Tierra Grande - October 2012

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

NON-PROFIT ORG.U.S. POSTAGE PAIDDALLAS, TEXASPERMIT No. 70

In This Issue

OCTOBER 2012

COLLEGE STATION, TEXAS 77843-2115

Taxes and the “Fiscal Cliff”

Real Estate Industry Wealth

Housing Markets Improving

Oil and Gas Economic Impact

Housing Market Segments

Texas Dodges Foreclosure Fiasco

Foreclosures and Appraisal Values

iii TIERRA GRANDE

A book by Dr. Charles Gilliland — Buying Rural Land in Texas — will be released by the Texas A&M University

Press this month. In it, Dr. Gilliland demonstrates that buyers can and should arm themselves with knowledge of the land-buying process, potential problems and available resources.

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

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

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

DR. CHARLES GILLILAND

published

honored

Gary Maler, Real Estate Center director, is one of nine 2012 Outstanding Alumni for the College of Architecture

at Texas A&M University. Maler received a master of architecture degree in 1974. He lifted the Real Estate Center to global prominence after a private-sector career spearheading some of Houston’s most notable developments.

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

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

GARY MALER

Dr. Luis Torres has joined the Center staff as an associate research scientist. Dr. Torres comes to the Center from Banco de Mexico where he

was an economist and communications analyst. He is an author, lecturer and researcher who has extensively studied the Mexican regional economy and U.S.- Mexico issues.

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

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

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

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

DR. LUIS TORRES

hired

1OCTOBER 2012

6 Texas TreasureCenter research reveals that despite the Great Recession, the state’s real estate industry remained strong, second only to manufacturing. And Texas’ real estate wealth continues to climb.

BY ALI ANARI

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITYTIERRA GRANDEOCTOBER 2012

Visit us online at

recenter.tamu.edu

Director, GARY W. MALER

Chief Economist, MARK G. DOTZOUR

Senior Editor, DAVID S. JONES

Managing Editor, NANCY MCQUISTION

Associate Editor, BRYAN POPE

Assistant Editor, KAMMY BAUMANN

Art Director, ROBERT P. BEALS II

Graphic Specialist/Photographer, JP BEATO III

Circulation Manager, MARK BAUMANN

Lithography, MOTHERAL PRINTING, FORT WORTH

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

TIERRA GRANDE (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031.

SUBSCRIPTIONS free to Texas real estate licen-sees. Other subscribers, $20 per year. Subscribe online at http://recenter.tamu.edu/store

VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Real Estate Center, Mays Business School or Texas A&M University. The Texas A&M University System serves people of all ages, regardless of socioeconomic level, race, color, sex, religion, disability or national origin.

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

© 2012, Real Estate Center. All rights reserved.

ON THE COVER Brazos River Bridge near the Burleson- Brazos County line

PHOTOGRAPHERJP Beato III

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

BY ALI ANARI

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

BY MARK G. DOTZOUR

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

BY JERROLD J. STERN

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

BY JAMES P. GAINES

13 Crude Awakening Oil, Gas Jobs in Play The oil and gas industry supports roughly two million direct and indirect jobs in Texas. That’s a huge chunk of the state’s economy.

BY HAROLD D. HUNT

VOLUME 19, NUMBER 4

26 Bringing Down the House?Foreclosure Effects on Market ValuesHousing markets hit hard by foreclosures can be a challenge for appraisers. Whether foreclosures are dominating the local market and whether investors are buying up the foreclosed homes (rather than people buying them to live in) factors into appraisal value.

BY CHARLES E. GILLILAND

2 TIERRA GRANDE

Income Taxes

“Taxmageddon” and “fiscal cliff” are terms being used throughout the financial press to describe

the potential result of federal government inertia regarding the tax system.

Without new legislation, automatic tax hikes could top $4 trillion during the coming years,

according to the Washington Times. The Congressional Joint Committee on Taxation predicts

a $300 billion tax increase in 2013 alone.

3OCTOBER 2012

Some economists predict a return to recession if the tax increases materialize and $1.2 trillion in defense and domestic spending cuts occur over the next ten years

(including cuts of $110 million in 2013). The budget cuts are required by the 2011 Budget Control Act.

While many tax commentators expect at least minimal tax legislation, they do not foresee any new tax laws being enacted prior to the November presidential election. Predicting the final outcome with certainty is not possible even though Democrats and Republicans agree on postponing some of the scheduled tax increases. The inability to predict future tax rules is a significant problem that has long plagued the U.S. tax system.

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

Tax Rates on Ordinary IncomeThe 2001–03 Bush-era tax cuts, originally set to expire after 2010, are now scheduled to end after 2012. Expiration will increase rates in almost every tax bracket for every taxpayer starting in 2013. For example, Table 1 shows the increases for married taxpayers who file jointly.

The top tax rates on ordinary income such as salaries and self-employment income are scheduled to increase to 36 and 39.6 percent in 2013, from 35 percent (Table 1). High-income taxpayers who itemize their deductions (such as mortgage interest and real estate taxes) will see a decline in total item-ized deductions as well as per-sonal and dependency exemp-tions thanks to the return of complex phase-out rules in 2013. The phase-out rules will cause the effective marginal tax rates for these taxpayers to increase.

Also scheduled to return is the so-called “marriage tax penalty.” The Bush tax cuts widened the married-filing-jointly tax brackets to be twice that of singles. Thus, for example, two married individu-als earning $50,000 each in salary would pay the same tax as a single person earning $100,000 (assuming equal deductions). In 2013, the two married individuals would pay more in tax as

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

Scheduled changes to salary (payroll) and self-employment (SE) taxes will push effective top marginal tax rates higher. Real estate professionals are generally considered self-employed for tax purposes. The current payroll/SE tax rates of 5.65/13.3 percent will return to their pre-2011 levels, 7.65/15.3 percent, in 2013. Income levels determine the actual amount of payroll/SE taxes paid.

Investment Income RatesTable 2 summarizes the scheduled 2013 top tax rate increases for most types of income.

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

The surtax will increase taxes on capital gains, interest, dividends, “passive income” from real estate investments (such as the passive rental of farm land, or passive income from real estate partnerships/limited liability companies), royalties, and some annuities. Capital gains include gains from the sale of a principal residence more than $500,000 for marrieds and $250,000 for singles (Table 2). The $500,000/$250,000 exclu-sion does not apply to sales of second homes.

The following are exempt from the 3.8 percent surtax: “active business rents” (such as apartment and commercial building rents); municipal bond interest; social security income; earned income (such as salary and self-employment income); and qualified retire-ment income from qualified pensions such as 401(k) plans, certain annuities and IRAs.

Moreover, the regular capital gains tax rate in 2013 will be 20 percent for most investors, up from the cur-rent 15 percent. Thus, the effective capital gains tax rate for $200,000/$250,000 AGI taxpayers would reach 23.8 percent (20 percent + 3.8 percent).

For example, in 2013 a mar-ried couple with $250,000 salary and $100,000 capital gains (AGI of $350,000) will pay $23,800 tax ($100,000 × [20 percent + 3.8 percent, or 23.8 percent]) on the $100,000. Under current

Taxable Income2012 Current

Tax Rates2013 Scheduled

Tax Rates

$0 – $17,400 10% 15%$17,400 – $59,000 15% 15%$59,000 – $70,700 15% 28%$70,700 – $142,700 25% 28%$142,700 – $217,450 28% 31%$217,450 – $388,350 33% 36%$388,350 – 35% 39.6%standard deduction $11,900 $9,950personal exemption $3,800 $3,800

* The table assumes the current 2012 tax brackets will remain the same in 2013. The actual 2013 tax brackets, which will widen slightly based on inflation, are not yet known.

Source: Table 1 in “An Overview of Tax Provisions Expiring in 2012,” by Margot L. Crandall-Hollick, 4-17-12, Congressional Research Service. The information was compiled from the Tax Policy Center and the IRS.

Table 1Comparison of 2012 Income Tax Brackets*

Married Filing Jointly

4 TIERRA GRANDE

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

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

The story is much worse for dividend income. Currently, dividends are taxed like capital gains and have a maximum tax rate of 15 percent. Starting in 2013, dividends will be treated as ordinary income, subject to the tax rates in Table 1. (Interest income has always been taxed as ordinary income.) Adding the 3.8 percent surtax for high-income individuals, the top tax rate on dividends (and interest) would reach 43.4 percent (3.8 percent plus the 39.6 percent top tax bracket rate noted in Table 1). From a tax-investment planning perspective, municipal bonds may be preferable to some stocks (depending on risk, growth potential and other factors) because municipals typically provide interest that is exempt from federal income taxation.

Alternative Minimum TaxThe federal government initiated the first version of the alter-native minimum tax (AMT) in 1969 following a realization that roughly 150 individuals with AGIs over $200,000 paid no tax in 1966. Since 1969, the AMT’s objective has remained the same: “to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions and credits” (1986 Senate Finance Committee Report).

During its long history, the number of individuals pay-ing the AMT has expanded dramatically. According to the Urban Institute’s Tax Policy Center, the number

of taxpayers paying the AMT expanded from roughly 20,000 in 1970 to about four million in 2011. Many of these taxpay-ers are in the middle and upper-middle classes and would have paid significant taxes without additional AMT taxes. The pri-mary reason for the enormous 1970–2011 increase is that AMT tax brackets and rates are not indexed for inflation.

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

Table 2

Top Tax Rates1

2012 Current Top Tax Rates

2013 Scheduled Top Tax Rates2

Adjusted Gross Income under$200k (singles)

$250k (marrieds)

Adjusted Gross Income over

$200k (singles)$250k (marrieds)

Capital gains 15% 20% 23.8%3

Sales of personal residences On profits under: $250k (singles) 0% 0% 0% $500k (marrieds) 0% 0% 0% On profits over:4

$250k (singles) 15% 20% 23.8%3

$500k (marrieds) 15% 20% 23.8%3

Dividends 15% 39.6% 43.4%3

Interest and “passive” rental income 35% 39.6% 43.4%3

“Active” rental income 35% 39.6% 39.6%Ordinary income (e.g., salary, payroll, self-employment [SE]) 35% 39.6% 39.6%Payroll/SE tax rates5 5.65%/13.3% 7.65%/15.3% 7.65%/15.3%

1 All top effective tax rates (other than 0% tax rates) could be higher due to the alternative minimum tax (AMT).2 Top effective tax rates could be higher due to phase-outs of itemized deductions, and personal and dependency

exemptions.3 Tax rate includes 3.8% investment income surtax.4 These profits are taxable capital gains.5 Paid in addition to ordinary income tax rates (depending upon income level).Note: “Singles” includes “unmarried heads of households” — typically, singles who support a dependent.Source: Jerrold Stern

5OCTOBER 2012

THE TAKEAWAY

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

fall to $33,750/$45,000, and the new AMT credits will disappear. Alarmingly, the lack of a patch will cause an estimated 30 mil-lion taxpayers (almost 20 percent of all taxpayers) to pay the AMT in 2012, according to the Congres-sional Research Service. However, some tax commentators believe a 2012 patch is highly likely.

Real Estate TaxationWithout new federal legislation, real estate professionals will pay higher self-employment taxes; high-income homeowners will pay higher capital gains taxes on large home sale profits; real estate investors will be subjected to higher capital gains taxes; certain real estate rental income will be subject to a new 3.8 percent surtax; and home mortgage interest and real estate tax deductions may yield less tax savings. Additional real estate-related tax issues should be considered as well.

$2 Million Foreclosure Tax Exemption

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

A married couple purchased a residence for $300,000, pay-ing $60,000 down and mortgaging the $240,000 balance with a recourse mortgage. By the time the mortgage balance was $210,000, the property value had dropped to $140,000. Because of financial difficulties, the couple could not continue making mortgage payments, and the lender foreclosed on the property. Without the taxable income exemption, the couple would have to pay tax at ordinary tax rates on $70,000 ($210,000 minus $140,000).

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

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

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

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

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

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

Under the rule, the amount paid for mortgage insurance for the first year of homeownership is deduct-ible as mortgage interest. The deduction phases out gradually

once AGI reaches $100,000. No deduction is available if AGI is higher than $109,000.

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

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

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

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

Dr. Stern ([email protected]) is a research fellow with the Real Estate Cen-ter at the Texas A&M University Mays School of Business and a professor of accounting in the Kelley School of Business at Indiana University.

According to the Urban Institute’s Tax Policy

Center, the number of taxpayers paying the

alternative minimum tax (AMT) expanded from roughly 20,000 in 1970

to about four million in 2011.

6 TIERRA GRANDE

Texas Economy

Texas TreasureBy Ali Anari

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

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

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

In the aftermath of the Great

Recession, how strong is Texas’

real estate industry?

An ongoing Real Estate Center

research program monitors the

relative importance of the Texas

real estate industry and the

state’s real estate wealth. Most

recent data show the state’s real

estate industry is maintaining

its standing among the state’s

industries and that real estate

wealth continues to grow.

7OCTOBER 2012

Table 1. Value Added by Industry, Texas and United States, 2011

Value Added, $Million Percent of Total

Texas United States Texas United States

All industries total 1,308,132 14,981,020 100.0 100.0 Private industries 1,161,971 13,097,365 88.8 87.4 Agriculture, forestry, fishing, and hunting 9,897 177,795 0.8 1.2 Mining 118,578 287,584 9.1 1.9 Utilities 24,234 250,825 1.9 1.7 Construction 57,970 520,340 4.4 3.5 Manufacturing 192,024 1,837,031 14.7 12.3 Durable goods 83,212 989,258 6.4 6.6 Nondurable goods 108,812 847,774 8.3 5.7 Wholesale trade 85,753 844,928 6.6 5.6 Retail trade 76,625 916,951 5.9 6.1 Transportation and warehousing 43,200 418,807 3.3 2.8 Information 44,903 662,324 3.4 4.4 Finance and insurance 89,757 1,256,198 6.9 8.4 Real estate and rental and leasing 109,657 1,751,682 8.4 11.7 Professional, scientific and technical services 92,107 1,171,145 7.0 7.8 Management of companies and enterprises 12,411 282,487 0.9 1.9 Administrative and waste management services 40,137 444,313 3.1 3.0 Educational services 8,052 169,315 0.6 1.1 Health care and social assistance 81,953 1,151,187 6.3 7.7 Arts, entertainment, and recreation 7,727 144,058 0.6 1.0 Accommodation and food services 35,777 441,647 2.7 2.9 Other services, except government 31,209 368,747 2.4 2.5 Government 146,162 1,883,655 11.2 12.6

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

Every $1 million of real estate industry

revenue generates:• just over half a million dollars of

revenue in other parts of the Texas economy,

• 5.2 jobs in the state’s real estate industry and

• five jobs in other industries.Real estate taxes are a big contributor

to the state’s overall wealth:• Taxes paid by the real estate indus-

try accounted for 14.8 percent of total Texas business taxes in 2009.

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

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

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

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

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

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

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

8 TIERRA GRANDE

Table 2. Employment by Industry, Texas and United States, 2011

Number Percent of Total

Industry Texas United States Texas United States

Total employment 14,611,475 175,834,700 100.0 100.0 Farm employment 258,641 2,635,000 1.8 1.5 Nonfarm employment 14,352,834 173,199,700 98.2 98.5 Private employment 12,368,147 148,898,700 84.6 84.7 Forestry, fishing, and related activities 55,848 862,700 0.4 0.5 Mining 452,452 1,429,400 3.1 0.8 Utilities 54,018 576,500 0.4 0.3 Construction 906,154 8,732,500 6.2 5.0 Manufacturing 893,871 12,344,600 6.1 7.0 Durable goods manufacturing 578,155 7,656,400 4.0 4.4 Nondurable goods manufacturing 315,716 4,688,200 2.2 2.7 Wholesale trade 566,598 6,122,100 3.9 3.5 Retail trade 1,438,676 17,829,600 9.8 10.1 Transportation and warehousing 525,226 5,635,400 3.6 3.2 Information 234,935 3,200,400 1.6 1.8 Finance and insurance 868,903 9,509,700 5.9 5.4 Real estate and rental and leasing 598,639 7,844,100 4.1 4.5 Real estate 521,684 7,099,700 3.6 4.0 Professional, scientific, and technical services 941,264 12,034,700 6.4 6.8 Management of companies and enterprises 114,336 2,071,200 0.8 1.2 Administrative and waste management services 987,751 10,890,400 6.8 6.2 Educational services 228,287 4,242,800 1.6 2.4 Health care and social assistance 1,418,313 19,391,400 9.7 11.0 Arts, entertainment, and recreation 235,590 3,851,700 1.6 2.2 Accommodation and food services 1,023,854 12,338,500 7.0 7.0

Other services, except public administration 823,432 9,991,000 5.6 5.7 Government and government enterprises 1,984,687 24,301,000 13.6 13.8


4.0

3.5

3.0

2.5

Perc

enta

ge

1990 1993 1996 1999 2002 2005 2008 2011

TEXAS

UNITED STATES

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


Restoring Texas Real Estate Wealth

The total value of Texas real estate wealth in 2011 was more than $1.6 trillion (Table 4). Since

1997, the total value of Texas real estate wealth has increased 2.4 times. Texas’ per capita real estate wealth in 2011 was $65,432, up 86.7 percent from $35,055 in 1997.

Real estate wealth comprises single-family residences, multifamily resi-dences, commercial properties, industrial

properties, mineral real estate, utility company properties, rural acreage and vacant lots.

Single-family residential wealth in Texas in 2011 totaled $945.1 billion, accounting for 56.3 percent of the state’s real estate wealth (Figure 2). The total value of single-family residential wealth in 2011 was 2.8 times its value in 1997 (Table 4). Single-family residential wealth includes houses, condominiums and mobile homes on land owned by the occupant.

The total value of Texas’ multiple-family residential wealth in 2011 was $85.1 billion, accounting for 5.1 percent of real estate wealth. The total value of multiple-family residential wealth in 2011 was 2.5 times its value in 1997 (Table 4).

Multifamily residential real estate includes apartments

and residential buildings containing two or more dwelling units belonging to one owner. Hotels and motels are excluded.

Commercial real estate had the largest share of the state’s real estate wealth in 2011 after single-family residential (Table 4). Texas’ commercial real estate wealth was $278.9 billion, 2.5 times its value in 1997. Commercial real estate consists of land and improvements devoted to sales or services to the public.

Texas’ 2011 industrial real estate wealth amounted to $95 billion, or 5.7

9OCTOBER 2012

THE TAKEAWAY

Texas’ real estate industry is the second largest in the state after manufacturing. Real estate has the largest proportion of self-employed persons of all Texas industries. Since 1997, the total value of Texas real estate has increased by 2.4 times. Per capita real estate wealth in 2011 was up 86.7 percent from 1997.

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

Region Number Percent of Total

Total Texas 522,306 100.0Dallas-Fort Worth-Arlington 174,141 33.3Houston-Sugar Land-Baytown 149,310 28.6Austin-Round Rock-San Marcos 53,671 10.3San Antonio-New Braunfels 48,066 9.2El Paso 12,716 2.4Corpus Christi 8,673 1.7 McAllen-Edinburg-Mission 8,116 1.6Killeen-Temple-Fort Hood 6,120 1.2Beaumont-Port Arthur 5,900 1.1 Lubbock 5,877 1.1Brownsville-Harlingen 5,371 1.0 Amarillo 5,255 1.0College Station-Bryan 4,310 0.8 Waco 4,181 0.8Tyler 4,145 0.8Longview 3,909 0.7Laredo 3,835 0.7Midland 3,677 0.7Abilene 2,767 0.5Odessa 2,650 0.5San Angelo 2,132 0.4Wichita Falls 2,064 0.4Victoria 1,906 0.4Texarkana 1,829 0.4Sherman-Denison 1,685 0.3


The total value of Texas’ rural acreage in 2011 was $80.3 billion, 4.8 percent of the state’s real estate wealth and 1.6 times its value in 1997 (Table 4).

The 2011 value of vacant lots was $39.5 billion or 2.4 percent of the state’s real estate wealth. This was twice its value in 1997 (Table 4).

Dr. Anari ([email protected]) is a research economist with the Real Estate Center at Texas A&M University.

percent of the state’s real estate wealth. That was 1.8 times the value in 1997 (Table 4). Industrial real estate wealth consists of land and improvements devoted to the develop-ment, processing or stor-age of a product, excluding utilities.

Texas’ mineral real estate wealth in 2011 totaled $106 billion, accounting for 6.3 percent of real estate wealth. This was 2.9 times its 1997 value (Table 4). Mineral real estate wealth comprises producing and nonproducing oil and natural gas wells, all other mineral interests, and equip-ment used for extracting and producing minerals.

In 2011, utility company properties in Texas were valued at $50 billion, close to their 1997 value (Table 4). The utilities industry includes gas companies, electric companies, railroads, water companies, pipeline companies and cable television providers.

Table 4. Texas Real Estate Wealth, 1997 and 20112010 1997

Real Estate Category $BillionPercent of Total $Billion

Percent of Total

2010/1997 Ratio

Single-family residences 945.1 56.3 338.3 48.9 2.8Multiple family residences 85.1 5.1 34.1 4.9 2.5Commercial real estate 278.9 16.6 110.3 15.9 2.5 Industrial real estate 95.0 5.7 54.2 7.8 1.8Mineral real estate 106.0 6.3 37.1 5.4 2.9Utilities 50.0 3.0 48.5 7.0 1.0Vacant lots 39.5 2.4 19.8 2.9 2.0Rural acreage 80.3 4.8 49.7 7.2 1.6Total real estate wealth 1,679.9 100.0 692.0 100.0 2.4

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

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

10 TIERRA GRANDE

Housing Markets

America’s housing market is rebounding.

This is a true recovery from the bottom. In economic cycle analysis, a contraction is followed by a bottom,

which is followed by a new expansion cycle. The data indicate that Texas has clearly moved from the bottom of

the last cycle to the early stages of expansion. The U.S. housing market is improving as well. Several indicators

are signaling this.

By Mark G. Dotzour

HOME IMPROVEMENT

11OCTOBER 2012

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

Lender Processing Services reported in June that home sales prices were essentially flat. Managing Director Kyle Lundstedt said, “There may be reason to be cautiously optimis-tic, since we’ve now seen three consecutive months of minor appreciation.”

The median price of homes in Texas has been virtually

stable for the past five years. But prices have broken out on the upside in the most recent period, reaching $162,400 in May 2012 (Figure 1).

Inventory NormalReal Estate Center research has determined that for Texas, 6.5 months of inventory of homes for sale is a stable market. When inventory is below 6.5 months, prices increase more rapidly. Inventory greater than 6.5 months causes price increases to slow (Fig-ure 2). When inventory gets into the nine- to 12-month range, prices start falling.

Texas’ inventory of unsold homes stood at six months in May. This suggests stable or even increasing prices going forward.

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

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

steady recovery process.” The company’s new home

orders nationally were up 40 percent in the second quarter.

Sales of newly built homes were at a two-year high in May; 369,000 are expected to sell in 2012 (Figure 3). The Wall Street Journal reported in

Buyer Psychology Improving

Americans have been skittish about buying homes for the past few years in light of negative economic news. Their two key worries have been whether or not they

will have jobs, and, in Arizona, California, Nevada, Florida and Georgia, significantly declining home prices.

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

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

2007 2012Sources: Real Estate Center at Texas A&M University and MLS Data

160150140130

Dol

lars

(tho

usan

ds)

Figure 1. Median HomeSales Price in Texas

2007–12

9

6.5

4

Mon

ths

2007 2012

Figure 2. Months InventoryTexas Homes for Sale

2007–12

Sources: Real Estate Center at Texas A&M University and MLS Data

2002 2007 2012

1,6001,200

800400

0Hou

ses

Sold

Figure 3. New Single-FamilyHouses Sold, 2002–12

Source: Federal Reserve Bank of St. Louis

12 TIERRA GRANDE

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

Existing Home Sales Volume UpCenter research indicates that three variables correlate with home sales

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

Texas recorded positive job growth, low interest rates and

virtually stable prices for the past two years. This resulted in increasing home sales volume, a trend that is con-tinuing in 2012 (Figure 4). For the first five months of 2012, home sales were 13.3 percent higher than the same period in 2011.

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

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

Dr. Dotzour ([email protected]) is chief economist with the Real Estate Center at Texas A&M University.

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

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

THE TAKEAWAY

Texas’ housing market, and the U.S. market as well, have hit bottom and rebounded. Consumer interest in buying is on the rise, home prices have leveled out, and inven-tory of homes for sale is stable.

Building Permits Issued, First Five Months of 2011, 2012

Region 2011 2012Percent Increase

United States 151,564 184,396 21.7Texas 26,174 31,540 20.5Austin-San Marcos 2,799 3,281 17.2Dallas 3,900 4,961 27.2Fort Worth-Arlington 1,951 2,151 10.2Houston 7,898 10,347 31.0Odessa-Midland 339 514 51.6San Antonio 1,668 2,014 20.7

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

Sources: Real Estate Center at Texas A&M University

3025201510H

ome

Sale

s(t

hous

ands

)

2007 2012

Figure 4. Monthly HomeSales Reported in Texas

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

growth is already boosting home sales.

13OCTOBER 2012

Texas Economy

It’s no secret that the oil and gas sector has been one of the few bright spots in the U.S. economy during the past few years.

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

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

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

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

These three plays each span two dozen or more counties. However, many counties have seen little or no economic benefit from recent increases in drilling activity. Only the five counties with the highest rig count in each play are repre-sented in the employment statistics of this analysis, so results reflect the areas heavily influenced by drilling activity.

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

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

14 TIERRA GRANDE

Employment Trends, 2006–12Total private job growth (Figure 1) in the most active Barnett shale counties closely resembles the state’s job growth pattern. This is primarily because of the large populations and diverse economies of Tarrant and Denton counties, where oil and gas activity has a smaller role.

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

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

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

Positive oil and gas employment in the Permian held up much longer than the other two plays and Texas as a whole, finally falling to a brief negative period in 2010. The Permian has traditionally been an oil play, and oil prices in excess of $100 per barrel throughout much of 2008 likely extended positive job growth through 2009. The ensuing drop in crude prices to the low $40s may have also led to the employment decline during 2010.

Rig Count’s Effect on Private EmploymentThe rig count for all 24 counties in the Eagle Ford was low yet fairly stable into 2008 (Figure 4). However, the pre-shale rig levels were not a large enough influence to protect private employment in

Figure 1. Total Private EmploymentPercent Change from Same Month a Year Ago

2006 2007 2008 2009 2010 2011 2012

12.5

10.0

7.5

5.0

2.5

0.0

–2.5

–5.0

–7.5

–10.0

Perc

ent

Permian Eagle Ford

BarnettTexasTexas

Source: Texas Workforce Commission

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

2006 2007 2008 2009 2010 2011 2012

1009080706050403020100

–10–20–30

Perc

ent

Permian

Eagle Ford

Barnett

Texas

Source: Texas Workforce Commission

Figure 3. Natural Gas Wellhead Pricevs. West Texas Intermediate Crude Price

2006 2008 2010 2012Source: Energy Information Administration

$ pe

r tho

usan

d cu

bic

feet

of

Nat

ural

Gas

$ per barrel ofC

rude Oil

160

140

120

100

80

60

40

20

0

12

10

8

6

4

2

0

Figure 4. Eagle Ford Shale AverageMonthly Rig Count versus Percent

Change in Total Private Employment

2005 2007 2009 2011 2012Sources: Smith Services and Texas Workforce Commission

Aver

age

Rig

Cou

nt

Percent Change Private Em

ployment

275

225

175

125

75

25

15

10

5

0

–5

–10

15OCTOBER 2012

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

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

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

Figure 5. Texas Permian AverageMonthly Rig Count versus Percent



Aver

age

Rig

Cou

nt

Percent Change Private Em

ployment

3253002752502252001751501251007550250

181614121086420–2–4–6–10

Figure 6. Barnett Shale AverageMonthly Rig Count versus Percent



Aver

age

Rig

Cou

ntPercent C

hange Private Employm

ent

200

180

160

140

120

100

80

60

40

20

0

9

6

3

0

–3

–6

16 TIERRA GRANDE

Sales of Goods and Services Subject to State Sales TaxYear–to–Year Percent Change in Dollar Value

Top Five Eagle Ford Counties by Drilling Activity

Top Five Barnett Counties by Drilling Activity

Top Five Permian Basin Counties by Drilling Activity

Date Dimmit Karnes La Salle McMullen Webb Denton Johnson Parker Tarrant Wise Andrews Martin Midland Pecos Upton

2005 Q1 9.1 2.2 0.9 40.9 12.1 12.4 15.6 24.8 9.8 19.7 33.0 23.8 20.1 9.9 38.52005 Q2 6.0 8.7 2.3 54.6 6.9 10.7 17.0 28.3 10.3 16.9 43.0 15.6 15.2 10.9 43.72005 Q3 11.4 6.7 12.7 58.6 10.1 8.8 14.0 22.3 9.3 16.0 34.0 –0.6 13.5 25.4 27.02005 Q4 6.2 10.0 4.3 26.1 11.5 11.8 17.7 27.5 12.1 20.2 29.4 –1.7 17.4 23.4 46.52006 Q1 11.4 4.7 8.1 –0.4 12.5 5.5 21.0 8.5 10.3 26.8 25.9 0.9 14.1 66.7 27.22006 Q2 12.3 –0.5 9.1 1.9 11.3 5.8 21.8 7.6 9.3 22.6 13.5 5.9 13.4 70.5 14.02006 Q3 13.3 –2.3 14.2 –10.0 9.6 5.1 21.0 7.3 8.4 22.9 16.4 23.9 20.5 50.5 37.02006 Q4 17.7 0.0 14.0 9.7 9.8 3.9 14.4 5.7 2.3 21.3 15.1 36.4 18.0 38.2 18.62007 Q1 4.7 4.3 3.9 22.6 4.6 7.7 20.1 16.2 0.4 12.4 19.4 24.3 14.7 45.0 14.22007 Q2 –1.5 14.7 8.2 53.1 2.2 3.6 17.9 15.8 –0.1 24.7 8.6 16.3 17.7 1.9 8.02007 Q3 1.3 21.3 –7.9 8.5 5.7 6.7 22.0 15.8 4.9 35.2 16.0 16.0 18.7 2.0 6.92007 Q4 3.4 11.3 –2.1 0.3 2.6 8.7 14.3 12.7 8.4 30.4 20.5 –12.5 11.6 6.7 –0.82008 Q1 8.9 10.7 25.6 17.8 2.0 4.7 11.1 10.1 8.7 24.0 23.9 13.4 19.8 –13.4 –8.22008 Q2 19.6 11.6 11.1 –27.1 2.2 9.4 12.2 11.9 10.9 19.0 43.0 30.8 32.0 62.1 –0.62008 Q3 29.7 17.4 78.2 2.3 0.8 9.4 10.7 15.3 7.0 4.4 48.7 10.3 34.7 73.8 8.52008 Q4 20.4 11.7 18.0 10.7 –7.6 –1.4 8.1 8.7 0.5 7.4 30.8 46.7 23.2 113.9 –0.22009 Q1 1.4 8.7 54.8 102.3 –13.3 –3.7 –4.2 –1.5 –5.1 –18.6 –17.2 8.8 –8.8 111.7 –10.82009 Q2 –7.8 –4.1 –19.7 –3.2 –13.3 –6.6 –16.2 –10.4 –11.7 –37.2 –36.4 –29.4 –31.4 –10.0 –28.92009 Q3 –16.3 –14.0 –19.3 –9.1 –17.2 –9.6 –23.2 –19.6 –14.1 –41.8 –36.6 –27.0 –35.9 –31.3 –40.32009 Q4 –13.1 –3.7 42.3 –16.0 –7.0 –4.7 –18.8 12.9 –10.6 –43.0 –28.0 –24.2 –28.6 –65.9 –14.82010 Q1 12.3 6.6 –17.9 –56.5 1.8 –0.3 –7.4 –12.2 –4.1 –22.5 7.5 –20.8 0.7 –20.2 21.82010 Q2 32.1 17.7 95.0 18.7 6.3 3.9 4.3 –1.8 1.8 3.7 45.0 22.9 28.5 –29.8 65.92010 Q3 83.9 25.3 58.9 39.1 11.2 3.5 11.7 2.0 3.1 13.0 32.7 49.1 33.0 –13.2 68.62010 Q4 74.1 42.7 46.3 150.0 11.0 7.0 9.7 –23.3 8.6 16.2 26.8 29.3 42.4 18.0 43.42011 Q1 78.9 86.7 98.6 134.8 12.9 6.1 6.0 7.3 6.5 8.7 34.5 46.1 45.1 –52.3 38.22011 Q2 97.3 72.1 86.8 208.6 12.1 5.9 16.6 4.0 5.5 9.0 31.1 12.4 37.0 43.0 34.92011 Q3 89.7 100.0 81.2 237.1 12.0 13.1 17.0 10.1 8.7 15.0 49.9 –1.5 41.3 48.5 38.6

2011 Q4 94.1 76.5 68.6 95.0 8.1 10.9 14.9 12.4 4.2 14.7 49.0 –12.2 27.8 67.5 38.3

Note: Blue numbers denote increases of 40 percent or more.Source: Texas Comptroller of Public Accounts

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

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

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

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

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

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

With the exception of Webb County, the percentage increases displayed in the Eagle Ford are impressive. Webb County’s population, like several other coun-

ties in the Barnett play, is relatively large. The county is also more diverse and dependent on economic trends that affect international trade rather than oil and gas activity.

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

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

17OCTOBER 2012

THE TAKEAWAY

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

Texas Real Estate and Future of Oil and Gas

Forecasts are for the price of natural gas to remain about $3 per mcf into fall 2012. Futures

prices dropped below $2 per mcf on April 11, 2012, the first time since January 2002. Natural gas price volatility remains heavily influenced by weather and the amount of spare U.S. storage capacity.

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

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

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

Drilling activity should continue to shift from regions that are mainly gas plays to areas offering oil and natural gas liquid (NGL) plays. About 140 fewer Texas rigs were drilling for natural gas in September 2012 compared with September 2011. Conversely, about 130 more rigs were drilling for crude and NGLs (such as propane, butane and ethane) priced relative to crude prices.

The large projected increases in a closer and more afford-able supply of NGLs is also driving the state’s petrochemical companies to expand the capacity of their facilities. Although not an exhaustive list, some of the petrochemical construction and expansions are:• new ethylene plant in Baytown (Chevron),• expansion of NGL fractionation plant in Old Ocean

(Chevron),• expansion of Shoup and Armstrong NGL fractionation

plants in Nueces and DeWitt counties (Enterprise Prod-ucts Partners and Duncan Energy Partners),

• expansion of NGL fractionation plant in Mont Belvieu (Enterprise Products Partners),

• new NGL fractionation plant in Yoakum (Enterprise Prod-ucts Partners),

• new synthetic lubricant plant in Baytown (ExxonMobil Chemical),

• expansion of ethylene plant in Point Comfort (Formosa),• new petroleum condensate processing plant on Houston

Ship Channel (Kinder Morgan),• restart of methanol manufacturing plant in Channelview

(LyondellBasell) and• new methanol manufacturing plant in Beaumont (Orascom).

Other sectors benefitting from low natural gas prices will include electrical power generators and manu-facturers of paper products, plastic products, cement,

fertilizers and fabricated metals. Existing or possible new loca-tions for these types of facilities should see increased interest in the next few years.

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

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

Dr. Hunt ([email protected]) is a research economist with the Real Estate Center at Texas A&M University.

18 TIERRA GRANDE

Housing Markets

Texas’ housing market comprises homes priced from less than $10,000 to several million dollars. The home price differential has divided the state’s residential real

estate market into several market segments according to price brackets. The shares of these segments in total homes sold gradually change over time in response to changes in income and consumer preferences.

Growing incomes and prosperity are usually reflected in higher growth rates of shares of higher-priced homes sold. However, socioeconomic factors and business cycles also impact market shares of different home price brackets. For instance, elderly or retired persons often prefer smaller, lower-priced homes that are more easily maintained.

Ordinarily, the housing market is made up of two broad seg-ments: a growing segment and a declining one. Growth is mea-sured by the shares of homes sold in each segment as a percent-age of total homes sold. The distribution of the percentages of homes sold is divided into two segments by a home price line. In a growing economy, the market shares of houses with prices above (or below) the price line increase (or decrease).

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

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

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

19OCTOBER 2012

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

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

downward (Figures 3.10 to 3.13). The most solid residential market segment comprises homes

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

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

Price Range 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 $29,999 or less 2.3 2.4 2.3 2.2 1.9 1.5 1.6 2.1 2.4 2.7 2.8 30,000 – 39,999 2.1 2.0 2.0 1.9 1.7 1.5 1.5 1.9 2.1 2.3 2.5 40,000 – 49,999 2.9 2.6 2.4 2.3 2.0 1.8 1.9 2.2 2.3 2.4 2.8 50,000 – 59,999 4.0 3.6 3.2 3.0 2.6 2.3 2.3 2.5 2.7 2.7 3.1 60,000 – 69,999 5.5 4.8 4.3 4.0 3.4 3.0 3.1 3.3 3.2 3.3 3.5 70,000 – 79,999 6.8 5.7 5.3 5.1 4.2 3.9 3.8 3.9 3.7 3.7 3.9 80,000 – 89,999 8.0 7.3 6.6 6.3 5.5 4.9 4.7 4.6 4.4 4.4 4.3 90,000 – 99,999 7.0 7.0 6.8 6.7 5.8 5.2 4.7 4.6 4.6 4.4 4.2100,000 – 119,999 11.7 11.9 12.4 12.5 12.1 11.4 10.5 9.9 9.9 9.4 8.9120,000 – 139,999 11.3 11.8 12.3 12.4 12.9 13.0 12.3 11.7 11.8 10.9 10.2140,000 – 159,999 8.6 9.1 9.4 9.4 10.1 10.5 10.2 9.8 9.9 9.5 9.0160,000 – 179,999 6.6 7.1 7.3 7.3 8.0 8.5 8.3 8.0 8.1 7.8 7.6180,000 – 199,999 4.6 4.8 5.0 5.0 5.5 5.9 6.0 6.0 6.0 5.7 5.7200,000 – 249,999 7.0 7.4 7.7 7.8 8.5 9.1 9.7 9.8 9.9 9.9 9.9250,000 – 299,999 4.2 4.5 4.8 4.9 5.3 5.7 6.2 6.3 6.6 6.7 7.0300,000 – 399,999 3.8 4.2 4.4 4.7 5.2 5.9 6.5 6.6 6.3 6.8 7.2400,000 – 499,999 1.5 1.6 1.7 1.8 2.1 2.5 2.8 2.8 2.6 3.0 3.1

$500,000 and more 2.1 2.3 2.3 2.7 3.1 3.5 4.1 4.1 3.6 4.3 4.6

Source: Real Estate Center at Texas A&M University

15

12

9

6

3

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2005 Home Sales Distribution2001 Home Sales Distribution

price line

Figure 1. Texas Housing Market Segments, 2005


Perc

ent H

omes

Sol

d$2

9k o

r les

s

30–3

9

40–4

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50–5

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60–6

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0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore

Home Prices


$29k

or l

ess

30–3

9

40–4

9

50–5

9

60–6

9

70–7

9

80

–89

90

–99

10

0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore

price line price line

12

9

6

3

0Perc

ent H

omes

Sol

d


Figure 2. Texas Housing Market Segments, 2011

Home Prices

The datasets used in this study con-sist of distributions of homes sold in different price brackets in Texas

each year from 2001 to 2011. The distri-butions were constructed by computing the percentages of homes sold in 18 price brackets (see table). Similar distributions

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

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

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

Data and Methods

20 TIERRA GRANDE

2001 2003 2005 2007 2009 2011

3.0

2.5

2.0

1.5

1.0

Figure 3.1 Price Less than $29,000

2001 2003 2005 2007 2009 2011

3.0

2.5

2.0

1.5

1.0

Figure 3.2 $30,000–$39,999

2001 2003 2005 2007 2009 2011

3.0

2.5

2.0

1.5

Figure 3.3 $40,000–$49,999

2001 2003 2005 2007 2009 2011

5.0

4.0

3.0

2.0

Figure 3.4 $50,000–$59,999

2001 2003 2005 2007 2009 2011

6.0

5.0

4.0

3.0

2.0

Figure 3.5 $60,000–$69,999

2001 2003 2005 2007 2009 2011

7.0

6.0

5.0

4.0

3.0

Figure 3.6 $70,000–$79,999

2001 2003 2005 2007 2009 2011

10.0

8.0

6.0

4.0

Figure 3.7 $80,000–$89,999

2001 2003 2005 2007 2009 2011

8.0

7.0

6.0

5.0

4.0

Figure 3.8 $90,000–$99,999

2001 2003 2005 2007 2009 2011

14.0

12.0

10.0

8.0

Figure 3.9 $100,000–$119,999

2001 2003 2005 2007 2009 2011

14.0

13.0

12.0

11.0

10.0

Figure 3.10 $120,000–$139,999

2001 2003 2005 2007 2009 2011

11.0

10.0

9.0

8.0

Figure 3.11 $140,000–$159,999

2001 2003 2005 2007 2009 2011

9.0

8.0

7.0

6.0

Figure 3.12 $160,000–$179,999

2001 2003 2005 2007 2009 2011

6.5

6.0

5.5

5.0

4.5

Figure 3.13 $180,000–$199,999

2001 2003 2005 2007 2009 2011

10.0

9.0

8.0

7.0

6.0

Figure 3.14 $200,000–$249,999

2001 2003 2005 2007 2009 2011

8.0

7.0

6.0

5.0

4.0

Figure 3.15 $250,000–$299,999

2001 2003 2005 2007 2009 2011

8.0

6.0

4.0

2.0

Figure 3.16 $300,000–$399,999

2001 2003 2005 2007 2009 2011

3.2

2.8

2.4

2.0

1.6

1.2

Figure 3.17 $400,000–$499,999

2001 2003 2005 2007 2009 2011

5.0

4.0

3.0

2.0

Figure 3.18 $500,000 or more

Figure 3. Changes in the Market Shares of Homes Sold in Texas From 2001 to 2011Percent of Market Share


21OCTOBER 2012

THE TAKEAWAY

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

Market Segments in Texas Metros

Current housing market segments for the state’s major metropolitan areas are shown in Figures 4 to 8. In Austin, homes priced less than $90,000 did not have a

significant market share in total homes sold from 2001 to 2011 (Figure 4). Currently, homes priced more than $160,000 are gaining larger market shares of homes sold. The market share of homes in the $90,000–$159,999 price bracket has signifi-cantly declined from 2001.

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


$29k

or l

ess

30–3

9

40–4

9

50–5

9

60–6

9

70–7

9

80

–89

90

–99

10

0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore

price line

12

9

6

3

0

Perc

ent H

omes

Sol

d


Figure 4. Austin Housing Market Segments, 2011

Home Prices


$29k

or l

ess

30–3

9

40–4

9

50–5

9

60–6

9

70–7

9

80

–89

90

–99

10

0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore

price lineprice line

12

9

6

3

0

Perc

ent H

omes

Sol

d


Figure 5. Dallas Housing Market Segments, 2011

Home Prices


$29k

or l

ess

30–3

9

40–4

9

50–5

9

60–6

9

70–7

9

80

–89

90

–99

10

0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore


12

9

6

3

0

Perc

ent H

omes

Sol

d

2011 Home Sales Distribution


Figure 6. Fort Worth Housing Market Segments, 2011

Home Prices


$29k

or l

ess

30–3

9

40–4

9

50–5

9

60–6

9

70–7

9

80

–89

90

–99

10

0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore


12

8

4

0

Perc

ent H

omes

Sol

d 2011 Home Sales Distribution2001 Home Sales Distribution

Figure 7. Houston Housing Market Segments, 2011

Home Prices


$29k

or l

ess

30–3

9

40–4

9

50–5

9

60–6

9

70–7

9

80

–89

90

–99

10

0–11

9

12

0–13

9

140–

159

16

0–17

9

18

0–19

9

200–

249

25

0–29

9

30

0–39

9

400–

499

$5

00k

or m

ore

price line

12

8

4

0Pe

rcen

t Hom

es S

old 2011 Home Sales Distribution


Figure 8. San Antonio Housing Market Segments, 2011

Home Prices

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

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

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

Dr. Anari ([email protected]) is a research economist with the Real Estate Center at Texas A&M University.

22 TIERRA GRANDE

Housing Markets

23OCTOBER 2012

The Great Recession made “foreclosure” a household word.

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

Texas weathered the foreclosure storm better than most other states. Here, foreclosures increased from a little more than 1 percent to just less than 2 percent. The absence of artificially inflated home prices in conjunction with a resilient job market buffered the negative effects on the state’s economy and housing market. Despite foreclosure rates that equaled and even surpassed those of the mid 1980s, when Texas’ housing market was devastated, the state generally suffered relatively minor damage.

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

The fall in home prices starting in mid-2006 closely correlates with the initial upsurge in foreclosures (Figure 2). The ensuing loss of jobs starting in 2008 further accelerated the pace of foreclo-sure filings (Figure 3).

5

4

3

2

1

01979 1990 2001 2012

Perc

ent

of L

oans

in F

orec

losu

reat

End

of Q

uart

er

Figure 1. Texas, U.S.Foreclosure Rates

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

TEXAS

U.S.

160

120

80

40

0

230

210

190

170

150Fore

clos

ure

Filin

gs (

thou

sand

s)or

ange

line

12-MM

A M

edian Single-Family

Hom

e Price (thousands) brown line

Figure 2. Monthly Foreclosure Filingsand 12-Month Moving Average

Median Single-Family Home Price

Sources: RealtyTrac Inc. and National Association of RealtorsNote: Data include notices of trustee sales plus notices of foreclosure sale; 12-month moving average median price

June2005

Oct.2007

May2012

Feb.2010

June2005

Oct.2007

June2012

Feb.2010

160

120

80

40

0

143

139

135

131

127Fore

clos

ure

Filin

gs (

thou

sand

s)or

ange

line

Jobs (thousands)brow

n line

Figure 3.Monthly Foreclosure Filings and Jobs

Sources: RealtyTrac Inc. and Bureau of Labor Statistics Note: Data include notices of trustee sales plus notices of foreclosure sale

Since mid-2010, foreclosure fillings have decreased significantly because of federal programs that require loan ser-vicers/lenders to use loan modifications, loan refinancing or both; increased use of short sales; and foreclosure moratoriums put in place pending resolution of the states’ attorneys general suit against major lenders and servicers. Continued high levels of existing delinquencies reported by the MBA and other loan data providers, however, suggest that foreclosures will pick back up as over-all market fundamentals remain fragile.

Texas Foreclosure Levels

Foreclosures in Texas generally have not caused a problem in overall market bal-

ance. While the MBA’s foreclosure rate (measured as percent of total loans) approached and even exceeded the record highs of the late 1980s, the market has been able to absorb the inventory of fore-closures relatively well. In 2011, RealtyTrac reported 89,675 foreclosure filings in Texas, which ranked seventh nationally, primarily because of the sheer size of the market (Figure 3). RealtyTrac’s 2011 rate of foreclosure filings (measured as the percent of total housing units) of 0.89 percent, however, ranked 25th and was nearly 38 percent less than the national rate of 1.43 percent (Figure 3).

RealtyTrac reported one foreclosure filing for every 113 housing units in Texas in 2011 (Figure 4) com-pared with one filing per 70 units nation-ally. Year-to-date, 2012 Texas filings equal one per 214 units relative to one in every 131 units nationally.

24 TIERRA GRANDE

Foreclosure filings in 2011 totaled 25 percent fewer than those recorded in 2010 (see table). The year-to-date 2012 total number of recorded filings in Texas

is down 15 percent from the corresponding 2011 level despite a surge in fil-ings during the past several months. As the number of foreclosure filings may pick up somewhat during the rest of the year, the projected final 2012 total may be roughly equivalent to the 2009 level or more.

Fortunately, the Texas residential market is show-ing sufficient strength to handle an increase in foreclosures. Home sales in Texas for the first half

of the year increased approximately 13 percent over last year, and median prices improved nearly 5 percent, so an increase in foreclosures should have a relatively minor impact on the market.

Each individual Texas metropoli-tan area had fewer foreclosure filings in 2011 than in 2010. In some metro areas, the decline was 75 percent or more; on average, it was 44 percent, ranging from a low of 6.5 percent in Waco to 85.9 percent in Wichita Falls.

16

14

12

10

8

6

4

2

10.9

10.7

10.5

10.3

10.1

9.9

9.7

9.5

Jobs

(m

illio

ns)

oran

ge li

ne

Notice of Trustee Sales Filings

(thousands) brown line

Figure 6. Texas Monthly Foreclosuresand Monthly Jobs

Sources: Texas Workforce Commission and RealtyTrac Inc.

June2005

Oct.2007

May2012

Feb.2010

The change in number of foreclo-sure filings relative to changes in home prices and jobs in Texas

is shown in Figures 5 and 6. Unlike the national experience, the positive influ-ences of increasing home values and new job creation appear to mitigate the level of Texas foreclosures. It remains to be seen what increase in filings may arise from the settlement between the attorneys general and the largest mort-gage loan servicers and providers. Even if foreclosures increase significantly for a few months, they should pose little problem for Texas overall. If new foreclo-sures cluster in specific neighborhoods, however, the impacts could be severe.

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

Sales, Inventory and Price EffectSo far, the Texas market has been able to absorb foreclosure and REO sales with little difficulty. Nationally, foreclosure sales account for 20 to 25 percent of total sales since January 2010. In Texas, fore-

closure sales typically amount to less than 10 percent of total sales.

Foreclosure sales in Dallas and Houston, the two biggest markets, are somewhat higher, generally in the 15 to 18 percent range. In 2011, Dallas and Houston ranked 84th and 85th, respectively, by foreclo-sure rate among all U.S. MSAs. They were the only two Texas MSAs ranked in the top 100.

Percent of TotalHousing Unitsorange

Housing Unitsbrown

Figure 4. Texas Total Foreclosuresand Rate per Total Housing Units

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

65,34272%

83,64591%

84,46990%

96,157100%

100,045103%

118,923119%

89,67589%

2005

2006

2007

2008

2009

2010

2011

16

14

12

10

8

6

4

2

151

148

145

142

139

136

133

130

12-M

MA

Med

ian

Hom

e Pr

ice

(tho

usan

ds)

oran

ge li

ne

Notice of Trustee Sales Filings

(thousands) brown line

Figure 5. Texas Monthly Foreclosuresand 12-Month Moving Average

Median Price

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

June2005

Oct.2007

May2012

Feb.2010

25OCTOBER 2012

THE TAKEAWAY

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

Number of Properties with Foreclosure Filing in Texas Metropolitan Areas

Number of Properties Percent Change

MSA 2011 2010 2010–11Abilene 69 301 –77.1Amarillo 465 1,162 –60.0Austin-Round Rock 7,524 9,809 –23.3Beaumont-Port Arthur 999 1,277 –21.8Brownsville-Harlingen 409 1,656 –75.3College Station-Bryan 112 191 –41.4Corpus Christi 1,300 1,732 –24.9Dallas-Plano 21,976 27,222 –19.3Fort Worth-Arlington 10,229 14,103 –27.5Houston 29,917 35,816 –16.5Killeen-Temple-Fort Hood 1,215 1,851 –34.4Laredo 246 755 –67.4Longview 161 337 –52.2Lufkin 31 136 –77.2McAllen-Edinburg-Mission 2,334 2,775 –15.9Midland 69 192 –64.1Odessa 73 310 –76.5San Angelo 235 322 –27.0San Antonio 8,272 11,196 –26.1Sherman-Denison 247 617 –60.0Texarkana 98 138 –29.0Tyler 230 471 –51.2Victoria 49 194 –74.7Waco 779 833 –6.5Wichita Falls 79 562 –85.9

Source: RealtyTrac Inc.

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

The statewide estimate of months of inventory is around six, and 13 of the MLS areas tracked by the Center have fewer than five months. Austin, for example, currently measures about 4.5 months inventory of homes available and some markets are less than three. These inventory levels would normally indicate a strong housing market with anticipated healthy price increases. How-ever, robust price increases have been spotty, occurring in particular submar-kets but are not pervasive.

Some lenders/servicers may be hold-ing REO properties for subsequent sale rather than releasing them all

at once. This may actually be good for the overall market if, as seems likely, a substantial number of foreclosed proper-ties cluster in specific neighborhoods or developments. Putting all of the proper-ties on the market at once could severely damage those areas. Releasing properties to the market over time helps stabilize local prices and may, in the long run, be more beneficial to the lender as well.

Foreclosure sales and the price discounts they garner have no doubt

limited overall annual price appreciation during the past four years. Some limited research in the major Texas markets found that the discounts paid for fore-closures were more than offset by price increases for nondistressed home sales. As compared with the nearly 25 per-cent decline in the median home price nationally, Texas’ annual median home price remained essentially flat between 2007 and 2010, falling less than 1 percent from its peak. Texas’ median home price in 2011 was the highest on record and surged to a new monthly record high during the summer of 2012. The current median prices in the five principal Texas metropolitan markets (Austin, Dallas, Fort Worth, Houston and San Antonio) are at or near all-time highs.

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

most part have been recovered. Except for specific subdivisions or neighbor-hoods where foreclosures were excessive, by and large the dampening price effects were spread out and not long term. Repressed demand from tight mortgage credit underwriting and job insecurities have been the key drivers of the recent housing market, not undue foreclosure levels.

Dr. Gaines ([email protected]) is a research economist with the Real Estate Center at Texas A&M University.

2007 2008 2009 2010 2011

1,000

800

600

400

0

New York - Brown Florida - Red

California - Green Texas - Orange

Figure 7Actual Days to Foreclose

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

1,019

806

352

90

26316913457

26 TIERRA GRANDE

Appraisal

Appraising real estate in difficult markets can be puzzling to the appraisers challenged with interpreting potentially confusing market signals. Recent reversals

in residential markets led the Appraisal Foundation to issue a valuation advisory entitled Residential Appraising in a Declining Market. This document provides guidance to appraisers as they struggle to make sense of markets buffeted by the

downturn in home prices following the Great Recession.

Bringing Down the House?Foreclosure Effects on Market Values

By Charles E. Gilliland

Because specific localized markets may have escaped the downdraft caused by collapsing mortgages, the advisory identi-fies conditions that characterize a declining market. These include: • an oversupply of competing properties;• extended marketing times for active, pending and closed

sales;• prior listings of the subject that reflect list prices notably

higher than the current contract, sale price or value; • prior sales of the subject, comparables or both that reflect

higher prices than current prices; • a decrease in sale prices as a percent of list prices; and• an increase in REO (properties acquired by lenders

through foreclosure) listings in the neighborhood.The document states that a declining market normally has

several of these characteristics.

Identify Client’s Intended Use

Describing the state of the market requires analysis of transactions over a period sufficient to reveal trends in prices. Examining historic levels of typical days on

the market, median prices, and the relationship between sale price and list price provides evidence of the health of the mar-ket. Economic studies and various databases can also provide insights into the direction the market is headed. Analysis of these kinds of information leads an appraiser to conclude that markets are either increasing, stable or declining.

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

27OCTOBER 2012

sellers were not “typically motivated.” Presumably, distressed sellers made concessions that affected the final prices in these transactions, driving them below a reasonable market value. For many appraisal assignments, all of these sales would likely be dismissed by appraisers.

However, when these types of transactions dominate markets in an area, excluding them may leave no mar-ket data to analyze. For those situations, an alternate

definition of value may better serve a client’s needs, especially if they want to know the most likely price the property would fetch under current conditions. The advisory cites disposition value, foreclosure sale, liquidation value and other values in addition to the standard market value as possible objectives of an appraisal. The value definition that most effectively meets a client’s intended use of the appraisal should be identified in the report’s scope of work and communicated to the client.

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

Describe Market ConditionsThe advisory cites three market situations: one dominated by end users, one reflecting a mixture of end users and investors and one in which all sales are consummated with investment buyers. In the first instance, comparable sales selection focuses primarily on differences among properties. In the second case, sales to inves-tors will likely yield lower prices than sales of similar properties sold to end users. For the mixed and investor-dominated market, the selection becomes muddled. Should the appraiser discard investor-related sales in the mixed market or perhaps adjust those sales upward to account for the conditions of the sale?

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

If an appraiser finds the subject property is located in a market where both non-REO and REO property

sales exist and these result in significantly different value opinions, the appraiser should use the compa-rable sales that represent the actions of buyers most similar to the most probable buyer for the subject. It is also possible for an appraiser to give clients two values, properly defined, in the same report.

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

Define Alternative Values

By definition, market value reports the most probable price expected from a sale in a free and open market between informed buyers and sellers, assuming that nei-

ther is under duress. Official definitions impose a set of restric-tions designed to describe a transaction that approximates an ideal, perfectly competitive market as closely as possible.

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

These stipulations acknowledge that price does not necessar-ily equal value. Sales of apples or oranges occur at prices set by competitive forces in the market place. Most buyers find the

offer of these items at a take it or leave it stated price. Shopping among competing sellers normally results in observing similar prices in all markets. Those prices arguably reflect the value of the apples or oranges in the given market. However, a late shopper encountering a seller with a few oranges left and a burning desire to close may be able to strike a bargain by offering to buy the remaining stock at

a lower price. Those specific circumstances have caused the agreed-to price to stray from the previously established market value.

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

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

For appraisals in a declining market, the determining

factor depends on the assumed most likely buyer

of the residence.

28 TIERRA GRANDE

THE TAKEAWAY

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

property. That reality traces through the market in general price increases.

Similarly, when sales of foreclosed properties occur in a market, observers might anticipate an overall drop in prices, believing that foreclosed properties sell at a

discount from market values. That drop would follow from two circumstances: the seller is motivated to liquidate an unwanted investment, and inventories of foreclosed properties add to the supply of homes on the market. The casual observer would justifiably expect foreclosure sales to drive values lower.

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

One can assume that sales of foreclosed properties should result in transactions at appar-ently depressed prices. Possibly because of such perceptions, the Texas Property Tax Code contains the following provi-sion referring to appraisal of homes for property tax purposes:

§ 23.01. Appraisals Generally(a) Except as otherwise provided by this chapter, all taxable property is appraised at its market value as of January 1.(b) The market value of property shall be deter-mined by the application of generally accepted appraisal methods and techniques. If the appraisal district determines the appraised value of a property using mass appraisal standards, the mass appraisal standards must comply with the Uniform Standards of Professional Appraisal Practice. The same or similar appraisal methods and techniques shall be used in apprais-ing the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property’s market value, and all available evidence that is specific to the value of the property shall be taken into account in determining the property’s market value.(c) Notwithstanding Section 1.04(7)(C), in deter-mining the market value of a residence homestead, the chief appraiser may not exclude from con-sideration the value of other residential property that is in the same neighborhood as the residence

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

Include Foreclosure Sales If . . .

The foundation advisory acknowledges that appraisers may include foreclosure sales if state assessment rules require it and still comply with Uniform Standards of

Professional Appraisal Practice. The way seems clear for tax appraisals to decline to reflect the sale prices on the foreclosure

sales. However, many Texans find that residential tax values have continued to rise even as foreclosure sales have popped up in local markets, leading them to conclude that the appraisal district is disregarding the code. The appraisal district responds that the sales were considered, but they did not impact the estimated market value of the homestead property.

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

evidence of market value given the legal definition envisioning arms-length transactions.

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

Dr. Gilliland ([email protected]) is a research economist with the Real Estate Center at Texas A&M University.

29OCTOBER 2012

Tierra Grande - October 2012

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