Tierra Grande - January 2014

JANUARY 2014

VOLUME 21, NUMBER 1 ™

TIERRA GRANDE

Visit us online at

recenter.tamu.edu

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

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, RR DONNELLEY, HOUSTON ADVISORY COMMITTEE: Mario A. Arriaga, Spring, chairman; Kimberly Shambley, Dallas, vice chairman; James Michael Boyd, Houston; Russell Cain, Port Lavaca; Jacquelyn K. Hawkins, Austin; Walter F. Nelson, Houston; Doug Roberts, Austin; Ronald C. Wakefield, San Antonio; C. Clark Welder, Beeville; and Avis Wukasch, Georgetown, ex-officio representing the Texas Real Estate Commission.

14 Houston

America’s Oil Headquarters Other areas have more oil rigs, but Houston is the beating heart of Texas’ (and the nation’s) oil industry.

With a specialized workforce, producers, drilling and service companies, refiners, and pipelines and tankers to transport the oil, Houston supports every sector of the oil business.

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.

BY ROBERT W. GILMER

SUBSCRIPTIONS free to Texas real estate licensees. 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: JP Beato III, pp. 1, 16–17, 20; Robert Beals II, pp. 2–3, 4, 6–7; 14–15, 18, 26; Real Estate Center files, pp. 8, 10–11, 28. © 2014, Real Estate Center. All rights reserved.

20 Dodd-Frank’s Impact

2 Bubble Vision

on Manufacturing Housing

Asset price bubbles, including the housing bubble that wreaked havoc in the early 2000s, are hard to predict. Economists can, however, get some insight into bubble formation by studying the relationship between home prices and economic fundamentals such as supply and demand.

BY LUIS B. TORRES

8 E-Commerce A Taxing Dilemma

In the beginning, we didn’t have to pay sales tax on stuff we bought on the Internet. But those taxes we weren’t paying meant decreased revenue for state and local government programs.

More and more online stores are beginning to collect sales taxes to keep states happy.

BY MARK G. DOTZOUR

10

Snow-covered bridge, Tarrant County

PHOTOGRAPHER Roger Armstrong

Center research used Dallas-Fort Worth area Multiple Listing Service sales data to measure the housing boom-bust’s and 2007’s Great Recession’s effects on the housing market. Distressed sales — how many and for how much — document how the recovery is going.

BY ALI ANARI AND JAMES P. GAINES

JANUARY 2014

BY HAROLD D. HUNT

23

Real Estate Investments and IRAs Can real estate investments be included in an IRA? Yes. A self-directed IRA allows you to diversify your retirement investments with real estate. Of course, you have to follow IRS rules.

BY JERROLD J. STERN

24 Homestead Exemptions Taking a Bite Out of Taxes

Here’s how it works: Determine which home-

???stead exemptions you’re eligible for. Apply for

BY ALI ANARIthose. When your next property tax bill arrives, count the cash you saved.

AND JAMES P. GAINES

BY CHARLES E. GILLILAND

Metroplex Market on the Mend ON THE COVER

Manufactured housing is a popular form of affordable housing in Texas. Now, the DoddFrank Wall Street Reform and Consumer Protection Act will make it harder to finance manufactured homes.

26 Last ‘Writes’ End-of-Life Decisions

Many of us have strong opinions about what we want to happen — or not — at the end of our lives. Here’s some information that may help you make these difficult decisions.

BY JUDON FAMBROUGH

1

U.S. Economy

House prices in the United States increased dramatically during the pre-2007 housing boom. Many economists and policymakers argued that a bubble did not exist and that numerous fundamental factors — job and income growth, low mortgage rates, demographics and restricted supply — were behind the price increases, making a substantial nationwide decline in house prices improbable.

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ut overly optimistic expectations about future price growth, along with government policies, led to a relaxation in lending standards. This resulted in a housing bubble. In regions where housing prices registered the highest increases, past price performance had a significant influence on subsequent loan approval rates. When price expectations did not materialize, the bubble burst, setting off a chain of events that led to a global financial and economic crisis comparable only to the Great Depression of the 1930s.

Like stock prices, house prices have boom and bust cycles because market participants tend to expect higher future returns when prices are high relative to fundamentals. “Irrational exuberance” comes into play when buyers and sellers in the midst of a bubble expect high future returns because they extrapolate recent price behavior into the future. This is fueled further by buyers’ perception that housing investment entails little risk of price declines.

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About Housing Bubbles Bubbles have occurred throughout history in many countries and various asset markets. In the case of real estate markets, the widespread use of the term “housing bubble” is relatively new.

It wasn’t until 2000 that the term “housing bubble” appeared in the media as speculation mounted of a bubble forming. ubbles can be defined as market participants’ expectations of high future prices that are not aligned with economic fundamentals but are instead based on recent trends of high-growth performance. This requires that market participants be able to finance their inordinate asset purchases.

The concept of a bubble is based on the public’s: (1) expectations that prices will continue to increase; (2) theories about the risk of falling prices; and (3) worries about being priced out of the future housing market if they don’t buy today. During a housing price bubble, homebuyers’ ideas about affordability are distorted; a home once considered too expensive is now seen as

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an acceptable purchase. Furthermore, they perceive little risk in purchasing a home because they consider a fall in housing prices unlikely.

Bubble Trouble So why wasn’t the housing bubble identified and subsequently avoided?

The problem with bubbles is that they cannot be identified with any certainty or confidence. If they could be, they would never form in the first place. Instead, the market would respond by selling assets to avoid future losses rather than purchasing homes at high prices. Identifying the beginning of a bubble requires extraordinary insight into the functioning of a market that even highly knowledgeable and specialized market participants lack.

Despite the difficulties in determining the existence of bubbles, economic fundamentals can help detect them. This is especially true in the housing market, where the underlying

3

Figure 1. Stock and U.S. House Price Index (Year-Over-Year Percent)

35

10

25

House Price Index

Housing as Investment Asset

15

45

fundamentals of supply and demand can be used.

• when housing is in short supply, home prices become irrelevant and can increase indiscriminately; and • when selling prices are higher than list prices, economic fundamentals determining supply and demand are no longer valid, and home prices can increase continuously.

Stock Price Index

5 15 Market participants’ widespread inclination 5 0 to view housing as an –5 investment asset is a defining characteristic of –5 –15 a housing bubble. Specu–25 lation in housing investDOW Jones –10 ment is a factor in the S&P 500 –35 creation of bubbles and Home Price Index (FHFA) (right y-axis) –15 –45 also contributes to their Housing Market 1992 1995 1998 2001 2004 2007 2010 2013 instability as the investFundamentals ment motive weakens.

Note: Estimated by the Real Estate Center at Texas A&M University.

Sources: Federal Housing Finance Agency and FRED St. Louis Fed Housing prices are deterWhen the attractiveness mined by supply and of housing as an investment deteriorates due to a fear of price declines, the bubble can demand. On the demand side are factors such as demographics, income growth, employment growth, changes in financing burst. ven after the Great Recession, homeowners continue mechanisms or interest rates, and changes in tastes and preferto perceive housing as a stable investment relative to ences based on locational characteristics, such as accessibility, the stock market given that declines in nominal house schools or crime. For example, a household’s income could prices are rare compared with stock prices (Figure Figure 2. FHFA Phoenix and Las Vegas House Price Index 1). This important difference between housing (Year-Over-Year Percent) markets and stock markets, as well as most asset 50 markets, is based on the fact that home prices are “sticky downward.” That is, when excess supply Phoenix 40 occurs, prices do not immediately fall, allowing Las Vegas the market to find a new equilibrium and clear.

30 1992–2013 Rather, sellers have “reserve” prices that they are Long-Run Growth 20 not willing to go below.

Phoenix 4.5 y-o-y % The investment motive for purchasing a home 10 is said to play an important role in housing bubbles. Popular misconceptions about housing 0 investment include: Las Vegas 1.9 y-o-y % –10 • bubbles cannot form in single-family residential real estate; –20 • single-family residential real estate is an investment that cannot lose money; –30 • single-family residential real estate is a –40 candidate for the “best investment” that can

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be made; • high-priced housing (such as a beach house) typically has higher price rate increases than other properties perceived as less valuable;

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–50 1992

1995

1998

2001

2004

2007

2010

2013

Notes: Estimated by the Real Estate Center at Texas A&M University. Home Price Index MSA Phoenix-Mesa-Scottsdale, Arizona and MSA Las Vegas-Henderson-Paradise, Nevada.

Source: Federal Housing Finance Agency (FHFA)

TIERRA GRANDE

Table 1. Home Prices, 1992 to 2013 Region United States Arizona Phoenix-Mesa-Scottsdale Nevada Las Vegas-Henderson-Paradise Texas Austin-Round Rock Dallas-Plano-Irving Fort Worth-Arlington Houston-The Woodlands-Sugar Land San Antonio-New Braunfels

1992–2013

1992–2002

2003–13

2002–06

2010–13

q-o-q %

y-o-y %

q-o-q %

y-o-y %

q-o-q %

y-o-y %

q-o-q %

y-o-y %

q-o-q %

0.8 0.9 1.0 0.5 0.4 0.9 1.3 0.8 0.7 1.0 1.0

3.2 4.0 4.5 2.2 1.9 3.4 5.2 3.0 2.7 4.0 3.8

1.1 1.3 1.3 0.9 0.8 1.0 1.6 1.0 0.9 1.0 0.9

4.4 5.0 5.4 3.4 3.0 3.9 6.6 3.8 3.5 4.1 3.7

0.4 0.6 0.7 0.0 0.0 0.7 1.0 0.6 0.5 1.0 1.0

1.9 3.0 3.6 1.0 0.8 2.9 3.8 2.1 1.8 3.9 3.9

1.9 3.4 3.5 3.4 3.5 1.1 1.0 0.7 0.8 1.1 1.5

8.2 14.8 15.6 15.5 16.1 4.1 3.5 3.0 3.1 4.5 6.0

0.2 0.8 1.4 0.6 0.9 0.7 1.0 0.6 0.4 1.2 1.0

y-o-y % –0.1 0.9 3.9 –0.7 –0.1 2.1 3.1 2.1 1.3 4.2 2.4

Notes: Estimated average percent changes. q-o-q % = quarter-over-quarter percent change and y-o-y % = year-over-year quarterly percent change. 2Q 2013.

Sources: Real Estate Center at Texas A&M University and Federal Housing Finance Agency

Table 2. Population, 1992 to 2012 increase, allowing it to purchase 1992–2012 2002–12 2002–06 2010–12 a home; a large proportion of Region y-o-y % y-o-y % y-o-y % y-o-y % the population could be forming United States 1.0 0.9 0.9 0.8 new households; or mortgage Arizona 2.6 2.0 2.7 1.1 rates could have fallen.

Phoenix-Mesa-Scottsdale 3.0 2.3 3.1 1.4 Supply side factors include Nevada 3.7 2.4 3.8 0.9 construction costs (lumber, Las Vegas-Henderson-Paradise 4.4 2.9 2.9 1.0 drywall, labor), interest rates, Texas 1.9 1.8 1.8 1.7 housing stock age, building Austin-Round Rock 3.6 3.0 2.9 2.5 technology and land availabilDallas-Fort Worth 2.4 2.1 2.3 1.3 Houston-The Woodlands-Sugar Land 2.2 2.2 2.5 1.7 ity. Elasticity of supply is a key San Antonio-New Braunfels 2.1 2.3 2.1 2.5 factor in the cyclical behavior of Note: Estimated average y-o-y % = year-over-year percent change. home prices.

Sources: U.S. Census Bureau and Bureau of Economic Analysis If the supply of homes is elastic, any small change in housTable 3. Employment, 1992 to 2013 ing prices can be matched by 1992–2013 2003–13 2002–06 2010–13 an increase in supply. Indeed, if Region y-o-y % y-o-y % y-o-y % y-o-y % demand for housing puts upward United States 1.0 0.4 0.6 0.9 pressure on home prices, the Arizona 2.5 1.0 3.1 0.7 quantity of new homes built can Phoenix-Mesa-Scottsdale 2.7 1.1 3.4 1.0 be increased to satisfy demand.

Nevada 2.9 1.0 4.0 0.3 In the process, the pressure on Las Vegas-Henderson-Paradise 3.8 1.4 4.8 0.3 home prices to continue to rise Texas 2.0 1.6 1.1 2.0 is eliminated.

Austin-Round Rock 3.5 2.4 1.4 2.9 When home price increases Dallas-Plano-Irving 2.1 1.2 0.4 2.0 are not based on changes in the Fort Worth-Arlington 2.1 1.5 1.1 2.3 economic fundamentals that Houston-The Woodlands-Sugar Land 2.0 1.8 1.4 2.4 San Antonio-New Braunfels 2.3 1.5 1.5 1.6 determine underlying supply and demand, a bubble exists, increas- Notes: Estimated average percent changes. y-o-y % = year-over-year monthly percent change. Total nonfarm employment. August 2013. ing the possibility that housing Source: Bureau of Labor Statistics prices could suddenly collapse as Table 4. GDP Per Capita, 2001 to 2012 market participants realize their 2002–12 2002–06 2010–12 home price expectations will not Region y-o-y % y-o-y % y-o-y % be met.

A rapid increase in prices doesn’t necesUnited States –0.7 1.6 1.4 sarily imply a bubble. It is, however, a good Arizona –0.1 2.4 0.3 indicator that price increases may not be Phoenix-Mesa-Scottsdale 0.0 2.4 0.4 Nevada 0.2 2.2 0.0 based on economic fundamentals, espeLas Vegas-Henderson-Paradise –0.4 2.5 –0.6 cially if price increases for that region do Texas –1.0 0.8 2.5 not reflect overall historical price trends.

Austin-Round Rock 1.6 2.6 2.9 This was evident in Phoenix and Las Vegas Dallas-Fort Worth 0.7 1.2 2.1 where home prices from 2002 to 2006 grew Houston-The Woodlands-Sugar Land 0.4 –0.5 2.1 at extraordinarily high rates versus historiSan Antonio-New Braunfels 0.5 0.7 2.3 cal price increases for those regions (Figure Notes: Estimated average percent changes. y-o-y % = year-over-year percent change.

2). During that period, home prices in the Source: Bureau of Economic Analysis JANUARY 2014

5

25 23

Figure 4. Home-Prices-to-Rents Ratios for Phoenix and Las Vegas (Annual) Phoenix Las Vegas

21 19 17 15 13 11

Figure 3. Home-Price-to-Median-Household-Income Ratio for United States, Phoenix and Las Vegas (Annual)

9 7 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

5.5 5.0 4.5

United States Phoenix Las Vegas

Note: Estimated by the Real Estate Center at Texas A&M University.

Sources: National Realtors Association and the U.S. Department of Housing and Urban Development

warning that price increases were not based on economic fundamentals related to median household income and annual rents, an important signal that a housing bubble had formed.

In contrast to Arizona and Nevada, the Texas housing market did not register such rapid home price increases during the housing boom cycle. Prices here were more in line with past price behavior for the region (Table 1). The relationship between home prices and economic fundamentals in Texas and its major MSAs shows that population and employment grew

4.0 3.5 3.0 2.5 2.0 1.5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note: Estimated by the Real Estate Center at Texas A&M University.

Sources: National Realtors Association and U.S. Department of Housing and Urban Development

United States also registered a higher rate of growth than previously observed (Table 1). o, how did economic fundamentals behave? Can they explain the rapid price increases? Both Phoenix and Las Vegas registered faster growth in population, employment and income growth on average than the nation and the cities’ respective average historical trends (Tables 2, 3, 4). By contrast, the United States did not outperform its past 20-year-average historical trend in population and employment growth. Only GDP per capita registered a relatively higher average growth rate during that period. The ratio of home price to median income for both Phoenix and Las Vegas increased sharply during that period, as it did for the United States to a lesser degree (Figure 3).

This also held true for the ratio of home price to annual rents for both Phoenix and Las Vegas, which registered acute increases from 2002 to 2006. These data were a possible

S

6

Figure 5.

Texas Home-Prices-to-Median-Household-Income Ratios (Annual)

4.0 3.5

Austin

3.0

Texas

2.5

Houston Dallas

2.0

San Antonio Fort Worth

1.5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note: Estimated by the Real Estate Center at Texas A&M University.

Sources: Real Estate Center at Texas A&M University and U.S. Department of Housing and Urban Development TIERRA GRANDE

faster in Texas and the majority of its MSAs than in the United States but was below the state’s average historical trend (Tables 2, 3, 4). However, GDP per capita for Texas and its major MSAs grew at a lower average rate compared with the nation. Houston’s GDP per capita decreased. Austin’s GDP per capita grew faster during the period and was higher than its ten-year average from 2002 to 2012. Ratios between home prices and median income and annual rents recorded small increases between 2006 and 2007 and, although they are higher, they still correspond to the behavior observed in previous years (Figures 5, 6).

Figure 6. Texas Home-Prices-to-Rents Ratios (Annual) 16

14

12

Texas Austin Dallas Houston

10

San Antonio Fort Worth

8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note: Estimated by the Real Estate Center at Texas A&M University.

Sources: Real Estate Center at Texas A&M University and U.S. Department of Housing and Urban Development JANUARY 2014

Unfortunately, asset price bubbles and crashes in stocks and housing are here to stay, as human nature plays an important role in the shaping of speculative bubbles. The events of the recent housing bust demonstrate the enormous economic and financial costs associated with asset price bubbles and crashes.

Supply and demand determinants change over time, so there is no safe way of knowing what asset prices should be. Still, when analyzing long-run trends in asset prices, especially the housing market, their relationship to economic fundamentals can offer insight into possible bubble formation. Currently, Texas home prices are based on strong fundamentals, but when expectations start to exceed real outcomes and current price increases are extrapolated into the future, beware. This assumption has been proven to be dangerously incorrect.

For more information, see Real Estate Center publication 2047, Housing Bubbles and Economic Fundamentals, at recenter.tamu.edu/pdf/2047.pdf.

Dr. Torres (ltorres@mays.tamu.edu) is an associate research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY While no method exists to predict housing bubbles with certainty, the relationship between home prices and economic fundamentals such as supply and demand can offer insight into bubble formation. Basically, when price expectations exceed actual outcomes, and when people believe that prices will continue to increase indiscriminately in the future, warning lights should come on.

7

Taxes

It’s hard to compete on an uneven playing field. For more than a decade, Internet “stores” have been allowed to sell products without collecting sales tax. Sounds like a great bargain for shoppers, and it is.

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eanwhile, brick-and-mortar stores are required to collect sales tax from their customers. When local stores lose market share, two negative things happen to the state and local communities. First, as sales tax collections fall, lost revenue must be made up through higher property taxes or user fees. Second, as the value of shopping malls and retail centers falls, property tax revenue also declines.

Consequently, the state of Texas and its cities must look for alternate revenue to make up for the loss of retail market share to the Internet.

Clicking a mouse and having a package from 3,000 miles away show up on your doorstep is one of the wonders of the 21st century. Virtual retailers have changed the face of consumerism and in doing so have also changed the way consumers are taxed.

Retail stores in Texas communities collect sales taxes that help fund local and state governments. Out-of-state Internet retailers don’t have stores in your community and don’t collect sales taxes. This gives them a great advantage because they can offer goods for a lower total cost. As more and more Americans

8

shop on the Internet, it is harder for local retailers to compete for shoppers’ attention. This economic fact is unavoidable: shoppers like to purchase things at the lowest possible price.

As Internet retail market share has expanded at a rapid clip, some local retailers have been forced out of business. When this happens, the local community and the state pay the price.

The shopping center loses value, and the sizable property taxes it pays fall. The sales tax revenue the city and state collect goes away as well. In Texas, a drop in sales taxes means that property taxes have to rise to cover the shortfall. Otherwise, the sales tax rate on the remaining retailers would have to increase.

It’s fun to buy stuff and not pay taxes. It’s not so fun when your local shopping center goes dark, the jobs go away and the tax revenues disappear. raditionally, an Internet company can only be responsible for collecting sales taxes if it has a “nexus” (presence) in the state where the consumer resides. Nexus can be created if the vendor has people or property located in the state. A nexus can be temporary as when sales people travel the state selling products. Building a warehouse in the state creates a permanent nexus. For example, since Amazon.com is located in Washington state, a person residing in Texas has not typically paid sales tax on Amazon purchases. This changed when Amazon opened a fulfillment center in the state.

The Internet tax issue gained national attention in the late 1990s. State governors wanted the sales tax revenue, but

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Internet proponents said the Internet was still in its infancy, and collecting taxes could have serious consequences for future growth. There were also growing concerns about taxing Internet access and usage.

In 1998, Congress passed the Internet Tax Freedom Act, which prohibited states and local jurisdictions from imposing taxes on Internet access. The law also created an Advisory Commission on Electronic Commerce to review, among other things, the efficacy of collecting sales taxes on Internet sales.

In 2007, the Internet Tax Freedom Act was extended by Congress, which extended the moratorium on Internet access and use tax until Nov. 1, 2014. But the difficult issues surrounding the collection of sales taxes on Internet sales have not been resolved.

Meanwhile, Internet sales volume has exploded, growing from $5.2 billion in fourth quarter 1999 to $71.5 billion in fourth quarter 2012 (see figure).

E-Commerce Retail Sales

Billions of Dollars

80

O

60

40

20

0

that differ in every Retail Sales Tax Rate for Selected States state. Amazon Percent Collected for State Revenue Only currently collects California 7.50 sales tax for nine Indiana 7.00 states and plans Rhode Island 7.00 New Jersey 7.00 on adding seven Tennessee 7.00 more. Projections Arizona 6.60 are that in 2014, Nevada 6.85 Amazon will colTexas 6.25 lect sales tax from New Mexico 5.13 half its customers.

Oklahoma 4.50 Louisiana 4.00 Initially, Amazon Colorado 2.90 wasn’t so willing to New Hampshire 0.00 comply with states’ Montana 0.00 demands; however, Alaska 0.00 the company has Source: Sales Tax Institute shifted strategies as it faces pressure from states and new business demands. This is reflected in the increasing amount of taxes they collect, but because there is no streamlined system, Amazon still pays on a state-by-state basis. pponents of collecting tax on Internet sales claim the lack of uniformity in reporting standards makes tax reporting and collection time consuming and uneconomical for businesses. The government seeks to combat this claim. Forty-four states have worked together to streamline an Internet tax collection agreement that will be the same across the nation. The Streamlined Sales and Use Tax Agreement (SSUTA) would be federally backed if approved by Congress.

Congressional approval is necessary under the Interstate Commerce Clause and would ensure uniform national enforcement.

The Marketplace Fairness Act of 2013 allows states to collect Internet sales tax on out-of-state retailers with more than $1 million in total remote sales in the preceding calendar year. Its stated purpose is “to restore states’ sovereign rights to enforce state and local sales and use tax laws, and for other purposes.” It operates in conjunction with the SSUTA of 2012, which aims to reduce the burden of tax compliance for e-commerce retailers.

Large retailers like Amazon support the federal legislation allowing states to regulate and collect sales tax as long as it is streamlined and uniform. This would help level the playing field for brick-and-mortar stores that provide significant employment and pay property taxes to support local communities in Texas. It will also reduce pressure to increase property taxes and sales tax rates.

2001

2004

2007

2010

Sources: U.S. Department of Commerce, U.S. Census Bureau and 2013research.stlouisfed.org

2013

The Saint Louis Federal Reserve data estimated e-commerce retail sales volume in 2012 at $225.5 billion. These are sales that previously would have been done through stores that pay property taxes and collect sales taxes. Suppose a typical store has retail sales of $300 per square foot per year. This means that e-commerce retail sales have replaced the need for 750 million square feet of retail shopping space in America. The Mall of America is one of the largest malls in the country, encompassing 4.2 million square feet. E-commerce sales for 2012 replaced the need for more than 175 such mega-malls or 225 typically sized regional malls.

Assuming that the average sales tax rate at the state level is 5 percent (see table), over $11 billion in sales taxes were not collected last year. While this number is probably too high (because some sales tax revenue is collected on Internet sales), it illustrates the magnitude of the problem.

The complexities of collecting sales tax on Internet sales have been analyzed, discussed and debated for nearly 15 years.

Signs point to an impending resolution.

One of the main complaints online retailers have regarding Internet sales taxes deals with tortuous reporting standards JANUARY 2014

Dr. Dotzour (dotzour@tamu.edu) is chief economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Many Internet retailers do not collect sales tax on online purchases. This means states have less revenue to fund local and state government activities. That can result in higher property taxes to make up the difference.

9

Housing Markets

X E L P O R T E M ON THE

BY ALI ANARI

T

he Dallas-Fort Worth (DFW) housing market, like many others around the country, had a surge and then decline in foreclosed and financially distressed residential properties coming to market from 2003 to 2011. The Real Estate Center researched the impact of the recent housing boom-bust cycle and the Great Recession of 2007 on major Texas metropolitan housing markets. The study was based on DFW home sales transaction data from October 2003 to June 2013 obtained from the North Texas Real Estate Information Services Multiple Listing Service.

The research found that the mortgage rate and the area’s unemployment rate were the main factors behind the level of distressed sales in the DFW market. The 2003–08 upward trend in the sales of distressed homes was associated with a short-run, slightly upward trend in mortgage rates coupled with loose credit and exacerbated by a rising unemployment rate. Declines in both mortgage and unemployment rates

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MARKET MEND

AND JAMES P. GAINES

due to economic stimulus policies and the general recovery of the U.S. economy since 2010 resulted in fewer distressed sales and improvement in DFW nondistressed housing prices.

Dallas Housing in the Great Recession Texas did not record a house price bubble thanks to the availability of low-cost land and flexibility of the local housing markets’ supply side. But the state’s local housing markets suffered a setback initially because of increasing mortgage rates and later the Great Recession.

DFW’s upward trend in distressed homes sold in the early 2000s peaked toward the end of 2008 followed by a slow, downward trend (Figure 1). The number of distressed homes sold increased from 437 units in October 2003 to an all-time high of 1,379 in April 2008. The smoother moving average of distressed homes sold, that is, the average of the past 12 months TIERRA GRANDE

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1,600

Figure 1. Distressed Housing Units Sold in Dallas Area

Number

1,200

800

400 Number of Units Moving Average Number of Units 0 2003

2005

2007 2009 Year/Month

2011

2013

Sources: Multiple Listing Service and Real Estate Center at Texas A&M University

8,000

Figure 2. Nondistressed Housing Units Sold in Dallas Area

Number

6,000

4,000

2,000 Number of Units Moving Average Number of Units 0 2003

2005

2007 2009 Year/Month

2011

2013

Sources: Multiple Listing Service and Real Estate Center at Texas A&M University

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Figure 3. Percentage of Distressed Homes Sold 50 40 Percent

recalculated for each month, rose to a record high of 1,204 in March 2009.

By comparison, nondistressed homes sold increased from 4,529 units in October 2003 to a record of 7,762 units in June 2006. The moving average of nondistressed homes sold hit an all-time high of 5,855 units in August 2006 (Figure 2). ividing the number of distressed homes sold by the total number of homes sold in each month gives the percentage of distressed homes sold (Figure 3), together with the moving averages of the percentages. The percentage of distressed homes sold fluctuated around 10 percent until January 2006. The moving average increased from 6.3 percent in October 2003 to 11.7 percent in February 2005 and fell to 9.8 percent in March 2006. From the end of 2006, the percentage of distressed homes sold rose sharply, reaching a peak of 36.5 percent in January 2009 (Figure 3). The 12-month moving average reached its peak of 26.7 percent in May 2009.

Percentage of Distressed Homes Sold Moving Average of Percentage of Distressed Homes Sold

30 20 10 0 2003

2005

2007 2009 Year/Month

2011

2013

Sources: Multiple Listing Service and Real Estate Center at Texas A&M University

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Figure 4. 30-Year Conventional Mortgage Rate

Percent

A number of Federal The higher percentage of distressed homes 7 Reserve policy initiasold was even more significantly fueled by tives, the Housing and growing unemployment in the area throughEconomic Recovery out the Great Recession (Figure 5). The aver6 Act of 2008, and the age unemployment rate nearly doubled from American Recovery just over 4 percent in 2008 to more than 8 and Reinvestment Act percent during most of 2010–11.

5 of 2009 resulted in a While higher mortgage rates triggered downward trend in growing distressed sales, falling mortgage the number and perrates did not reduce distressed sales until centage of distressed the rate fell to less than 5 percent in 2010 4 homes sold in late (Figures 3 and 4). Facilitated by mortgage Mortgage Rate 2009 and early 2010. rates less than 5 percent from mid-2010 and Moving Average Mortgage Rate The moving average a falling unemployment rate from the end 3 of the percentage of of 2011, the percentage of distressed homes 2003 2005 2007 2009 2011 2013 Year/Month distressed homes sold sold in the DFW area began falling in midSource: Board of Governors of the Federal Reserve System fell to 22.3 percent in 2011, a trend that continues.

May 2010. However, Distressed, Nondistressed Home Prices mainly because the national economy’s recovery was fragile, ith abundant supplies of land, a relatively more the trend was temporary, and the moving average percentage efficient land acquisition and development process, resumed an upward trend that lasted until June 2011, when it and a milder general recession, Texas’ local housing was 26.3 percent. The percentage of distressed homes sold fell markets, including DFW, the state’s largest housing market, to 14.7 percent in June 2013, still nearly double the pre-Great avoided a major home price bubble-bust cycle. However, the Recession level. overall housing downturn that evolved led to growing sales of The rise and fall of the percentage of distressed homes distressed housing units, which affected overall home prices. sold in the DFW area closely correlated with the rise and fall The average selling price of nondistressed homes from October of long-term mortgage rates and the local area’s unemploy2003 to June 2013 was $194,824; the low was $166,750 and the Figure 5. Unemployment Rate in Dallas Area high $230,955 (Figure 6). The average selling price of distressed October 2003 to March 2013 homes was $111,129, with a minimum of $96,792 and a maxi9 mum of $123,441 (Figure 7).

Nondistressed home sales prices trended upward from Unemployment Rate 8 2003 until February 2009 when the moving average sellMoving Average Unemployment Rate ing price reached $200,287 (Figure 6). The moving average 7 selling price fell to $193,280 in May 2010, a decrease of Percent

W

6 240

5

2005

2007 2009 Year/Month

2011

2013

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

ment rate. The moving average rate for 30-year conventional mortgage loans was less than 6 percent from October 2003 to April 2006, coinciding with low rates of distressed homes sold (Figure 4). The moving average mortgage rate rose from 5.74 percent in August 2005 to 6.43 percent in October 2006 and remained above 6 percent until the end of 2008 when it began a steady decline to around 3.5 percent.

12

Thousands of Dollars

Sale Price Moving Average Sale Price

4 3 2003

Figure 6. Sale Prices of Nondistressed Housing Units Sold in Dallas Area

220

200

180

160 2003

2005

2007 2009 Year/Month

2011

2013

Sources: Multiple Listing Service and Real Estate Center at Texas A&M University TIERRA GRANDE

130

Figure 7. Sale Prices of Distressed Housing Units Sold in Dallas Area

68

110

100

90 2003

Distressed Price to Nondistressed Price Percentage Moving Average Distressed Price to Nondistressed Price Percentage

64

120 Percent

Thousands of Dollars

Sale Price Moving Average Sale Price

Figure 8. Distressed Prices as Percentages of Nondistressed Prices

60 56 52

2005

2007 2009 Year/Month

2011

2013

Sources: Multiple Listing Service and Real Estate Center at Texas A&M University

48 2003

2005

2007 2009 Year/Month

2011

2013

Sources: Multiple Listing Service and Real Estate Center at Texas A&M University

Distressed Prices as Percentages of Nondistressed Prices

sales increases, the ratio of distressed-to-nondistressed price 3.6 percent from the previous peak. Distressed home sales declines. A smaller price ratio translates into a larger price prices steadily declined through 2011 (Figure 7). discount for distressed Dividing distressed properties. A 62 percent home sales prices by Figure 9. Impacts of Ratios of Distressed to Nondistressed Units price ratio, for example, sales prices of nonon Relative Prices of Distressed and Nondistressed Units means that distressed distressed homes and 63 properties sell for 38 multiplying by 100 62 percent less than nongives a time series of distressed properties. distressed prices as 61 Similarly, a lower percentages of nondis60 price ratio, say 56 tressed prices together percent, means that with 12-month moving 59 distressed properties averages (Figure 8). sell for a 44 percent Before foreclosures 58 discount. The overall increased in 2007, 57 trend line indicates that there were minor if the percentage of dischanges in the aver56 tressed sales increased age trend. Distressed 55 by 10 percent, say prices ranged roughly 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 from 20 percent to 30 between 60 and 65 perRatios of Distressed Units to Nondistressed Units percent, the percentage cent of nondistressed Source: Real Estate Center at Texas A&M University of distressed-to-nondisprices. A downward tressed prices dropped trend began in 2007 from 59.5 percent to 57.8 percent. and continued through 2009. It became steeper in 2010 and 2011 and stabilized in 2012 and 2013 at historically low levels, Dr. Anari (m-anari@tamu.edu) and Dr. Gaines (jpgaines@tamu.edu) are around 52 percent. After dipping in 2009 and 2010, nondisresearch economists with the Real Estate Center at Texas A&M University. tressed home prices showed a recovery, climbing consistently from mid-2011. Distressed home prices were still falling in THE TAKEAWAY 2011 but started a weaker upward trend in 2012 and early 2013.

Distressed Sales’ Impact on Home Prices The ratios of distressed-to-nondistressed prices relative to the ratio of distressed-to-nondistressed unit sales are illustrated in a scatter diagram (Figure 9). The computed trend line shows a significantly negative relationship between the price ratio and the sales ratio. That is, as the percentage of distressed unit JANUARY 2014

Research findings indicate an ongoing recovery in the DFW housing market. The percentage of distressed home sales relative to total sales has declined, and the average price of distressed sales has risen. As the distressed sale proportion declines, expect the price discount for such sales to decrease.

13

Commercial Markets

14

TIERRA GRANDE

Texas is home to about 280,000 employees in oil production and oil services. Most of these workers are here to exploit Texas’ vast hydrocarbon resources, which make up 26.5 percent of U.S. oil reserves and 29.4 percent of U.S. natural gas. These reserves are scattered throughout the state from East Texas to Eagle Ford to the Permian Basin, and Texas oil workers generally follow the drilling rigs.

JANUARY 2014

15

Thousands of Jobs

There is, however, an imporFigure 1. Houston Upstream Oil tant exception. The Houston Employment Producers and Oil Services metropolitan area has 107,000 120 workers in oil production and services, 38.1 percent of the state total (Figure 1). But in 100 2012, the Texas Railroad Commission issued only 445 drilling permits for the ten-county 80 region, or 1.6 percent of the state total. There was other drilling in southeast Texas, of 60 Services course, but not nearly enough to explain the large number 40 of oil workers found in the Houston area.

Producers Houston is headquarters 20 for the American oil industry, bringing together an extraordinary concentration of manage0 2000 2004 2008 2012 ment and technical skills dedicated to oil markets that reach Source: Bureau of Labor Statistics far beyond Texas or the United States. Complexities arise when we ask how the industry came to be located there and why it stays. More complications come when we recognize there is much more to Houston’s oil industry than just “upstream” producers and service companies.

The table below describes various sectors of the local industry, with examples of companies that support each segment. Houston has a large downstream refining and petrochemical sector, much of it located on the ship channel, as well as the pipeline and engineering companies that serve upstream and down.

The Upstream Cluster

H

ouston’s upstream exploration and production (E&P) form a cluster of economic activity no different than the concentration of finance on Wall Street, autos in Detroit, movies in Hollywood or high tech in San Jose. Each of these cities is closely identified with the major industry located there and serves as home base for its highest levels of management and technical skills. These clusters form for much the same reasons: they house highly specialized, industry-specific skills that broadly complement one another, bring related firms into proximity, and provide an institutional framework to share the industry’s knowledge base.

At the heart of Houston’s oil-related activity are the large, integrated producers like ExxonMobil, Shell and ConocoPhillips, and the independents such as Apache, Anadarko, EOG and Noble.

These companies decide what to drill for and where, arrange the financing and assume the risk of exploration. The oil service companies are hired to bring these projects to fruition, carrying out the drilling, cementing, down-hole testing and other tasks necessary to deliver the well. Similarly, pipeline companies work with producers to deliver hydrocarbons to market, and the engineering companies support both upstream and downstream on specific projects.

The most important glue that binds any cluster together is a skilled and specialized workforce. Houston has a deep pool of geologists, geophysicists, petroleum engineers, resHouston’s Oil Industry by Sector and Selected Companies Operating in Each One ervoir engineers, chemical engineers and other Upstream Oil Companies oil-related specialties. The Producers level of skills required • Integrated ExxonMobil, Shell, Chevron, ConocoPhillips • Independent Apache, Anadarko, EOG, Noble by the clusters is generOil Services Schlumberger, Baker Hughes, Halliburton, Weatherford ally high, reflecting the Midstream Pipelines and Processing Enterprise Products Partners, Plains All-American, Enbridge, Kinder Morgan industry’s most demanding Downstream management and technical • Refining ExxonMobil, Valero, Marathon requirements.

• Petrochemicals ExxonMobil, ChevronPhillips, Dow, LyondellBasell In Houston, the typical Engineering KBR, Technip, WorleyParsons, S&B, Mustang upstream oil and gas job paid $140,500 in wages, Source: Dr. Robert Gilmer

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TIERRA GRANDE

OIL STORAGE TANKS are ubiquitous in the Houston area. Some have murals depicting famous people and events in Texas history.

The petrochemical plant in the background is one of dozens in the area.

salaries and employer-paid benefits in 2011, almost double the $71,000 earned by the typical Houston worker. Once the cluster is in place, a virtuous cycle forms to maintain and expand the base of specialized skills. The oil industry locates in Houston because the skills are there; workers with those skills come to Houston because the jobs are there.

Geological and geophysical societies are based there and share cutting-edge technical advances. The biggest trade and technical conferences in the industry come to the city. The 2013 Offshore Technology Conference drew 104,000 attendees to Houston. Local universities offer petroleum engineering degrees and MBAs specialized in energy markets. Local banks know how to finance the oil and gas exploration. Every cluster provides access to industry intelligence that is less available to business located elsewhere.

An industry downturn generally forces consolidation of companies into the cluster as firms located elsewhere must lower costs to survive. Each downturn in the oil industry in recent years has seen a wave of E&P companies or their divisions relocating to Houston from Midland, New Orleans and Tulsa.

This is at the core of Houston’s unique role in the American oil industry and explains why it has no serious competitor.

If clusters have enormous competitive advantages once established, their initial location is often an historical accident.

JANUARY 2014

For Houston, the key event was the discovery of the first great oil gusher at Spindletop in 1901. Texaco, Gulf Oil and Sun Oil all quickly formed at Spindletop or at later discoveries in southeast Texas, and by 1904 the search for oil reached the Humble oil fields outside Houston. Houston was the closest major rail center with good telegraphy services, and — by a stroke of luck — it became the home of a new Texas industry.

Global Role for Oil Services

W

hen the North Sea opened for exploration and production in the 1960s, the British set a public policy goal of developing their own oil service industry.

Recognizing that oil was a depleting resource, the British wanted to be able to take their oil-related skills to Africa, Asia or wherever the next oil frontier would be found. The American oil service industry, based in Texas and particularly Houston, was the model they chose to emulate.

This British effort, like later attempts by the Norwegians and French, was largely a failure. These countries could not break the American monopoly on oil services, a product of experience in U.S. oil fields, access to the best technology and a grip on that technology through key patents. Competitor countries often made gains in peripheral activities such as platform construction, building drill ships or supply boats, or in offshore

17

OIL TANKERS AT THE MOUTH of the 25-mile-long Houston Ship Channel are reminders that the area’s transportation capabilities are one reason Houston became the center of the oil industry. Ships from 154 countries use the Port of Houston, more than any other U.S. port.

Linkages to Manufacturing

T

hanks to the boom in oil and natural gas over the past decade, Houston has added thousands of manufacturing jobs since 2003. Few other metropolitan areas can make a similar claim. During this period, the U.S. economy was losing 2.5 million manufacturing jobs.

Houston’s most obvious ties to oil- and gas-related manufacturing are refining and petrochemicals, which together account for about 48,000 well-paid jobs. Manufacturing of fabricated metal and machinery industries added 40,000 new jobs since 2003, now totaling 117,000 (Figure 2). These industries are not in the energy sector, but they are strongly linked to upstream E&P in Houston, supplying equipment such as pumps, compressors, drill pipe, drill bits and custom-machined products.

The recent pressure exerted on Houston’s manufacturing base by the expanding oil sector is demonstrated by the average

18

Figure 2. Machinery and Fabricated Metal Lead Growth in Houston’s Manufacturing Jobs 60 55 Thousands of Jobs

logistics; but once the drilling began, American companies controlled core down-hole activities such as drilling, cementing and testing.

American control remains in place today, led by the four largest oil service companies: Baker Hughes, Halliburton, Schlumberger and Weatherford. They defend their technical leadership and market share with billions of dollars spent on research and development annually. Although three of these companies maintain headquarters abroad for tax or administrative purposes, their employment base is firmly in Houston.

They have helped Houston become the most sophisticated oil-related labor force in the world, and these companies rely on their Houston-based employees for their most challenging work. Virtually no difficult oil-related project is carried out at home or abroad without substantial input from one or more of these companies.

Fabricated Metal Machinery

50 45 40 35 30 2000

2004

2008

2012

Source: Bureau of Labor Statistics

workweek, which reached 49.1 hours in 2012, compared with 43.3 in Dallas and 41.7 in the United States.

Like Houston’s E&P activities, these manufactured goods reach a market far beyond Texas. Last year, Houston passed New York to become the number one exporter among U.S. metropolitan areas, with $110 billion in exports (Figure 3). Oilrelated industries — crude oil, refined products, petrochemicals and machinery — accounted for 85 percent of 2012 exports.

Current Oil Boom Since December 2003, Houston has added 497,000 payroll jobs, more than the total number of jobs in Tulsa, Omaha or Honolulu. The 2003 date is important because it marks TIERRA GRANDE

S

Figure 3. Largest U.S. Metro Exporters Houston New York Los Angeles Detroit

Figure 4. Capital Expenditures for Exploration and Production 300,000

279,136

250,000 Constant $ Million

the point at which oil prices began to rise quickly from $40 per barrel to $140 just before the financial crisis. Oil prices fell hard at the height of the crisis in 2009, and Houston lost 100,000 jobs to a combination of the U.S. recession and a setback in oil markets. But prices bounced back quickly, and Houston’s 2009 job loss was restored by the end of 2011. More than 100,000 new jobs were added in 2012, and strong growth continues today. ince 2009, Houston’s job growth stands in stark contrast to a weak U.S. recovery, adding jobs at more than twice the national rate. History tells us that the price of oil is always the key factor that sets Houston’s economy apart.

Despite the continued size and importance of the E&P sector, Houston seems to have diversified in the 1980s and 1990s, and the volatility that marked the local economy in the 1970s and 1980s has dissipated. That is the good news.

The bad news is that the source of the diversification — the U.S. economy — recently has been weak relative to the growth in oil markets.

While the U.S. recovery has provided little impetus to Houston’s economy, the current boom in E&P spending is unprecedented. We often monitor changes in the drilling cycle indirectly through the rig count. But new technology to extract oil and natural gas from shale has been the hallmark of this latest boom, bringing widespread use of expensive horizontal drilling and fracturing. High oil prices also have opened the door to other high-cost technologies such as deepwater drilling and tar sands. The cost or effectiveness of a vertical rig from the 1980s simply cannot be compared with today’s horizontal or deepwater rig. E&P capital expenditures per working rig have quadrupled since 2003, resulting in a surge in spending unrelated to the number of working rigs.

Exploration and production budgets were $65.3 billion in 1982 (Figure 4), the year that marked the end of the last great oil boom, and the beginning of the great Texas oil and real estate crash. E&P spending did not return to 1982 levels until 2003, and since then, E&P spending has increased by a factor of four to $279.1 billion. The current boom in Houston’s econ-

200,000 150,000 100,000 65,318 44,832

50,000 13,855 0

1982

1992

2002

2012

Source: International Trade Commission

omy is the result of a massive and unprecedented expansion of E&P spending. here does this boom go from here? Maybe it all comes crashing down as the price of oil falls to less than $65 per barrel, the price needed to sustain drilling in oil shale or deep water. The price of natural gas collapsed in late 2011, and today 80 percent of drilling at home and abroad is directed to oil. Or perhaps it ends in a whimper, as the global commodity cycle of the last ten years simply winds down. Oil prices would settle to lower levels, not necessarily under $65, but low enough to reduce margins and return drilling to a pedestrian pace. Or maybe it continues as it is, with high oil prices driving higher levels of drilling and a sustained push for American energy independence.

Which is it? No one knows because no one can predict the price of oil. Certainly oil markets have let the Houston economy down in the past — in 1982, 1986, in the Asian financial crisis of 1998, and in the American crisis of 2009.

And they will disappoint again. The biggest mistakes of past downturns have stemmed from thinking oil prices were predictable: they would never go down, or they would not go down soon. The hardest lesson learned from these downturns is remarkably simple: Never bet your business on the price of oil. Now is as good a time as ever to keep that lesson firmly in mind.

W

Dr. Gilmer (rwgilmer@Central.UH.edu) is director of regional forecasting at Bauer College of Business at the University of Houston, and has a longstanding relationship with the Center.

Seattle Miami

THE TAKEAWAY

Chicago DallasFort Worth San Jose Minneapolis 0

20

40 60 80 Billions of Dollars

100

120

Houston’s oil industry is a cluster of economic activity that starts with exploration and production. Oil service companies do the drilling and bring in the wells, and pipeline companies work with producers to deliver the product to markets. A highly skilled workforce of geologists and engineers in oil-related specialties, along with an abundant supply of experienced workers in support services is key to Houston’s role as the headquarters of the Texas oil industry.

Source: International Trade Commission JANUARY 2014

19

Homebuying

N

ew rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) took effect on January 14th and are expected to have a significant impact on residential mortgage markets. One of the areas that could be hardest hit is the financing of manufactured housing, a critical segment of affordable housing in Texas.

D.J. Pendleton, executive director of the Texas Manufactured Housing Association (TMHA), offers an overview of the major consequences for his industry in this interview. Pendleton served on the industry’s Dodd-Frank task force, which evaluated proposed mortgage regulations and advocated on behalf of the manufactured housing industry.

Which Dodd- Three rules should be the most challenging for our industry, and I Frank rules will think all three are primarily meant to have the biggest protect the buyer.

First is the ability to repay (ATR) impact on rule, which requires lenders to verify manufactured that borrowers can actually make the mortgage payments. This rule defines housing (MH) a “qualified mortgage” (QM) and lending? explains how that designation relates

to the lender’s level of liability stemming from the origination process.

Then there’s the high-cost mortgage loan/home ownership and equity protections act (HOEPA) rule. A non-QM loan will be classified as “high-cost” or “predatory” based on tripping one of two triggers, either an annual percentage rate (APR) cap or a points and fees cap.

Finally, the loan originator compensation (LO Comp) rule mandates who can be classified as a loan originator based on their activities or actions. Any compensation paid to any individual defined as a loan originator must be included in the calculation of points and fees. That means this rule can potentially influence every other rule, limit and increased liability that comes with exceeding points and fees thresholds.

20

What are the The rule establishes two types QMs. First is the “safe harbor” QM, important of basically a plain vanilla, fully amortizelements of the ing loan with a low fixed interest rate an adjustable rate that falls within ATR Rule? or specific parameters and has low points and fees. Safe harbor QMs will be issued to borrowers with a relatively small debt load compared with loans made before the recent financial crisis.

Sandwiched between a safe harbor QM and non-QM loans is the “rebuttable presumption” QM. Unlike the safe harbor provision, which protects lenders from borrower lawsuits, this loan can be challenged in court. However, borrowers must prove that the lender didn’t make a reasonable and good faith determination of their ability to repay the loan at the time it was originated.

Borrowers will have a maximum of three years after loan origination to bring such claims against their creditors. This time limit doesn’t apply if the lender or any assignee ever attempts to bring a foreclosure action against the borrower.

Lenders who fail to comply with the ATR Rule are subject to a broad array of civil penalties and cease-and-desist orders from the Consumer Financial Protection Bureau (CFPB). These penalties are far from toothless. The civil penalties alone can be up to $5,000 per day for any violation and up to $25,000 per day for a reckless violation. The “nuclear option” penalty is up to $1 million per day for a knowing violation.

How does the The rule determines whether a loan is a QM or not based on a comATR Rule affect parison of the spread between a potenmanufactured tial loan’s APR and the average prime offer rate (APOR) published weekly by housing lending? the Federal Reserve Board.

The problem is the APOR is based on the pricing terms for comparable loan transactions pulled from a Freddie Mac survey of prime mortgage lenders. The TIERRA GRANDE

few MH lenders there are can’t access funds at the APOR. As a result, it will be extremely difficult for MH loans to qualify for QM status.

Calculation of loan points and fees will vary. The rule states that loans above $100,000 cannot have points and fees exceeding 3 percent of the loan amount. For smaller loans, the rule created four tiers for determining total points and fees depending on loan amount.

While the tiers exceed 3 percent, the dollar amounts are relatively small when compared with what can be collected on larger loans. So I don’t think the rule went far enough to pay for the cost of originating loans for the five or six national MH lending portfolios.

I say portfolios because there really is no secondary mortgage market for MH loans. The ATR rule creates “temporary QM status” for loans originated until 2021 as long as any of the federal agencies such as Fannie, Freddie or HUD insure, purchase or provide a guaranty for them.

Temporary QMs will play a significant role in traditional lending for site-built homes. But their impact on MH lending will be miniscule. Government-sponsored entities do not participate in MH lending at any significant level, especially personal property loans. So the MH lenders’ cost of funds and liquidity have always been and will continue to be a problem for our industry.

You mentioned Under the rule, a loan will be classified as high-cost if its APR the APR and points is 6.5 percent or more above the and fees triggers APOR. However, if it’s a personal property or “chattel” loan less related to the high- than $50,000, the cap is raised to cost/HOEPA rule. 8.5 percent above APOR. There are approximately ten MH chattel Could you explain loans for every one MH real propthem in a little erty loan. Between January and July 2013, 7,815 chattel loans and more detail? 746 real property loans originated in Texas.

The points and fees cap is split. For loans of $20,000 or more, total points and fees cannot exceed five percent of the total loan amount. The cap is 8 percent or $1,000, whichever is smallest, for transactions less than $20,000.

What’s the I think the big impact will come from the extremely high liabilities and significance of penalties related to originating and a loan being investing in high-cost loans.

Borrowers may get their loan rescinded classified as if certain prohibited terms are included. high-cost? Lenders will now be subject to much

higher damages than are allowed for other types of Truth in Lending violations. Mandatory credit counseling before entering into such a loan also adds expense. Finally, any investor in or purchaser of a high-cost mortgage will also be subject to any claims and defenses against the original lender.

JANUARY 2014

It’s difficult to obtain industry-wide lending data on MH loans. However, we spoke to several of the largest lenders in Texas about the possible impact on their originations. These select lenders originated approximately 47 percent of all the MH loans in 2012. They estimate that 40 to 45 percent of all MH loans originated in Texas during 2012 would have failed either the APR or points and fee caps, putting them in the high-cost category. That represented about 2,500 loans that year. So I think the rule may create a real dampening effect on the origination of and investment in any MH loans that get classified as high-cost. he lenders calculated that just raising the APR cap from 8.5 to 10 percent over APOR for chattel loans less than $50,000 would have caught about 91 percent of those 2012 loans here in Texas and kept them out of the high-cost category. Despite countless efforts, comment letters and meetings with the CFPB over the last 18 months, they are unwilling to raise the rates for manufactured home loans.

I see three possibilities for the way this rule will play out.

One is that the caps are too low for lenders, so high-cost loans don’t get originated and potential borrowers get turned away.

Another possibility is that retailers and factories cut their profit margins just to keep the lights on and try to survive until the rule can be changed. That’s a pretty risky strategy.

A third possibility is an interest rate “buy-down” to induce lenders to make the loan. In many cases, the MH retailer will be the source of the buy-down through seller points. If this occurs, the entire MH market will adjust by increasing the cost of manufactured homes.

I believe this will adversely impact both buyers and sellers as some consumers will be priced out of homes. That will negatively impact retailers and manufacturers. For those consumers who can still afford the home, they will be paying more for less simply because of the limits placed on lenders through this “consumer protection” rule.

Let’s say this third option is pervasive, and a year from now the MH industry has sold about the same number of homes.

CFPB announces that the sky didn’t fall and claims victory, but the manufactured housing industry is stuck with this model and consumers still foot the bill.

T

What should The rule defines a loan originator a person who, in expectation of readers know as direct or indirect compensation or other about the LO monetary gain, performs any of the activities: Comp Rule? following • takes a loan application, • offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person or • represents to the public through advertising or other means of communication that he or she can or will perform any of these activities.

The rule exempts individuals performing purely administrative or clerical tasks on behalf of a loan originator under certain conditions. Clerical and administrative exceptions are the

21

most critical in the final rule. Exceptions apply only if there is a direct employee-employer relationship. The final rule specifically eliminates the clerical and administrative exception for other agents or contractors.

In our retail sales setting, where there are only a handful of lenders and no mortgage brokers in the chattel space, the act of “referring” takes on a special challenge. The final rule went to extensive lengths to justify how the CFPB interpreted a “referral” as a trigger for classification as a loan originator.

Referring includes any oral or written action directed to consumers that can influence them to select a particular loan originator or creditor. So I believe the rule makes it fairly easy to inadvertently become classified as a loan originator.

of reprisal. That should be a competitive advantage because they will be able to talk credit, send potential buyers to a specific lender and help them fill out a credit application.

However, one more uncertainty arises when the salesperson in the transaction is also a licensed loan officer. The rule states that, once a salesperson is engaged in loan origination activities, all compensation must go toward points and fees. Some concerned lenders are looking at this as a possible liability to becoming licensed if it means that both origination charges and the salesperson’s commission are included in points and fees.

How will The list of administrative penalties and liabilities for violations of this rule manufactured is lengthy. For the MH industry in parhousing be ticular, in which retailers are not direct employees of lenders and therefore not affected by the exempt from the referral activity to a LO Comp Rule? lender, another dilemma arises. If sales-

hole. This is not to say there haven’t been gains made and modifications obtained on our behalf, without which our industry would have been eliminated completely. However, at a fundamental level I think politicians and regulators still have great difficulty understanding our industry.

We also have been neglected by the government-sponsored entities, which significantly support the site-built industry. This has severely limited the MH industry’s liquidity, increased our cost of funds and drastically restricted our loan originating and lending environment.

Finally, I’m convinced that federal regulators lack knowledge of how we differ from the traditional site-built home industry.

At the sales level, we have retail lots with retailers. We do not have Realtors and mortgage brokers. We primarily serve consumers seeking affordable homes in rural areas. We are the only form of unsubsidized, affordable family housing that exists through a small number of fixed rate, fully amortizing portfolio lenders.

Our industry did not contribute to the subprime-lending situation that led to the housing crisis. Yet the collateral damage inflicted on us will dramatically affect the way we do business and the consumers we serve.

Looking ahead, we believe these regulatory changes will have a negative impact on all involved.

I’m sure the CFPB would see things differently. Only time will tell who is right.

Editor’s note: For a more in-depth discussion of Dodd-Frank’s effect on manufactured housing, see Pendleton’s article “The Road Ahead” at http://www.texasmha.com/news/featured/ mhtq-cover-story-the-path-ahead.

persons cannot steer customers to one of the five or six lenders available and navigate the buyer through viable lending programs offered by lenders, the borrower may not be able to find financing.

The CFPB did provide additional guidance in the final rule.

They allow a salesperson to provide general information about creditors and loan originators that may offer financing for manufactured homes in a general area when doing so does not cross the delicate line of “referring.” These types of general acts do allow for a salesperson to, in a neutral manner, provide general brochures and information about creditors.

I don’t think the rule provided the “bright line” the MH industry had continuously requested, so we are left to navigate under these general activity-based allowable examples. Without a rule change, it will take years of regulation and litigation to identify with certainty which specific acts cross the line and make a salesperson an accidental loan originator.

Another issue is prequalification. Again, this is where the MH industry deviates from the traditional home buying and selling process, in which buyers routinely know before shopping for a home how much of a loan they can qualify for. Our retail sales setting is more akin to buying a car or boat off a retail lot.

Many customers want to look without knowing anything about their potential borrowing capacity. Salespeople must be able to focus in and show potential buyers homes they can afford.

The cost to obtain a mortgage broker license is somewhere between $500 and $2,000 and 20 hours of class time. The bigger issue is whether MH salespeople will be able to pass the broker exam, which is based on traditional lending terminology. Individuals who have worked only with chattel loans are generally unfamiliar with that terminology.

Some salespeople may still choose to obtain a mortgage broker’s license just to be able to talk about lending terms without fear

Any final The most frustrating part of this entire effort is the fact that our niche industry is a thoughts? square peg that doesn’t fit into CFPB’s round

‘Our industry did not contribute to the subprime-lending situation that led to the housing crisis. Yet the collateral damage inflicted on us will dramatically affect the way we do business and the consumers we serve.’

22

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

THE TAKEAWAY The Dodd-Frank Wall Street Reform and Consumer Protection Act was intended to protect low-income homebuyers but may instead wind up limiting their housing choices.

Expectations are that the bill will seriously damage the manufactured home industry by making it more difficult for buyers to obtain financing.

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Investment

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hen most people think of IRA investments, they typically envision stocks, bonds and various types of mutual funds. Relatively few seem to be aware that real estate investments can also be included in an IRA as long as the IRA is “self-directed” and IRS requirements are met. Key advantages of including real estate investments in self-directed IRAs (SDIRAs) are diversification and the deferral or elimination of taxes on annual investment income and gains from sales.

The number of SDIRAs has doubled during the past five years. The Wall Street Journal (April 2012) reported that the Retirement Industry Trust Association estimated that $4.6 trillion was held in IRAs in total, with 2 to 5 percent invested in SDIRAs. In general, there are two types of IRAs (SDIRAs included) — traditional and Roth. Investments in traditional IRAs are tax deductible; tax on all earnings is deferred until the earnings are withdrawn; and all withdrawals are fully taxable at ordinary tax rates (which presently range from 10 to 39.6 percent), even if the withdrawals are associated with gains from the sale of assets. Thus, the capital gains tax rate does not apply.

Penalty-free withdrawals are allowed to begin at age 59½ but must begin at age 70½. In sharp contrast, contributions to Roth IRAs are made with after-tax dollars (that is, they are not deductible), but all withdrawals, including annual earnings and gains from sale, are tax-free.

Also, withdrawals are not required.

Annual contribution limits for any type of IRA (including both traditional and Roth SDIRAs) can be as low as $5,500 but may be higher for any IRAtype plan that small businesses offer JANUARY 2014

their employees.

Large balances in SDIRAs may be created through annual contributions made over many years, rolling over funds from other IRAs and/or rolling over traditional/Roth 401(k) plans when employees retire or move from one employer to another.

Most IRAs are administered by large investment houses, banks, and savings and loan institutions. Investments in these IRAs are typically required to be stocks, bonds, mutual funds and similar investments.

The only way to hold income-producing real estate in an IRA-type plan is to create an SDIRA. To do so, the investor must locate an SDIRA custodian/trustee approved by the IRS who will allow the investor to invest in real estate. Such custodians may be found via the Internet and may be a local firm or a large national firm that specializes in SDIRAs. There are very few large firms, but they are easy to find online. arious types of fee arrangements exist for SDIRAs — flat fees, fees based on fair market value, or a combination. Annual administration flat fees may range from $250 to more than $1,500 depending on fair market value (FMV). Some annual fees reflect the number of properties held in the SDIRA. Annual FMV percentage fees may range from .4 percent to 1.5 percent of FMV, according to the Wall Street Journal (April 2012).

Other fees may be charged for each transaction (each SDIRA contribution as well as each property acquisition or sale). Also, there may be restrictions on the number of real estate trades in a given year. In contrast, some SDIRAs

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are referred to as “checkbook” SDIRAs and literally enable investors to write a check to purchase SDIRA assets (see restrictions that follow). Investors need to perform due diligence and carefully compare SDIRA custodian arrangements.

Another set of critical issues pertains to the strict IRS rules governing SDIRAs. The only debt allowed to be in SDIRAs is property acquisition debt. Transactions are not allowed to take place between relatives and the SDIRA. The SDIRA owner may not sell the SDIRA assets he or she owns outside the SDIRA. Other prohibitions preclude (1) SDIRA investments in the SDIRA owner’s (or a relative’s) personal residence, (2) using the SDIRA as collateral for a loan and (3) receipt by the SDIRA owner of compensation associated with an SDIRA asset. As with all tax-related transactions, careful record-keeping by the SDIRA owner and/or the custodian is crucial.

Running afoul of IRS requirements could bring about penalties, immediate taxation of SDIRA funds and possible termination of SDIRA tax-preferred status.

Thorough investment analyses are as important for SDIRA real estate investments as any other real estate investments. For specific advice, consultation with a tax accountant or tax attorney is recommended.

Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate Center at Texas A&M University and a professor of accounting in the Kelley School of Business at Indiana University.

THE TAKEAWAY Self-directed IRA investments in income-producing real estate may provide significant advantages such as tax deferral, tax-free income and diversification. Tax and nontax complexities require due diligence before establishing an SDIRA.

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Property Taxes

By Charles E. Gilliland

Texas relies heavily on property taxes for public education, and because of this, homeowner tax burdens are high compared with most other states. To ease this situation, the Texas Property Tax Code contains a series of measures exempting qualiďŹ ed individual homeowners from all or part of the property tax liability.

Those who live in their own homes, are 65 or older or disabled, or who are disabled veterans can take advantage of various homestead exemption allowances. However, the exemption does not happen automatically. Owners must file a valid application with the local appraisal district to qualify for reduced taxes.

Both the owner and the property must qualify for the exemptions, and each exemption requires a timely application. An owner may file an application up to one year after taxes would have become delinquent.

The owner must occupy a property adapted for and used as a residence. The homestead exemption is not lost if the homeowner temporarily moves, does not establish another principal residence, intends to return to the home, and is absent for less than two years. Persons who intend to return but live outside of the United States as a member of the military or who live in a facility that provides services related to health, infirmity or aging may continue to receive homestead exemptions for an indefinite period. The exemption also covers up to 20 acres with the residence.

Mandatory Homestead Exemptions

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mandatory exemption is available to all owners of qualifying homesteads throughout Texas. The total amount of the exemption depends on the owner’s circumstances, options exercised by the taxing jurisdictions, and property use. The Texas Property Tax Code includes several mandatory homestead exemptions. First, owners occupying a home as their primary residence can qualify that homestead for an exemption of $3,000 of assessed value from county tax levies for farm-to-market roads and flood control. This exemption applies for all owners of a residence homestead in every Texas

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county. For counties with a $1 per hundred dollars tax rate on the listed items, this exemption will save the owner $30.

An additional homestead exemption from school taxes reduces taxable value by $15,000 for all qualified homeowners.

This mandatory exemption applies to homesteads in all Texas school districts. A $1 tax rate applied to this amount will reduce homestead taxes by $150.

In addition, schools must also exempt an additional $10,000 from school taxes for owners who are 65 or older or are disabled as defined by the Social Security Administration. Those owners who are both 65 or older and disabled cannot receive both exemptions and must choose one or the other.

The final mandatory exemption applies to disabled veterans. A veteran receiving 100 percent disability compensation as the result of a service-connected disability and rated 100 percent disabled or classified as nonemployable by the U.S. Department of Veterans Affairs or its successor is exempted from all property taxes on his or her residence homestead.

Recently, Texas voters approved constitutional amendments extending exemptions to veterans when the disability rating is less than 100 percent and the home was donated to the veteran by a charitable organization. The amount of the exemptions is linked to the percentage of disability suffered by the veteran. Voters also approved a total exemption from property taxes for surviving spouses of armed service members who were killed in action, provided they have not remarried.

In addition to this exemption for the elderly or disabled, taxing units can choose to extend an exemption of $5,000 or up to 20 percent of the homestead’s value to all qualified homeowners.

Applying for Homestead Exemptions

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his list of exemptions can add up to a sizable tax break when all are available to owners. But the homeowner must apply for the exemptions. Although the taxing unit decides which exemptions to offer, it isn’t directly involved in deciding whether a particular property or property owner qualifies for the exemptions.

The taxing unit provides a list of its exemptions to the appraisal district.

Property owners then apply to the appraisal district for homestead exemptions. The appraisal district determines whether the owner and property are eligible.

Exemptions are automatically applied by the taxing units where the property is located.

Once an owner has qualified for homestead exemptions, they need not reapply in subsequent years unless the chief appraiser for the appraisal district requires another application. Such requests are infrequent.

Some businesses advertise that they can save homeowners tax dollars by getting them qualified for these exemptions.

However, the forms necessary to qualify are easily accessible and user friendly. They are available at Office of the Comptroller, Property Tax Assistance Division, http://www.window. state.tx.us/taxinfo/taxforms/50-114.pdf and http://www.window.state.tx.us/taxinfo/taxforms/50-135.pdf.

For more information about Texas’ property tax, consult Real Estate Center publication 1192, The Texas Property Tax System at http://www.recenter.tamu.edu/pdf/1192.pdf.

Some businesses advertise that they can save homeowners tax dollars by getting them qualified for these exemptions. However, the forms necessary to qualify are easily accessible and user friendly.

Optional Homestead Exemptions Added optional homestead exemptions may also be available to homeowners, but this situation is more complicated. The optional exemptions must be adopted by the separate taxing units before they are available to owners. For example, a city, school district or county may opt to exempt at least $3,000 of additional value from qualified residence homesteads for disabled owners or those over age 65.

The provision in the Property Tax Code does allow each jurisdiction to exempt more than $3,000. However, some jurisdictions may not extend this benefit at all. In some cases, a city allows this added exemption, but the school and county do not.

To establish the extent of the tax relief, a homeowner must find out which added exemptions are available in their location.

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Dr. Gilliland (c-gilliland@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY To receive the largest possible property tax breaks, property owners should determine what exemptions their local taxing unit offers and apply for all exemptions available to them.

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Legal Issues

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one of us will live forever. When contemplating death, most people ponder preparing and executing a will or trust, or implementing probate-avoiding techniques.

These are certainly wise choices. But other critical documents should be considered.

Five of these (Powers of Attorney, Living Wills, Medical Powers of Attorney, Do Not Resuscitate [DNR] Orders, and Anatomical Gifts) are briefly described here.

For more details, instructions and copies of forms, see Real Estate Center publication 2044, End-of-Life Documents, at recenter.tamu.edu/pdf/2044.pdf.

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Powers of Attorney By executing a Power of Attorney, you grant another person, known as an attorney-in-fact or agent, the authority to manage your assets, among other things. You decide how long the agent serves and the scope of his or her authority.

The person serving as your attorney-in-fact should be someone you trust implicitly even though this person owes you a fiduciary duty to serve in your utmost best interests. For married couples, this is generally the spouse.

The duration of the agent’s authority depends on whether you make the power durable or not. According to the statute, TIERRA GRANDE

a durable power of attorney confers on the agent the continued authority to act notwithstanding your subsequent disability or incapacity. More specifically, the statute describes a Durable Power of Attorney as one that “does not lapse because of the passage of time unless the instrument creating it specifically states a time limitation.”

An added benefit of a Durable Power of Attorney is that you avoid having the court appoint a guardian once you become incompetent. But, if the court appoints a permanent guardian, the Durable Power of Attorney terminates, and all assets under the agent’s control must be delivered to the guardian of the estate.

Whether durable or not, no Power of Attorney survives your death.

Finally, the scope of the authority depends on whether you grant a general or special Power of Attorney. Basically, a General Power of Attorney permits the agent to enter any legal transaction you could enter. A Special Power of Attorney limits the authority to specific tasks.

The promulgated Statutory Durable Power of Attorney Form lists 13 specific types of transactions the agent may enter on your behalf, real property transactions being one of them. You have the option of eliminating one or more of the listed transactions by crossing them out. You may also insert special instructions limiting or extending the powers and the time frames in which they may be exercised.

These tasks are described in the Promulgated Statutory Durable Power of Attorney Form (recenter.tamu.edu/ pdf/statutory_poa. pdf). This form must be signed before a notary to be effective.

Second, if in the judgment of your physician you are suffering from an irreversible condition which prevents you from caring for or making decisions for yourself, and you are expected to die without life-sustaining treatment, you have the same two options.

If after signing the document you are placed in hospice care, only those treatments needed to keep you comfortable will be provided, and you will not receive life-sustaining treatments. inally, if you do not have a Medical Power of Attorney (next section) and you are unable to make your wishes known, you may designate a person or persons to make treatment decisions compatible with your personal values at that time within the context of the Living Will.

The statutory form contains several examples and explanations for various types of conditions including cancer, failure of major organs (kidneys, heart, liver or lungs) and dementia, including Alzheimer’s. It defines the terms “irreversible condition,” “life-sustaining treatment,” “terminal condition” and “artificial nutrition and hydration” as used in the form.

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Medical Powers of Attorney As the name implies, a Medical Power of Attorney (MPOA) permits another individual to make medical decisions on your behalf when you become incompetent. The procedure for implementing an MPOA differs from the others because the statute contains two prescribed forms. The first, known as the Disclosure Statement, must be read and understood before the second, the actual MPOA, is read and signed.

The Disclosure Statement explains the importance of understanding the MPOA before signing it.

The agent’s (the person you appoint to make your medical decisions) authority begins when a doctor certifies your incompetence to make health care decisions. This certification must be placed in your medical record. The agent is then obligated to follow the instructions set forth in the MPOA (the second form) in making medical decisions on your behalf. fter signing the MPOA, you have the continued right to make health care decisions as long as you are competent. As long as you are competent, you have the right to revoke the document by informing the agent orally or in writing or by executing a subsequent MPOA. The appointment of your spouse as agent terminates if you subsequently divorce or have the marriage annulled unless you direct otherwise.

The form allows you to designate alternate agent(s) and to limit the duration of the power granted. Without a termination date, the Power of Attorney exists indefinitely from the date it is signed. But, if you insert a termination date and are incompetent when the MPOA expires, the agent’s authority continues until you become competent, if ever.

Living Wills, also known as Directives to Withhold Life-Support Devices, do not delegate your health care decisions to others, but relieve others from having to make health care decisions on your behalf.

Living Wills

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iving Wills, also known as Directives to Withhold LifeSupport Devices, do not delegate your health care decisions to others, but relieve others from having to make them on your behalf.

The preamble to the form gives insight regarding its usage.

“It (the form) is designed to help you communicate your wishes about medical treatment at some time in the future when you are unable to make your wishes known because of illness or injury.” The form contains the following language: “If there comes a time that I am unable to make medical decisions about myself because of illness or injury, I direct that the following treatment preferences be honored. . . .”

The directive describes two scenarios. First, if in the judgment of your physician you are suffering with a terminal condition from which you are expected to die within six months even with available life-sustaining treatment, you may request that (1) all treatments other than those needed to keep you comfortable be discontinued or withheld and let you die as gently as possible or (2) that you be kept alive using available life-sustaining treatment.

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Out-of-Hospital DNR Orders

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ny competent adult or an agent acting under an MPOA may execute an Out-of-Hospital DNR Order directing health care professionals acting in an out-of-hospital setting to withhold cardiopulmonary resuscitation and other life-sustaining treatments specified in the statutes. The order must be honored by medical care professionals provided they are aware of the order and establish the patient as the one who executed it.

The order does not authorize withholding of medical interventions or therapies considered necessary, such as providing water or nutrition, comfort and care, or alleviating pain. The order does not condone, authorize or approve mercy killing or permit an affirmative or deliberate act or omission to end one’s life except to permit the natural process of dying as provided in the statute. The order does not apply to pregnant women.

The presence of a DNR identification device (authorized bracelets or necklaces) on the person is conclusive evidence that the person executed or issued a valid order or had one issued on his or her behalf. These devices may be worn around the neck or on the wrist as prescribed by the medical board.

The execution of the order is slightly different from the other documents. While the physician cannot be a valid witness, the physician must sign the order and make it a part of the patient’s medical record. Also, in lieu of having to sign the order in the presence of two qualified witnesses, the patient may sign the order before a notary public.

Anatomical Donations The donation of tissue, organs and other body parts may not be on everyone’s mind. The enabling statute, entitled the Revised Uniform Anatomical Gift Act, sheds light on the process. It is quite lengthy. Some of the more critical provisions are summarized here.

The statute describes four ways in which an anatomical gift may be made. They are: • statements or symbols imprinted on the driver’s license or ID card; • provisions in the donor’s Last Will and Testament; • statements, in any form, issued during a terminal illness or injury addressed to at least two adult witnesses, one of whom is disinterested; or

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• statements or symbols signed by the donor indicating an anatomical gift has been placed on a donor registry.

A revocation, suspension, expiration or cancellation of the driver’s license or identification card on which the anatomical gift was placed does not invalidate the gift. Anatomical gifts take effect on the donor’s death whether or not the will is probated. An invalidation of the will after the donor’s death does not invalidate the gift.

Interestingly, the statute provides a method by which a person may indicate that he or she does not want to make an anatomical gift. Without implementing this procedure, the statute allows an agent (spouse, adult children of the deceased, for example) to make anatomical gifts of the deceased’s body.

An anatomical gift may specify (1) which part or parts of the body may be donated, (2) purpose for the donation and (3) named recipients.

In the absence of anything expressed to the contrary by the donor, a gift of a part of the body for a particular purpose does not limit or restrict the making of a subsequent gift(s) of another part or parts for a different person or purpose by the donor or a qualified person.

The statute prohibits a person from knowingly purchasing or selling body parts for transplantation or therapy. Likewise, it is an offense to intentionally falsify, forge, conceal, deface or obliterate an anatomical gift for financial gain. Either offense is a Class A misdemeanor. However, a reasonable charge is permitted for the removal, processing, preservation, quality control, storage, transportation, implantation or disposal of an anatomical gift.

Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Delegating management and medical decisions when you are no longer able to do so needs to be addressed now.

For managing your assets, consider executing a Durable Power of Attorney. For medical decisions, consider signing a Living Will, a Medical Power of Attorney and a Do Not Resuscitate (DNR) Order. For donating all or a part of your body at your death, consider making an anatomical gift.

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COMMUNICATION MATTERS You Need More Than Words To Win Hearts & Influence Minds In the Real Estate Center始s new free video series, John Krajicek, Mays Business School executive professor, reveals how important clear communication is in our business and personal lives.

It始s all about succeeding. And speaking is just the beginning.

In four 20-minute videos, you will learn to cultivate your listening skills, develop a powerful presence, lead by example, and make body language convey the same message your words do. www.recenter.tamu.edu/video

Communication Matters Power of Presence Communicating as a Leader Open Up and Own the Room

JANUARY 2014

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