75,000 to $99,999 $100,000 to $149,999 $150,000 or more

5.0% 3.3% 4.8% 4.3% 4.7% 10.6% 15.4% 20.2% 11.7% 12.4% 7.6%

0.1% 0.1% 0.2% 0.3% 0.4% 1.0% 1.9% 7.3% 21.7% 34.3% 32.8%

4.4% 3.6% 4.8% 5.3% 5.7% 12.2% 16.3% 20.4% 12.0% 10.1% 5.3%

100.0%

0.0% 0.2% 0.5% 0.9% 1.3% 3.7% 7.7% 20.3% 21.3% 25.0% 18.9%

5.0% 4.4% 5.5% 6.5% 6.4% 12.8% 15.6% 18.5% 10.2% 9.3% 5.7%

0.1% 0.3% 0.7% 1.3% 1.8% 4.6% 9.9% 27.4% 20.9% 18.9% 14.0%

5.9% 5.2% 6.1% 6.6% 6.9% 13.4% 16.1% 19.0% 9.8% 7.6% 3.5%

0.1% 0.4% 0.8% 1.5% 2.3% 6.6% 13.0% 26.5% 20.2% 17.7% 10.9%

100.0%

FHA Financing Less than $5,000 $5,000 to $9,999 $10,000 to $14,999 $15,000 to $19,999 $20,000 to $24,999 $25,000 to $34,999 $35,000 to $49,999 $50,000 to $74,999 $75,000 to $99,999 $100,000 to $149,999 $150,000 or more

5.0% 3.3% 4.8% 4.3% 4.7% 10.6% 15.4% 20.2% 11.7% 12.4% 7.6%

0.1% 0.3% 0.5% 0.8% 0.9% 2.1% 9.5% 34.7% 22.0% 18.0% 11.0%

4.4% 3.6% 4.8% 5.3% 5.7% 12.2% 16.3% 20.4% 12.0% 10.1% 5.3%

0.1% 0.7% 1.8% 2.7% 3.5% 9.4% 20.7% 29.6% 15.2% 11.1% 5.2%

5.0% 4.4% 5.5% 6.5% 6.4% 12.8% 15.6% 18.5% 10.2% 9.3% 5.7%

0.3% 1.1% 2.4% 3.5% 4.3% 12.9% 26.4% 25.8% 11.1% 7.2% 4.9%

5.9% 5.2% 6.1% 6.6% 6.9% 13.4% 16.1% 19.0% 9.8% 7.6% 3.5%

0.3% 1.2% 3.0% 4.8% 6.3% 14.8% 25.4% 25.1% 10.0% 6.5% 2.7%

100.0%

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

SPRING 2021

TG_28-2.indd 11

3/31/21 8:11 AM

Table 3. (Under)/Oversupply of Homes for Households Using Financing by Income Cohort, Price Range (2019) AustinRound Rock

Dallas-Fort WorthArlington

Houston-The WoodlandsSugar Land

San AntonioNew Braunfels

Renter Household Income

Maximum Home Price Range

Conventional

FHA

Conventional

FHA

Conventional

FHA

Conventional

FHA

Less than $5,000 $5,000 to $9,999 $10,000 to $14,999 $15,000 to $19,999 $20,000 to $24,999 $25,000 to $34,999 $35,000 to $49,999 $50,000 to $74,999 $75,000 to $99,999 $100,000 to $149,999 $150,000 or more

0 to $12,441 $12,442 to $24,882 $24,883 to $37,323 $37,324 to $49,764 $49,765 to $62,205 $62,206 to $87,087 $87,088 to $124,410 $124,411 to $186,615 $186,616 to $248,821 $248,822 to $373,231 $373,232 and above

(24,230) (15,456) (22,361) (19,516) (21,412) (47,113) (66,394) (63,879) 49,164 107,593 123,604

(23,895) (14,462) (20,784) (17,109) (18,858) (41,666) (29,044) 71,292 50,617 27,351 16,558

(76,456) (60,549) (75,748) (77,185) (78,191) (150,443) (152,551) (443) 166,001 264,130 241,435

(75,264) (50,481) (53,676) (45,150) (40,362) (49,594) 77,109 163,734 57,748 17,150 (1,213)

(79,143) (66,074) (78,571) (86,467) (75,368) (133,590) (93,657) 145,058 175,133 157,359 135,320

(76,478) (53,336) (50,870) (50,231) (35,026) 2,006 177,322 119,485 13,911 (33,438) (13,345)

(36,436) (30,451) (33,761) (32,233) (29,377) (43,226) (19,814) 47,676 66,376 64,143 47,103

(35,328) (25,277) (19,725) (10,914) (4,164) 8,855 59,028 38,284 1,146 (7,072) (4,833)

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

than the number of homes actually for sale within each price range (Table 1). Likewise, the demand figures reflect the total number of renter households in each income cohort (Table 2), as opposed to only those households looking to become homeowners. All data reflect 2019 figures; 2020 Census data will not be published until late 2021.

Results Reveal Shortages Subject to these limitations, the under or oversupply of homes that renter households would have had sufficient income to purchase in 2019 in Texas’ major

MSAs is shown in Table 3. Numbers are shown for both conventional and FHA financing. For example, in Austin-Round Rock, there was a shortage of 66,394 homes for renter households earning $35,000-$49,999 who were using conventional financing. For similar households using FHA financing, there was a shortage of 29,044 homes. Several patterns are evident. The most prominent shows that, across all four MSAs, the shortage of homes is much more pronounced among lower-income households with conventional loans rather than FHA loans. Government-

sponsored mortgages generally offer more relaxed borrowing constraints than conventional mortgages (FHA loans do not require the same wealth and income—loan-to-value and debt-toincome ratios—as conventional loans). Furthermore, regardless of the type of loan, affordability is most constrained for lowest-income households, particularly those earning less than $50,000 annually. First-time buyers, who tend to be younger than repeat buyers, are more likely to fall in the lower-income cohorts. The table shows homeownership is generally out of reach for the lowest-

LOWER-INCOME HOUSEHOLDS in all four major Texas MSAs are having difficulty finding homes within their price range. For example, in 2019 DFW had a shortage of more than 152,500 homes affordable to buyers earning $35,000 to $49,999 and using conventional financing.

TG_28-2.indd 12

3/31/21 8:11 AM

Understanding Owner-Occupied Housing Affordability

ousing affordability generally describes the relationship between household income and housing costs. In the realm of homeownership, affordability is typically measured separately for existing homeowners and would-be homebuyers (particularly first-time homebuyers). The former refers to repayment affordability, which is the ability of the borrower (i.e., existing homeowner) to repay his/her mortgage. The latter denotes purchase affordability, or the household’s ability to obtain mortgage financing and buy a home. In a separate article (“Downsized: Pandemic Diminishes Homebuying Ability”), homeownership demand is quantified for two types of mortgage loans: conventional and FHA. A standard measure of homeownership demand is the estimation of maximum home price that is affordable to a particular household. This is generally a function of the characteristics of the borrower (income, wealth, and credit score) and the loan as well as the mortgage interest rate, and additional costs of homeownership, including property taxes and insurance, and points and fees on the loan. The vast majority of homebuyers in Texas—87 percent—used mortgage financing in 2020. The table establishes the maximum affordable home price for borrowers of varying incomes seeking either a conventional or FHA mortgage. For example, in 2019, the median family income in Austin-Round Rock was just over $95,000. The maximum affordable home price would be $236,380 for a conventional borrower and $365,614 for an FHA borrower.

income cohorts. The supply of homes in their price range is simply insufficient. FHA’s more relaxed qualifying standards certainly enhance purchase affordability, but FHA financing generally remains unattainable for the lowest-income buyers, who lack both income and wealth (even without considering potential credit constraints). Shortages in homes for highest-income households using FHA financing cause these households to “buy down.” In other words, they purchase homes that are priced lower than what is reasonably affordable to them. Consequently, they dip into the supply that is affordable to moderate and high-income cohorts.

Pandemic Puts on the Pressure Texas’ housing market already faced a variety of challenges before the pandemic, including supply constraints and a decline in purchase affordability SPRING 2021

TG_28-2.indd 13

Maximum Home Purchase Price Home Price Affordable Income

Conventional Loan

FHA Loan

$150,000 $145,000 $140,000 $135,000 $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

$373,231 $360,790 $348,349 $335,908 $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

$577,285 $558,042 $538,799 $519,556 $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: Texas Real Estate Research Center at Texas A&M University

following the Great Recession. In 2019, the months of inventory—the supply of homes listed for sale relative to the number of homes purchased—measured a mere three months for the state. Generally, 6.5 months indicates a balanced market—that is, sufficient supply to meet household demand. Supply is typically more constrained in larger markets because of strong population growth and greater shortages of developable land. Meanwhile, the widening gap between household income and home prices generally signals increased difficulty in meeting the qualifying standards for mortgage financing, particularly for households on the margin. Assuming it takes longer for lowincome and minority households to recover economically, purchasing a home may prove difficult for first-time buyers as they strive to recover lost wages.

However, the government could relax qualifying standards for mortgages insured or guaranteed by federal entities. Furthermore, a potential swath of foreclosures could actually enhance purchase affordability for lower-income households. That will depend on the duration of the foreclosure moratorium and the speed of households’ economic recovery. For more on how the pandemic has made it more difficult for some Texas households to purchase a home, read “Downsized: Pandemic Diminishes Homebuying Ability.” 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.

3/31/21 8:11 AM

Land Markets

TG_28-2.indd 14

3/31/21 8:11 AM

Texas’ rural land market posted strong sales in the latter part of 2020. Sales for small properties were especially high, possibly boosted by concerns over COVID-19 contagion and civil unrest in urban areas. By Charles E. Gilliland

easures intended to reduce the spread of COVID-19 hit Texas land markets hard in early 2020, sending brokers to the sidelines as their phones stopped ringing and buyers canceled pending transactions. Reports from across the state painted a picture of markets beset by uncertainty. The troubled summer with riots in urban areas added to people’s concerns. As the summer progressed, scattered reports suggested a wave of urban dwellers had begun descending on rural locations seeking small acreages away from the contagion and threatened violence in the cities. Many dismissed these reports as isolated incidents in normally quiet markets, not portents of an emerging trend. However, as the year drew to a close, sales data reported to the Texas Real Estate Research Center seemed

TG_28-2.indd 15

3/31/21 8:11 AM

Number of Sales (Hundreds)

Figure 1. Small Property Sales Numbers Austin-Waco-Hill Country

10 8 6 4 2 0

2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Texas Real Estate Research Center at Texas A&M University

Figure 2. Annual Percent Change in Sales Numbers Austin-Waco-Hill Country

100

Percent Change

80 60 40 Average = +12.8%

20 0

–20

2015

2016

2017

2018

2019

2020

Source: Texas Real Estate Research Center at Texas A&M University

to confirm the opposite. Led by high volume Austin-Waco-Hill Country (Region 7), rural areas in the state’s land markets had a remarkable annual increase in total small property sales. To gauge the strength of this phenomenon, the Center examined developments in the first size quintile (smallest 20th percentile of sales from 1966-2009) of rural land market sales for six of the state’s seven regions. Table 1 shows each region’s size boundaries for the first size quintile.

Small Properties’ Sales Explosion

between 2015 and 2020. Third quarter 2020 growth was nearly double the previous high of 37.1 percent in first quarter 2015. However, that growth occurred when markets were on the upswing from the financial meltdown in the subprime mortgage industry that depressed market volumes for several years. The number of sales in third quarter 2020 nearly doubled the average number for the past six years. Clearly, activity rose to never-before-seen levels. Sales volumes increased significantly in six regions (Region 2 was excluded due to the limited number of transactions) in third quarter 2020 (Table 2). In addition, third and fourth quarter numbers represent continued market growth. In general, prices for small rural properties have trended up in all regions, with quarterly fluctuations associated with changes in the location of sales (Table 3). Fourth quarter 2020 results indicate price increases likely accompanied volume growth across most areas of Texas. These results suggest the hypothesized flight to the countryside began in the third and fourth quarters of 2020. Experienced market observers who speculate about how long this phenomenon can continue should keep in mind some factors that contributed to the moves. First, social distancing measures caused restaurants and entertainment venues to close, making city life much less attractive. Second, urban living made social distancing more challenging. Finally, disorder in the streets of major cities prompted many to seek more remote settings.

atest data show sales of small properties in Austin-WacoHill Country’s rural markets exploded in the third Table 1. Small Property Rural Land Sizes and fourth quarters of 2020 (Figure 1). In the Region Number Region Name Lower Bound Upper Bound third quarter, the region logged 1,103 reported sales, 1 Panhandle and South Plains 10 acres 160 acres exceeding 1,000 sales in a quarter for the first time. 3 West Texas 10 acres 95 acres Fourth quarter reports logged 978 sales for that quar4 Northeast Texas 10 acres 35 acres ter. Third quarter 2020 sales were up 85.1 percent 5 Gulf Coast-Brazos Bottom 10 acres 43 acres over the same quarter in 2019, while fourth quarter 6 South Texas 10 acres 45 Acres sales were up 70.7 percent (Figure 2). 7 Austin-Waco-Hill Country 10 acres 50 Acres This remarkable growth occurred in a market where sales volume growth averaged 12.8 percent Source: Texas Real Estate Research Center at Texas A&M University

TG_28-2.indd 16

3/31/21 8:11 AM

DATA SUGGEST COUNTRY LIVING APPEALED to a growing number of people in 2020. Small property sales increased remarkably in rural areas of Texas’ land markets.

Large Properties Also Impacted The combined effect of the virus and political unrest appears to have impacted the large property market as well. Large land sales, defined as acreage larger than the upper bound in Table 1, had similar large increases in activity (Table 4). All regions except 1 and 3 had substantial growth in activity in the third quarter. Fourth quarter numbers, meanwhile, show growth in all regions. Investors seeking a safe haven for their capital in uncertain times flocked to this market. Some reportedly subdivided them into small properties, selling them quickly.

Back to ‘Normal’?

iolent confrontations in cities quieted after summer 2020, and vaccines could be the harbinger of a return to a more normal social milieu, easing concerns about living in cities. If 2020’s concerns are allayed in 2021, fewer urban dwellers may feel a need to purchase rural land. However, the opening weeks of 2021 saw unrest reappear and created worries of more to come. On top of that, a core urban demographic longs for country getaways even in the absence of these concerns. Ultimately, the strength and longevity of this uptick in demand for small rural properties depend on how the remainder of 2021 unfolds. Dr. Gilliland (c-gilliland@tamu.edu) is a research economist with the Texas Real Estate Research Center at Texas A&M University. SPRING 2021

TG_28-2.indd 17

Table 2. Small Property Rural Land Sales Volume

Region Number

Region Name

3Q2020 Sales/Percent Change

1 3 4 5 6 7

Panhandle and South Plains West Texas Northeast Texas Gulf Coast-Brazos Bottom South Texas Austin-Waco-Hill Country

62 / 87.9% 275 / 59.0% 871 / 36.1% 532 / 45.4% 294 / 61.5% 1,103 / 85.1%

4Q2020 Sales/Percent Change 45 / 73.1% 229 / 36.3% 772 / 45.4% 511 / 78.0% 304 / 75.7% 978 / 70.7%

Source: Texas Real Estate Research Center at Texas A&M University

Table 3. Small Property Rural Land Sales Prices

Region Number

Region Name

3Q2020 Price Per Acre/ Percent Change

1 3 4 5 6 7

Panhandle and South Plains West Texas Northeast Texas Gulf Coast-Brazos Bottom South Texas Austin-Waco-Hill Country

$4,001 / 32.93% $3,064 / -2.00% $10,347 / 3.40% $11,508 / 2.14% $8,749 / 7.96% $9,492 / -3.54%

4Q2020 Price/Percent Change $3,913 / 4.85% $3,184 / 1.88% $10,568 / 5.24% $11,675 / 4.04% $8,926 / 7.96% $9,769 / 0.06%

Source: Texas Real Estate Research Center at Texas A&M University

Table 4. Large Property Rural Land Sales Volume

Region Number

Region Name

3Q2020 Sales/Percent Change

1 3 4 5 6 7

Panhandle and South Plains West Texas Northeast Texas Gulf Coast-Brazos Bottom South Texas Austin-Waco-Hill Country

81 / -3.57% 256 / -6.92% 681 / 48.7% 290 / 38.8% 167 / 25.6% 704 / 57.1%

4Q2020 Sales/Percent Change 135 / 107.7% 271 / 123.7% 604 / 59.0% 317 / 115.7% 201 / 95.2% 702 / 80.0%

Source: Texas Real Estate Research Center at Texas A&M University

3/31/21 8:11 AM

Residential

How Long Can It Last? Strong 2020 Housing Market Moves into Uncertain 2021 The pandemic didn’t slow Texas home sales in 2020. However, despite strong demographics, low housing supply could hamper growth in 2021. By Joshua Roberson

Despite the onset of a pandemic, 2020 was an absolutely phenomenal year for Texas’ housing market. Fourth quarter sales expanded after the third-quarter boom, and year-end sales capped off at 9.4 percent over 2019, which was already a record year. Strong sales were accompanied by other strong growth numbers, notably home price appreciation (see table). Fourth-quarter price

TG_28-2.indd 18

3/31/21 8:11 AM

What’s even more impressive is that yearend figures were blunted by the massive twomonth decline incurred during the pandemic’s lockdown period. Comparing May-December 2020 with the same period in 2019 shows sales growth was actually closer to 13 percent. The last time Texas housing was this strong was in the early 2010s when the market finally began recovering from the Great Recession (Figure 1). Sales growth hit double digits in 2012 and made an even bigger leap the following year. Unfortunately, following yesterday’s playbook won’t be enough to sustain today’s housing trend. Unlike in the early 2010s, when home sales clawed their way back from a recession, 2020’s sales growth was on top of an already hot housing cycle. Homeowners back then were anxious to buy homes again after waiting for both the housing and mortgage industries to get back on their feet. After years of pent-up demand and strong economic tailwinds, Texas’ housing market had plenty to look forward to. Those strong tailwinds may have disappeared for the time being, but the market stands to benefit from a surge in younger buyers.

growth catapulted to almost 8 percent over fourth quarter 2019. Overall in 2020, the typical home sold much faster, and sellers made fewer price concessions. 2020 Texas Housing Market Performance In the end, the market (Percent Change from 2019 in Parentheses) simply wasn’t able to keep Median Close Price: $259,000 (+7.9%) Sales: 393,168 (+9.4%) pace with demand, resultMedian Close Price: (per square foot) $129 (+6.2%) Close/Ask Price Ratio: 97% (+1%) ing in a massive housing Days on Market: 47 (-27.7%) Months Inventory: 1.7 (-44%) shortage. Source: Texas Real Estate Research Center at Texas A&M University SPRING 2021

TG_28-2.indd 19

3/31/21 8:11 AM

The Millennial Wave

ndividuals born in the 1980s, or “older millennials,” make up the age cohort of most interest in the current housing market, according to the National Association of Realtors’ most recent “Home Buyers and Sellers Generational Trends Report.” These households took center stage in 2020 and propelled housing demand, but how deep is that well of potential homebuyers, and why are they relevant now? In major markets like Dallas-Fort Worth, millennials in their mid 30s are more likely to own than rent (Figure 2). However, simply being born in the early to mid ‘80s doesn’t show the big picture of how they fit into the housing market. Many at this age cross several key milestones, pushing them closer toward homeownership. The first milestone is simply dollars and cents. While millennials in general are highly educated, their income levels

Figure 1. Annual Texas MLS Home Sales

MLS Sales (Thousands)

400

16.0%

300

3.2% 3.9%

4.4%

4.0% 2.4%

Figure 3. Population Density by Year Born Persons Per Square Mile

4,400

9.4%

4.3%

200

100

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Texas Real Estate Research Center at Texas A&M University

Figure 2. DFW Metro Housing Tenure by Birth Year 2000 1995 1990 1985 1980 1975 1970 1965 0%

25% Rented

50% 75% Owned or being bought (loan)

100%

Sources: IPUMS USA, University of Minnesota, and Texas Real Estate Research Center at Texas A&M University

TG_28-2.indd 20

3,200

1970

1980

1990

2000

Sources: IPUMS USA, University of Minnesota, and Texas Real Estate Research Center at Texas A&M University

15.4%

1960

3,600

2,800 1960

1.9%

4,000

haven’t always matched up with their college degrees. After several years in the workforce, many are just now reaping the benefits of their education. According to U.S. Census Bureau data, older millennials in Dallas now have above-average earnings, which, when combined with today’s mortgage rates, creates a lot of buying power. Higher earnings coincide with other key life milestones as well, such as marriage and children. Older millennials are now hitting marriage rates comparable to Gen Xers and boomers. They also have the most kids per household of any age cohort, creating a need for more space. That need goes against the stereotype that they prefer to live in dense urban areas. Make no mistake, many millennials still prefer the urban lifestyle, but a departure from this trend is clearly emerging. In 2019, older millennials were more closely aligned with older age cohorts than with younger millennials (those born in the ‘90s) when it came to neighborhood density (Figure 3). Whether it’s by want or by need is debatable, but older millennials are making the push to less populated areas like the suburbs. How many of these households are there? The biggest spike in births for this age cohort occurred in 1993, putting them in their late 20s. However, the Texas Demographer’s 2019 estimates show the crest of the millennial wave is still ahead (Figure 4). In addition, geographic reshuffling caused by the pandemic could mean increased migration into Texas, bolstering the millennial head count. Dallas isn’t the only Texas market that could benefit greatly from the millennial demographic. Assuming the mid 30s is the new normal age to begin household formation, millennials could be a major market driver in Texas cities both big and small for years to come. But smooth sailing into an expanding TG

3/31/21 8:11 AM

Single-Family Detached Home Supply, 4Q2020 Months Inventory ≤ 0.5 ≤ 1.0 ≤ 1.5 ≤ 2.0 ≤ 2.5 ≤ 3.0

Source: Texas Real Estate Research Center at Texas A&M University

The Big Shortage

ousing shortage was already a problem in Texas before 2020, but the COVID pandemic pushed the shortage into an entirely new dimension. Around a six-month supply of homes is the general rule of thumb for a balanced market. Most major Texas markets have operated below that for almost ten years. During that time, homeowners who couldn’t find a home in denser areas could sprawl out to surrounding, less populated areas for more options. That may not be the case now. At the current sales pace, most Texas markets are nearly depleted of existing homes. Inside the Texas SPRING 2021

TG_28-2.indd 21

Population (Thousands)

housing market isn’t as simple as that. A few factors could get in the way. One is the possibility that 2020’s strong sales may cannibalize future sales, at least in the short term. Essentially, did conditions in 2020 artificially accelerate the pace of home purchasing? Some households may have only been considering homeownership at the beginning of 2020, but then they sped up their schedule to take advantage of record-setting mortgage rates and perhaps satisfy their sudden need for additional space brought on by shelter-in-place restrictions. If this is the case, then 2021 could experience a shortterm lull in demand until the next wave of millenni400 als enters the buyer’s market. The general state of the economy and the management of virus cases are other demand-side risks, but the biggest hurdles may actually 300 be on the supply side.

Triangle, the region located within the four major metros, inventories are at their lowest with little variance between core metro counties and beyond (see map). In other words, options continue to narrow. Other markets, such as Lubbock, El Paso, and Tyler, aren’t faring much better. Bricks and sticks aren’t the only thing in short supply. Developable land is also much harder to come by with competition among builders intensifying. Once land is acquired, it

Figure 4. Texas Population by Age, 2019

200 100 0 20

50 60 Age Gen Z Younger millennials Gen X Younger boomers Silent Generation

Older millennials Older boomers

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

3/31/21 8:11 AM

In the early stages of the pandemic, construction employment took a tremendous spill. The low point for 2020 took construction employment to levels not seen since 2018.

takes time to push lots into the building pipeline, creating a lag to market. High housing demand in this environment drives up land prices, which typically get passed on to homebuyers. The current housing shortage places a lot of pressure on homebuilders’ shoulders to deliver. As with existing homes, new-home inventories have dwindled, leading to a surge of new-home starts. Can builders meet demand? In the early stages of the pandemic, construction employment took a tremendous spill (Figure 5). The low point for

Average Employment Levels (Thousands)

Figure 5. Texas General Contractor Employment 100

Bright Spots Amid Uncertainty

80 60 40

2012

2014 2016 2018 2020 Nonresidential construction Residential construction Highway, street, and bridge construction

Sources: Quarterly Census of Employment and Wages and Texas Real Estate Research Center at Texas A&M University

TG_28-2.indd 22

2020 took construction employment to levels not seen since 2018. Fortunately for homebuilders, most of the decline was in the nonresidential sector, which slashed payrolls by at least 10,000 jobs in Texas during the second quarter alone. Still, residential construction jobs did not emerge unscathed after shelter-in-place restrictions were lifted. Heightened demand and a smaller workforce are hurdles that could slow new-home delivery. On top of that, home construction levels never fully recovered from the Great Recession of the mid 2000s and from the recent rise in home renovations. It’s unlikely that the new wave of homes will be sufficient to restore balance to the housing market.

ooking at the housing data, it’s hard to reconcile how much has changed in such a short time. Despite 2020 being a rollercoaster year, the housing sector rose to the challenges and quickly adapted. Going forward, traditional housing indicators are still in flux. The oil market is hardly stable, the economy is still not back to full strength, and overall consumer confidence remains poor. On the other hand, interest rates are expected to remain low for the time being, and homeowner migration is accelerating, signifying some bright spots among the uncertainty. Roberson (joshuaroberson@tamu.edu) is a senior data analyst with the Texas Real Estate Research Center at Texas A&M University. TG

3/31/21 8:11 AM

Taxes

Take It to the Limit Benefits and Costs of Chapter 313 Tax Limitations

Take It to the Limit Benefits of Chapter 313 Tax Limitations

Chapter 313, an incentive-based program designed to encourage the development of capital-intensive projects and strengthen the overall Texas economy, is up for renewal in the 2021 legislative session. By Adam Perdue

exas is generally considered a low-tax state, but its reliance on property taxes for local funding leads to property taxes higher than those in many other states. Property taxes particularly place a burden on the development of capital-intensive projects that often provide higher-thanaverage-paying jobs. School taxes make up approximately 54 percent of local property tax collections. Texas Chapter 313, also called the Texas Economic Development Act, was created in 2001 by Texas House Bill 1200. SPRING 2021

TG_28-2.indd 23

It regulates a school district’s ability to offer tax value limitations to proposed local manufacturing projects. The program is intended to increase economic development and related high-paying employment in the state by allowing local school districts to offer property tax relief to selected projects. Chapter 313 is scheduled to expire in 2022, and the Texas Legislature is taking up the question of renewal in the 2021 session. This article explores the program’s tax impact on 437 participating projects.

3/31/21 8:11 AM

Most people are probably more familiar with a related program, Chapter 312, which allows local governments to offer tax abatements to development projects in their jurisdictions. Tax abatements are tax rebates, or agreements to not collect taxes owed. School districts were originally included in the state-granted eligibility to reward tax abatements, but changes to school Chapter 313 Project Count by Three-Digit NAICS Industry Code finance rules in the 1990s meant districts Percent lost funding over and above the abatement. Industry of Total Consequently, they abandoned the program. Grouping Count Count Chapter 313 replaced abatements for school Auto NAICS 336 Transportation equipment manufacturing 2 0.5 districts. The program placed limits on the Cement NAICS 327 Nonmetallic mineral product manufacturing 2 0.5 taxable value of a project. This seemingly Electronics NAICS 334 Computer and electronic product manufacturing 8 1.8 minor change removed the loss of state Food NAICS 311 Food manufacturing 5 1.1 funding to the school district. Machinery NAICS 333 Machinery manufacturing 4 0.9 State funding to school districts is directly Metal NAICS 331 Primary metal manufacturing 6 1.4 related to the number of students in the district and inversely related to the total O&G&C NAICS 324 Petroleum and coal products manufacturing 21 4.8 taxable value of property in the district. O&G&C NAICS 325 Chemical manufacturing 136 31.1 Limiting taxable value instead of offering O&G&C NAICS 211 Oil and gas extraction 6 1.4 an abatement meant school districts would Oil, Gas, and Petrochemicals 163 37.3 be no worse off in terms of total per-student Utilities NAICS 221 Utilities 246 56.3 spending when a Chapter 313 tax value Wood NAICS 321 Wood product manufacturing 1 0.2 limitation is approved. The state would Total Project Count 437 continue funding the school as if the value Source: North American Industry Classification System of the capital in the project was no greater than the limitation. Chapter 313 projects are subject to the limitation for no more than ten years after the initial investment. The limit on the project’s taxable value is set by the statute and determined by school district characteristics. To be eligible for a Chapter 313 limitation, a project must be: • for manufacturing, research and development, or a specific type of electrical generation; • a Texas Priority Project; or • a computer center related to one of those classifications. The project developer can negotiate rebates with the school district. If the school district agrees, the proposed agreement is submitted to the Texas Comptroller for approval. As of Jan. 22, 2021, about 580 Chapter 313 projects have been approved.

Chapter 313 Projects by Industry and Location The two North American Industry Classification System (NAICS) industries with the most Chapter 313 projects are utilities and the combined oil, gas, and petrochemicals grouping with 246 projects (56.3 percent) and 163 projects (37.3 percent), respectively (see table). These projects, which account for 93.6 percent of all Chapter 313 projects, are clustered in four broad areas of Texas (Map 1). Oil, gas, and petrochemical projects are primarily along the Gulf Coast (Map 2), while utilities projects are largely in the Panhandle, West Texas, and Rio Grande Valley (Map 3).

TG_28-2.indd 24

3/31/21 8:11 AM

CHAPTER 313 WAS CREATED when changes to school finance rules in the 1990s meant districts lost funding under Chapter 312. Simply put, the local government gave up potential revenue under a Chapter 312 abatement. With a Chapter 313 limitation, the state essentially pays the school district’s loss of revenue.

Project locations by school district for the remaining industries are shown in Maps 4-10 in the online version of this article. Use the QR code to access it.

Project Investment, Market Values, and Taxation The average 25-year reported investment per Chapter 313 project is approximately $500 million (Figure 1). This amounts to $217 billion total for all 437 projects included in the Texas Real Estate Research Center’s study. Most projects see all of their investment in the first two to three years, with few receiving funding beyond that point. The average taxable market value of Chapter 313 projects peaks in the sixth year as new investment winds down and depreciation on the market value of the initial investments begins to outweigh any further value increases. By the tenth year of the project, the market value is 83 percent of the peak market value, and by the 25th year it has, on average, fallen to 38 percent of the peak market value. Local property taxes owed for an average project in Texas under Chapter 313 limitations are comparable to the unlimited local property taxes that would have been paid if Chapter 313 status SPRING 2021

TG_28-2.indd 25

3/31/21 8:11 AM

had not been awarded and the project had still come to fruition. Even with the tax value limitation, local property tax collections rise an average of $3.9 million per year between the third and tenth year of the project (Figure 2). Once the limitation runs out, a Chapter 313 project continues paying property taxes on the market value for the remaining life of the project. The difference between Chapter 313’s limited taxes and the potential unlimited taxes are a project’s gross savings from participating in Chapter 313 (Figure 3). For the average project, the maximum annual gross savings ($2.8 million) occurs in the seventh year. Total gross tax savings for an average project is $23.2 million. School districts can negotiate with Chapter 313 projects for defined types of rebates. These rebates are paid

directly to the district and do not impact state funding. By removing the value of the rebates out of the gross savings, the total net tax savings for an average project falls to $17 million.

Complete Accounting of Economic Benefit Chapter 313 incentives are intended to help Texas compete against other states for large-scale capital investments and, according to state tax code, “strengthen and improve the overall performance of the economy of this state.” However, measures other than direct local property tax collections and project revenues should be taken into consideration for a more complete accounting of the program’s total

Figure 1. Average Project Investment and Market Value

600

8 7

Total Investment Annual Investment Market Value

400 300 200 100

TG_28-2.indd 26

6 5 4 3 Total Local Property Tax Unlimited Total Local Property Tax Limited

2 1

11 13 15 17 19 21 23 25 Year of Project

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

Dollars (Millions)

500

0 1

Figure 2. Average Project Limited and Unlimited Taxes

0 1

11 13 15 17 19 21 23 25 Year of Project

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

3/31/21 8:11 AM

MORE THAN HALF OF THE 437 CHAPTER 313 PROJECTS included in the Texas Real Estate Research Center’s study are utilities projects. They are concentrated in the Panhandle, West Texas, and Rio Grande Valley.

economic benefit or potential to induce economic development. Such measures include impacts on other taxes paid, employment, income, property values, government costs, and the nondirect induced and indirect impacts. Any project has benefits as well as costs. If the gross benefit of Chapter 313 projects is calculated and found to be positive, the question becomes, “What proportion of the projects are induced by the incentive?” If the proportion is greater than the ratio of the incentive costs to the gross benefit of Chapter 313 developments, then Chapter 313, on the whole, would likely be regarded as succeeding in its goal of improving economic development in Texas.

Figure 3. Average Project Tax Savings

3.0 Dollars (Millions)

2.5 Gross Savings

2.0

Net Savings

1.5

Total Rebates

1.0 0.5 0.0

– 0.5 1

11 13 15 17 19 21 23 25 Year of Project

Sources: Texas Comptroller and Texas Real Estate Research Center at Texas A&M University SPRING 2021

TG_28-2.indd 27

For instance, in the example from the previous section, the present value of 25 years of net tax savings through Chapter 313 would be 17.4 percent of the present value of 25 years of unlimited taxes that the project developers would have paid without Chapter 313. In other words, Chapter 313 would have to induce at least 17.4 percent of investment to have the net effect of increasing the expected present value of revenues to local property-taxing jurisdictions. Perdue (aperdue@tamu.edu) is a research economist with the Texas Real Estate Research Center at Texas A&M University.

Chapter 313 Project Reporting Requirements

ctive Chapter 313 projects are required to submit a cost data report to the Texas Comptroller biannually once they are underway. This report provides the name of the participating school district, the project name, and the project’s industry, as well as historic and forecast investment amounts, taxes, tax rates, and direct payments from the project developer to the school district. As of Oct. 23, 2020, 437 projects had a cost data report available on the state comptroller’s website. These formed the basis of the analysis in this report. Financial data are inflation-adjusted and analyzed in terms of “project years” to put all projects on an equivalent timeline.

3/31/21 8:11 AM

Q. Under the revised Texas Real Estate Commission (TREC) contracts, can I deliver the option fee to either the seller or the escrow agent?

A. No. The revised TREC contracts provide that the option fee shall be delivered to the escrow agent (this is usually

the title company). There is not a provision to deliver it directly to the seller. Note that the revised TREC contracts permit the option fee to be delivered in a separate payment or in a combined payment with the earnest money.

Q. What if the buyer deposits the earnest money and option fee in one sum and gets the amount wrong? A. The contract provides that money received by the escrow agent first be applied to the option fee and then to the earnest money. So, if both sums are given in one check and the check is short, the earnest money will not be paid in full, and the buyer will be in default under the contract–unless the full amount is paid within the required timeframe.

What the Law Says According to Texas case law, there must be consideration to have a valid option period. The promulgated TREC contracts provide for a negotiated amount of money as part of the consideration for the option period. Failure to pay the agreedupon option fee in a timely manner means no option period will be created and the buyer will not have a right to terminate

the contract for any reason under that contract provision. If the earnest money is not paid or not paid in full, the TREC contracts provide the seller can terminate the contact or pursue default remedies in the contract, or both, by providing notice to the buyer before the buyer deposits the required earnest money.

For Example The parties sign a contract that requires $3,500 in earnest money and a $150 option fee be deposited with the escrow agent within three days after the effective date. The effective date is Monday, April 5. The buyer writes one check in the amount of $3,560 and gives it to the buyer’s agent to deliver to the title company on April 7. The agent does not notice that the buyer has transposed the numbers, and he delivers the check to the Title Company on April 8 and sends a copy of the check to the seller’s agent. As of 12:01 a.m. on April 9,

the buyer will have failed to deliver the required earnest money under the contract, since $150 will be applied to the option fee first, leaving $3,410 to be applied to the earnest money. This is $90 less than the contract required. Now the race is on. If the buyer realizes the mistake and gets the additional $90 to the title company before the seller sends a termination notice, the contract term will be fulfilled. If the termination notice is sent first, the seller can proceed with seller’s rights under the contract.

Best Practice The buyers’ agents should keep track of the required dates for delivery of the option fee and earnest money to the escrow agent (three days after the effective date). Do this promptly. There is no reason to wait until the last day. If the earnest money and option fee are delivered in one payment, check the math and double-check the math to make sure the correct

amount is delivered. Sellers’ agents should also keep track of the time. If the earnest money is late and the seller elects to send a Notice of Termination, the seller’s agent should ensure it is delivered in a manner that documents the time it was sent. This could be important if the seller has a more desirable back-up contract waiting in the wings.

Bonus Question Q. When does the seller get the option fee from the escrow agent? A. When the seller asks for it, or, if the seller does not ask for it, at closing. Note that the escrow agent does not need

permission from the buyer to deliver the option fee to the seller. The contract terms contain that permission already.

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.

TG_28-2.indd 28

3/31/21 8:11 AM

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.

SPRING 2021

TG_28-2.indd 29

3/31/21 8:11 AM

TG - Spring 2021

Articles inside

In Short Supply

Taxing Matters

Practically

Dost Thou Protest