Tierra Grande - October 2016 by Texas Real Estate Research Center

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

NON-PROFIT ORG. U.S. POSTAGE PAID HOUSTON, TEXAS PERMIT No. 4126 COLLEGE STATION, TEXAS 77843-2115

In This Issue Affordable Housing in Austin Oil Law Applied to Water Supply, Demand, and Affordability Selling the Waggoner Ranch Clean Water Act Expands Seasonal Patterns in Home Sales

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

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OCTOBER 2016

VOLUME 23, NUMBER 4 ™

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

Director, GARY W. MALER Chief Economist, JAMES P. GAINES Senior Editor, DAVID S. JONES Managing Editor, NANCY MCQUISTION Associate Editor, BRYAN POPE Associate 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: Russell Cain, Port Lavaca, chairman; Doug Jennings, Fort Worth, vice chairman; Mario A. Arriaga, Conroe; Jacquelyn K. Hawkins, Austin; Walter F. “Ted” Nelson, Houston; Doug Roberts, Austin; Kimberly Shambley, Dallas; Ronald C. Wakefield, San Antonio; C. Clark Welder, San Antonio; and Bill Jones, Temple, ex-officio representing the Texas Real Estate Commission.

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

How the West Was Won

Selling of the Waggoner Ranch It wasn’t just a big deal. It was a Texas-sized deal. Bernie Uechtritz and Sam Middleton brokered the sale of the 535,000-acre Waggoner Ranch after marketing it to the richest of the rich both nationally and internationally. BY CHARLES E. GILLILAND

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: Courtesy of www.Icon.Global, pp. 1, 14–15, 16, 17, 18, 19; Harold Hunt, pp. 2–3, 5, 6; Robert Beals II, pp. 4, 20; Alden DeMoss, p. 7; Real Estate Center files, pp. 24–25, 28.

10 Game of Homes

2 East Side Story

East Austin, traditionally made up of lowincome neighborhoods adjacent to downtown, is being redeveloped to meet demand for housing a growing, younger, urbanite population that wants to both live and work downtown. BY HAROLD D. HUNT

The Supply-Demand Struggle The high cost of lots and construction labor to build single-family homes has resulted in tight inventory and home prices that keep rising. This in turn has decreased the affordability of homes in Texas. BY LAILA ASSANIE, SARAH GREER, AND LUIS B. TORRES

Navigating Watershed Changes

7 Mixing Oil and Water Law ON THE COVER Sunset over Lake Bryan with rain clouds moving in

PHOTOGRAPHER JP Beato III

OCTOBER 2016

Citing similarities, the Texas Supreme Court applied the Accommodation of the Estates Doctrine, previously applied only to mineral law, to a groundwater case pitting the City of Lubbock against surface owners with environmental concerns. BY JUDON FAMBROUGH

Changes made to the Clean Water Act by governmental agencies rather than Congress are calling into question the legal definitions of terms such as the “source” of waters, “dry land,” and “ditch.” BY JUDON FAMBROUGH AND DAN HATFIELD

24 Selling Season

Spring and summer are the busiest times of year for selling homes. The reasons have a lot to do with school calendars, among other things. BY ALI ANARI

Residential

East Side Story By Harold D. Hunt

The cost of residential housing prices higher and their property taxes become more burdensome. The area’s proximity to downtown makes it exceptionon Austin’s east side is increasing ally attractive for expensive residential redevelopment and renovation. No doubt property values will continue to rise. dramatically. For decades, homes However, the private sector offers a few alternatives that lower-income residents may find appealing and reasonably located east of I-35 were occupied priced. This article briefly discusses three affordable housing options currently available on the city’s east side: manufacprimarily by low-income residents. But tured housing communities, the Mueller development’s affordable homes program, and accessory dwelling units (ADUs). strong population growth combined Population Growth Rolls On with increasing trafﬁc congestion Austin continues to attract new residents at a high rate. The ve-county Austin-Round Rock Metropolitan Statistical Area and limited new housing supply has fi(MSA) has averaged 3.1 percent annual population growth from 2011 through 2015 while Travis County has averaged 2.8 perled to an ongoing wave of east-side cent (Table 1). By comparison, the Texas population increased 1.8 percent and the U.S. as a whole grew at a mere 0.8 pergentriﬁcation. at cent during the same period. Webster defines gentrification as “the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents.” Gentrification can be a double-edged sword. Improving the city’s housing stock and property values—good. Displacing the city’s underprivileged residents—not so good. The gentrification process is occurring in all major Texas cities. Many low-income folks on the east side will eventually be forced to relocate farther away from the city as demand forces

Much of the increase has come from people migrating to the Austin area from other parts of the state and country. At the MSA level, population growth due to a net increase in domestic migrants has exceeded 50 percent since 2012. This compares with about one-third for the state as a whole. The total population growth rate within Travis County has slowed, declining from 3.7 percent in 2011 to 2.2 percent by 2015 (Table 1). Part of this reduction could be tied to the increasingly limited affordable housing choices available to newcomers and locals in Austin. TIERRA GRANDE

In their first quarter 2016 Home Affordability Index, RealtyTrac named Travis County one of its top 20 least-affordable county housing markets in America compared with the county’s own historical affordability norms.

Pressure from Young Arrivals A number of the Austin area’s new residents are millennials, young professionals looking for a compact, walkable urban environment where abundant amenities are in proximity. Austin fits that profile perfectly. The commercial brokerage firm CBRE’s research group recently published a study titled 2016 Scoring Tech Talent. The study found that the millennial population (defined in the study as people aged 20–29) living in Austin’s downtown area had increased by 7.5

fill with young urbanites, east Austin’s proximity to downtown makes it more desirable for denser, more expensive residential development.

East Austin’s Existing Single-Family Market

edian closing sales prices in four of the six ZIP codes increased more than 100 percent during the study period (Table 2). Growth in median prices in all six ZIP codes exceeded both Travis County and the Austin MSA. ZIP code 78722 registered the highest median sales price of $407,750, an increase of $170,417 since 2011. Increases in average sales price per square foot during the study period were also quite strong, ranging from a 161.5 percent increase in 78721 to 62.5 percent in 78752. Again, the percentage increases in all six ZIP codes were significantly higher than in Travis County and the Austin MSA. The highest-dollar increase in average closing price per square foot was in ZIP code 78702 with an astounding increase of $185.19 during the five-year study period. Travis County and the Austin MSA registered increases of $55.90 and $44.95 per square foot, respectively. Months’ inventory and average days on market numbers verify the tightening of existing single-family inventory for sale, another contributing factor to such large price increases.

Comparing New Housing, Employment Growth

An annual comparison of residential building permits issued against the change in total housing units and total employIN THIS NEIGHBORHOOD, ment growth in Travis County and the Austin-Round Rock affordable housing blends in with MSA is shown in Table 3. A lag should be expected between higher-end properties. the time a permit is issued and completion of a housing unit. Changes in the number of housing units are calculated using annual U.S. Census Bureau American Community Survey estimates. percent between 2009 and 2014. The most obvious conclusion is the large disparity between The city was also tapped by CBRE as the nation’s tenth most concentrated millennial market. As the city’s core continues to the increase in total housing units and the increase in employment in both Travis County and the AustinTable 1 Round Rock MSA. Increases in housing Austin-Round Rock MSA Population* stock are woefully inadAustin Total Total Net Percent of Population equate for the employMSA Population Population Domestic Change from ment growth occurring Date Population Change Percent Change Migration Domestic Migration in the Austin region, 2011 1,781,409 65,120 3.8 29,482 45.3 especially in Travis 2012 1,835,298 53,889 3.0 30,984 57.5 County. 2013 1,884,439 49,141 2.7 26,433 53.8 Focusing on new 2014 1,943,465 59,026 3.1 33,412 56.6 single-family construc2015 2,000,860 57,395 3.0 33,276 58.0 tion, the Austin real Average: 3.1 estate firm Pred Inc. Travis County Population produces a weekly publication advertising Austin Total Total Net Percent of Population MSA Population Population Domestic Change from “spec” homes (those Date Population Change Percent Change Migration Domestic Migration not being custom-built 2011 1,062,041 37,775 3.7 15,245 40.4 for a particular home2012 1,096,661 34,620 3.3 18,635 53.8 buyer) currently under 2013 1,121,968 25,307 2.3 9,176 36.3 construction in and 2014 1,150,996 29,028 2.6 12,309 42.4 around Austin. Their 2015 1,176,558 25,562 2.2 8,885 34.8 June 6, 2016, issue Average: 2.8 reported that 1,287 *Five counties make up the Austin-Round Rock MSA (Bastrop, Caldwell, Hays, Travis, and Williamson). spec homes were under Source: U.S. Census Bureau construction in the OCTOBER 2016

RESEARCH Methodology Existing single-family home sales in six east Austin ZIP codes were compared individually with sales in Travis County overall and the Austin-Round Rock MSA. The six ZIP codes displayed in Table 2 are largely bounded by I-35 on the west, SH 183 on the east and north, and SH 71 on the south. Population data by ZIP code is published only in the decennial census. A three-month average was calculated using the Real Estate Center’s monthly housing data to reduce monthly volatility. The data in Table 2 are sorted by highest to lowest cumulative percentage increase in median closing sales price. The data compare sales prices, months’ inventory, and average days on market in the first three months of 2011 to those in the first three months of 2016.

“greater Austin area,” a region that actually stretches beyond the Austin-Round Rock MSA. Of that number, only 24 were selling for under $200,000, about the maximum price a homebuyer earning Austin’s median household income or less can afford. Of those 24, only four were located in Austin’s far eastern fringe, a significant distance from downtown. The remainder were scattered throughout the region.

Manufactured Housing as Affordable Option The Texas Manufactured Housing Association estimates that there are 50 manufactured housing (MH) communities in Austin with a total capacity of about 7,500 lots. Zoning ordinances prohibit MH communities in the majority of the city. This prohibition has made it difficult for owners to locate (or relocate) their homes close to their jobs or job opportunities.

Removing zoning prohibitions in Austin could increase MH supply, providing the city with more unsubsidized affordable housing. There are indications that this may be occurring slowly. In a December 2015 Austin city council meeting, Roberts Communities, owner of three Austin MH communities, was granted a rezoning. The decision changed 169 acres near SH 130 and Pearce Road adjacent to their Oak Ranch MH community from single- and multifamily zoning to MH zoning. Council members voted unanimously in favor of the rezoning after residents from another Roberts Communities MH park, Loma Vista, turned out in force to support the change at the meeting. Roberts Communities is also planning a “tiny home” community in Austin. A tiny home is loosely defined as having 400 square feet or less, either on wheels or a foundation.

Table 2 Housing Summary Statistics Austin-Round Rock MSA, Travis County, Speciﬁed East Austin ZIP Codes (Existing Single-Family Homes Only)

Location

Population

Average Closing Price per SF

ZIP Code

2010 Census

Jan.–Mar. 2011

78721 78741 78702 78723 78722 78752 Austin MSA Travis Co.

11,425 44,935 21,334 28,330 5,901 18,064 1,716,289 1,024,266

$84.93 $83.04 $144.31 $100.22 $183.29 $133.31 $108.20 $126.46

Median Closing Price

Months’ Inventory

Average Days on Market

Jan.–Mar. 2016

Percent Change

Jan.–Mar. 2011

Jan.–Mar. 2016

Percent Change

Jan.–Mar. 2011

Jan.–Mar. 2016

Percent Change

Jan.–Mar. 2011

Jan.–Mar. 2016

Percent Change

$222.06 $208.32 $329.50 $212.30 $286.68 $216.59 $153.15 $182.45

161.5 150.9 128.3 111.8 56.4 62.5 41.5 44.3

$93,400 $109,483 $162,667 $141,750 $237,333 $164,250 $183,167 $217,500

$238,317 $275,667 $366,083 $309,167 $407,750 $261,900 $260,467 $305,000

155.2 151.8 125.1 118.1 71.8 59.5 42.2 40.2

8.3 4.7 8.4 5.3 3.1 5.5 5.9 5.3

2.3 1.4 3.2 1.4 0.8 0.8 2.0 2.1

–72.3 –70.2 –61.9 –73.6 –74.2 –85.5 –66.1 –60.4

117 82 81 83 85 95 91 92

33 28 47 34 35 41 48 47

–71.8 –65.9 –42.0 –59.0 –58.8 –56.8 –47.3 –48.9

Notes: Housing data is calculated using a three-month average of monthly data from January through March in 2011 and 2016 to reduce volatility. Data is sorted by largest to smallest cumulative percentage increase in median closing sales price over the ﬁve-year analysis period. Five counties make up the Austin-Round Rock MSA (Bastrop, Caldwell, Hays, Travis, and Williamson). Source: U.S. Census Bureau

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“One hundred tiny home sites will be another affordable housing option located within our existing Loma Vista manufactured home community,” said Scott Roberts, CEO of Roberts Communities. “Located off Decker Lane in east Austin, Village Farm will be an enriching community for people looking to simplify their lives by living in a progressive tiny home community integrated around an existing organic farm,” said Roberts. Village Farm will adjoin Green Gate Farms, a certified organic farm established in 2006.

WITHIN SIGHT OF downtown Austin, some homes are being purchased and renovated. Other existing houses are torn down to make way for new ones.

Mueller Affordable Homes Program

Homes in the program are sold for less than their actual market value. The difference between sales price and market value he Mueller Affordable Homes Program was created speis reflected in a soft second lien held by the Mueller Foundacifically to provide homes for families earning less than tion to support future affordability efforts. the area’s median family income (MFI) that might not Buyers do not pay interest or make monthly payments on otherwise be able to afford a home in East Austin. Commuthe mortgage and principal amount of the second lien for 30 nity Wheelhouse, a nonprofit organization, administers the years unless there is a default. The Mueller Foundation has the program. first right of refusal when a buyer decides to sell. The goal of the program is to develop at least 25 percent of Mueller’s for-sale and for-rent residences as Table 3 affordable units. These affordable properAustin-Round Rock MSA Building Permits Issued, Housing Unit Change, and Employment Growth ties are being located Austin MSA Change in Number Austin MSA Building throughout the comof Housing Units Permits Issued munity and are basiSingle2-to-4 5+ Single2-to-4 5+ Total Job cally indistinguishable Family Units Units Total Family Units Units Total Growth Date Date from all other homes 2011 6,242 81 3,944 10,267 2011 16,030 –4,873 –295 10,862 26,900 inside the develop2012 7,982 116 11,220 19,318 2012 9,158 –2,580 –956 5,622 40,100 ment. 2013 9,216 402 11,509 21,127 2013 9,099 5,603 868 15,570 38,100 The earnings limit 2014 11,842 444 7,990 20,276 2014 9,441 –5,208 15,272 19,505 39,400 to purchase a home in 2015 11,540 498 10,059 22,097 2015 13,722 1,025 9,285 24,032 44,500 the Mueller program Total 46,822 1,541 44,722 93,085 Total 57,450 –6,033 24,174 75,591 189,000 is 80 percent or less of the Austin-Round Travis County Building Permits Issued, Housing Unit Change and Employment Growth Rock MSA’s MFI. DifTravis County Change in Number Travis County Building ferent from median of Housing Units Permits Issued “household” income, Single2-to-4 5+ Single2-to-4 5+ Total Job which is a single Family Units Units Total Family Units Units Total Growth Date Date number, median “fam2011 3,301 50 2,419 5,770 2011 7,347 –5,983 2,765 4,129 18,079 ily” income varies by 2012 4,423 41 8,018 12,482 2012 6,424 -283 –3,286 2,855 28,693 family size. As of June 2013 4,484 370 9,051 13,905 2013 7,117 2,735 457 10,309 21,462 2016, 80 percent of 2014 5,730 368 6,580 12,678 2014 6,155 –3,702 8,673 11,126 28,502 MFI for the MSA was 2015 5,664 364 7,802 13,830 2015 416 891 11,491 12,798 32,762 $62,250 for a famTotal 23,602 1,193 33,870 58,665 Total 27,459 –6,342 20,100 41,217 129,498 ily of four, dropping Note: Five counties make up the Austin-Round Rock MSA (Bastrop, Caldwell, Hays, Travis, and Williamson). to $43,600 for one Sources: U.S. Census Bureau and Texas Workforce Commission (CES Data for Total Non-Farm Employment) person.

OCTOBER 2016

According to documentation available on the Mueller Foundation’s website, David Weekley Homes currently builds units under the affordable home program that range in size from 841 to 1,439 square feet and priced from $159,990 to $284,000 with an additional second lien. Standard Pacific Homes also builds homes under the program from 1,145 to 1,175 square feet, priced from the mid-$170,000s. All affordable models must achieve Austin Energy Green Building threestar ratings. Complete program details can be found at http:// www.muelleraustin.com/ homes/home-types/affordablehomes/for-sale/.

THE MUELLER AFFORDABLE Homes Program offers homes ranging in price, size, and from a variety of builders.

Accessory Dwelling Units

ccessory dwelling units (ADUs), also referred to as accessory apartments, second units, or granny flats, are additional living quarters on single-family lots that are independent of the primary dwelling unit. According to Nicole Joslin, executive director of the Austin Community Design and Development Center, the purpose of promoting more ADUs is to encourage residents to stay in their neighborhoods, provide them a way to generate rental income, and increase the affordable housing stock in Austin. Joslin says that so far, the people building ADUs in Austin prefer smaller one- or two-bedroom units over larger ones. Joslin believes three types of people generally choose to build ADUs: • those wanting to house a family member, such as a child or aging parent. In this way, the relative can remain in the neighborhood at an affordable cost; • homeowners who would like to downsize but still want to stay in the neighborhood. They may live in the ADU and rent or sell the primary residence to someone else; and • folks who are into the mission of creating a dense urban neighborhood environment while generating some extra income as well. Although only a few hundred ADUs are estimated to have been built in Austin thus far, no solid statistical data exists. However, Joslin believes the number has increased somewhat since the city relaxed their ordinances pertaining to ADUs last year. Joslin reports that her group conducted a recent study that only looked at lots in SF-3 zoning of at least 5,750 square feet in size. They found 58,000 lots in Austin that are “eligible” for ADU construction. Of those, she estimates about 10,000 would not require additional parking.

Portland, Oregon, a city with only slightly more than half the population of Austin, now receives permit requests for development of 200 ADUs annually according to the Austinbased nonprofit organization AURA. Portland was one of the earliest adapters of ADUs. Kol Peterson, editor of AccessoryDwellings.org and owner of Accessory Dwelling Strategies LLC in Portland, says Portland’s first ADU regulations started in 1981. However, they weren’t developed to any significant degree until 2010. “Portland instituted a regulatory waiver of system development charges, which amounted to about $10,000 in permit cost savings,” says Peterson. “That made all the difference.” eterson believes Austin needs a good consumer webpage to help promote ADUs. “The city’s page (http://www.austin texas.gov/page/adu) explains some things but is missing all of the information average homeowners/developers need to actually build an ADU on their property,” says Peterson. He also suggested it would be helpful if a local credit union or bank came up with a good renovation loan product that could be used to finance ADUs. Obtaining financing is one of the biggest barriers to increased ADU development. As in so many high-growth metropolitan areas, Austin’s true challenge will continue to be delivering enough affordable housing to meet demand.

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

THE TAKEAWAY Austin’s population is growing rapidly. Many of these newcomers are millennials seeking an urban lifestyle. East Austin offers an adjacent, affordable area available for redevelopment to meet the growth. TIERRA GRANDE

Legal Issues

Mixing Law By Judon Fambrough

n May 27, 2016, the Texas Supreme Court, in a case of first impression, added a new dimension to groundwater law by applying a rule previously limited to oil and gas to groundwater exploration and production. The rule is known as the accommodation of the estates doctrine (the doctrine), which was first recognized by Texas courts in 1970. The doctrine requires producers of oil and gas (and now groundwater) to accommodate any pre-existing uses being employed by the surface owners. The initial case, Getty Oil v. Jones, involved two pump jacks being installed inside an existing irrigation pivot. The height of the pump jacks prevented the operation of the pivot. The court ruled that even though the mineral estate is dominant over the surface, the mineral lessee must accommodate (or give due regard to) any pre-existing uses of the surface by the surface owners. In this case, the court required Getty to either install shorter pump jacks or place them in cellars. For a description of the facts and holdings of all prior Texas appellate cases applying the doctrine, see Center publication 2090, “Surface Tension: The Accommodation of the Estates Doctrine.” The facts of the present case, Wiley v. City of Lubbock, fall short of any pre-existing man-made uses of the surface. Instead, the surface owners raise environmental concerns. Here are the facts. OCTOBER 2016

The plaintiff owns Coyote Lake Ranch (the ranch). It consists of 26,600 acres in the Texas Panhandle. The surface owner uses the ranch primarily for agriculture, raising cattle, and recreational hunting. Most of the ranch consists of sand dunes with natural grass cover. Groundwater comes from the Ogallala Aquifer. The aquifer serves as the principal source of water for the Texas High Plains including the City of Lubbock (the city), which is about 90 miles southeast of the ranch. In 1953, the city purchased the ranch’s groundwater to supplement its water supply. In the deed, the ranch reserved a portion of the groundwater for domestic use, ranching operations, oil and gas production, and irrigation. The deed permitted the ranch to drill wells in specific locations for its needs. The deed contained lengthy, detailed provisions regarding how the city could use the surface to explore and produce the groundwater. These included: • Well locations: The city has the full . . . rights of ingress and egress in, over, and on the ranch, so that the city may at any time and location drill water wells and test wells on said lands for the purpose of investigating, exploring, producing, and accessing the percolating and underground water. However, no wells could be drilled or located within a quarter of a mile of any presently existing windmills. • Surface use generally: The city has the rights to use all that part of the ranch necessary or incidental to the taking,

producing, treating, transporting, and delivery of the water. • Surface use specifically: The city may construct certain specified facilities, including water lines, fuel lines, power lines, communication lines, barricades, and access roads on, over, and under the land necessary or incidental to any of the specified operations. • Additionally, the city must: ▪ pay rent for any occupied surface space; ▪ compensate the surface owners for any damages to the surface caused by its operations or activities; and ▪ install gates and cattle guards on its roads. rior to 2012, the city had drilled seven wells on the northern edge of the ranch but published plans for an additional 80. The ranch objected to the proposal because it would increase erosion and injure the surface unnecessarily. The city claimed it was acting within its contractual rights granted in the deed. Unable to reach an agreement, the city began mowing extensive paths through the native grass to prospective drill sites. The ranch sued to enjoin the city from proceeding. The ranch pleaded, in part, that the city “has a contractual and common law responsibility to use only that amount of surface that is reasonably necessary to its operations” and “a duty to conduct its operations with due regard for the rights of the surface owner.” The city contended that it had full rights under the terms of the deed (not a lease) to pursue its plans. The law imposes no duty on groundwater owners, as it does on mineral owners, to accommodate the surface owner or estate as suggested by the ranch. At the temporary injunction hearing, the ranch’s manager testified that mowing or removing vegetation from the surface causes destructive wind erosion, exacerbated by cattle tromping the mowed paths. According to the manager, wind, drought, and grazing cattle prevent grass from growing back, particularly in the areas the city mowed that happened to be the sandiest, hilliest part of the ranch. The elevated power lines leading to the wells would allow hawks to roost and prey on the Lesser Prairie Chicken, a threatened species for which the ranch is a natural habitat. He proposed an alternative plan for different well sites and fewer roads. The trial court agreed with the ranch and enjoined the city from:

The city appealed. The Court of Civil Appeals reversed the trial court’s decision, holding the accommodation of the estates doctrine does not apply unless one estate is dominant over the other. Groundwater is not dominant over the surface estate. The ranch appealed to the Texas Supreme Court. The Texas Supreme Court reinstated the injunction, in part, and held that the doctrine applies to groundwater exploration and development when the groundwater has been severed from the surface estate. Here are the three requirements for the application of the doctrine according to prior oil and gas cases. The surface owner (the ranch in this situation) must prove that (1) the city’s use of the surface in the exploration and production of the groundwater completely precludes or substantially impairs the ranch’s existing surface use; (2) the ranch has no available, reasonable alternative to continue its existing use; and (3) given the particular circumstances, the city has available reasonable, customary, and industry-accepted methods to access and produce the groundwater and allow continuation of the ranch’s existing use. Apparently, the high court based its decision on the competing needs of the two estates to use the surface, as well as on the similarities between groundwater and minerals. The fact that there were no pre-existing man-made uses of the surface to the extent required in prior oil-and-gas cases was not an issue. Here is what the court said. The accommodation doctrine is based on the principle that conflicting estates should act with due regard for each other’s rights. This has provided a sound and workable basis for resolving conflicts between ownership interests. The paucity of reported cases applying the doctrine suggests that it is well understood and not often disputed. We have applied the doctrine only when mineral interests are involved. But similarities between mineral and groundwater estates, as well as in their conflicts with surface estates, persuade us to extend the accommodation doctrine to groundwater interests. Groundwater and minerals both exist in subterranean reservoirs. . . . An interest in groundwater can be severed from the land as a separate estate, just as an interest in minerals can be. A severed groundwater estate has the same right to use the surface that a severed mineral estate does. Both groundwater and minerals are subject to the rule of capture. And both are protected from waste. These similarities led to the holding in Edwards Aquifer Authority v. Day that groundwater, like oil and gas, is owned by the landowner in place below the surface. Common law rules governing mineral and groundwater estates are not merely similar; they

The accommodation doctrine is based on the principle that conflicting estates should act with due regard for each other’s rights.

• mowing, blading, or otherwise destroying the growing grass on the surface; • proceeding with any test hole drilling or water well drilling without consulting the plaintiff regarding potential impacts to the surface of the ranch; and • erecting power lines to proposed wells.

TIERRA GRANDE

are drawn from each other or from the same source. The dispute here over the city’s right to use the ranch is much the same as the disagreement between Getty Oil and Jones involving the installation of a pump jack within a circular irrigation pivot. Resolution of both requires an interpretation of the severed estate’s implied right to use the surface. The accommodation doctrine has proved its worth in such cases.

Limited Application The court imposed some limits or refinements on the application of the doctrine to groundwater. These limitations or refinements may apply to oil and gas exploration and production as well. First, the doctrine applies only when the groundwater has been severed from the surface estate by deed or reservation. Without the severance, the doctrine does not apply to groundwater. However, this limitation does not apply to mineral leases. Why? Simply put, a mineral lease in Texas is a deed, not a lease. The mineral lease (deed) acts to sever the minerals from the mineral or surface estates or both. For this reason, the application of the doctrine to environmental concerns may have a far greater impact on future oil and gas exploration and production than on groundwater because of the number of transactions. Second, the court appears to apply the doctrine to situations where the groundwater deed does not fully describe the range of permitted surface operations. he court ruled the doctrine resolves conflicts between a severed groundwater estate and the surface estate “that are not governed by the express terms of the parties’ agreement” (emphasis added). The contractual provisions in question gave the city the necessary or incidental, necessary or useful, and necessary and conventional rights to pursue its surface operations on the ranch. Three of the judges in this decision felt that the language adequately described the city’s right to select well sites but not the city’s selection of the paths, roads, and power lines. So, for every disputed drafted agreement, the courts may have to decide whether due regard was given to the surface owner.

Change in the Law? The court may have unknowingly extended the doctrine beyond groundwater and mineral exploration and production. When the Court of Civil Appeals refused to apply the doctrine in this case, it stated that the doctrine applies only when one estate is dominant over the other. The high court countered this argument by stating that the dominance theory is really a matter of semantics. “In the law of servitudes, the mineral estate is called ‘dominant’ and the surface estate ‘servient,’ not because the mineral estate is in some sense superior, but because it receives the benefit of the implied right of use of the surface estate.” Could this “benefit” serve as the basis for the application of the doctrine to easements? Easements have the servient and dominant estates. The servient estate is the one being crossed and the dominant estate (the benefited estate) is the one with the right to cross the other. Surface owners would welcome the right to object to the installation of pipelines based on environmental concerns. OCTOBER 2016

Future Impact It will be interesting to see how this case impacts future reservations of groundwater. In the past, many surface owners sold the surface and retained the groundwater

rights. According to this case, without a detailed description of surface operations in the reservation, the accommodation of the estates applies to all aspects of exploration and production. Consequently, future reservations of groundwater may become more complex by attempting to detail surface operations. Otherwise, surface owners will be able to use the doctrine to determine how the groundwater will be explored and produced. As pointed out by the court, “What is reasonable, necessary, or incidental for the severed estate cannot be determined in the abstract but must be measured against and with due regard for the rights of the surface estate.” Finally, will the high court continue to recognize environmental issues as valid reasons for applying the doctrine? If so, this may expand litigation regarding surface operations for the exploration and production of oil and gas. Fambrough (info@recenter.tamu.edu) is a member of the State Bar of Texas and former lawyer with the Real Estate Center at Texas A&M University.

THE TAKEAWAY The Texas Supreme Court applied the Accommodation of the Estates Doctrine to groundwater exploration and production for the first time in May 2016. The doctrine had previously been limited to oil and gas law.

Residential

apid recovery from the Great Recession, buoyed by the shale oil boom, has fueled demand for single-family homes in Texas. Homebuilders have been unable to keep pace with increasing demand; supply is limited by lot and labor constraints, reducing affordability.

Prices Ascend to New Highs Texas has a vast supply of land suitable for development and relatively few building regulations. Construction typically responds quickly to demand, resulting in smaller home price swings versus other large states. During the U.S. housing boom in the mid-2000s, Texas recorded modest home price appreciation, while prices nationwide climbed to record levels (Table 1). Similarly, when the housing market peaked and home values collapsed across the U.S., price declines in Texas were muted. During the housing recovery, Texas price gains uncharacteristically outpaced those at the national level from December 2010 to December 2015, pushing home prices to record highs. Prices rose 33 percent in second quarter 2016 from fourth quarter 2007—the high before the housing bust, according to Federal Housing Finance Agency (FHFA) data. In contrast, U.S.

home prices surpassed their prerecession peak in fourth quarter 2015 and are only 2.8 percent above their previous high. Other measures, such as the Standard & Poor’s/Case-Shiller Index and data from the Multiple Listing Service, show a similar pattern of less Texas home price volatility during the U.S. housing boom-bust period but an unusual surge in values recently (Table 1).

Driven by Population, Economic Growth Texas has been a leading state for domestic migration since the mid-2000s, only losing the top spot to Florida in 2015 (Figure 1). California is by far the leading “sending” state as companies have increasingly departed for Texas. This influx of people isn’t limited to domestic transfers; Texas has been consistently among the top five states for international migration. This mass migration to Texas has propelled strong population growth. According to the U.S. Census Bureau, the state’s population has grown almost a full percentage point faster than the U.S. since 2010. Texas’ relatively low cost of living, strong economic growth due to the most recent oil boom, and lightly regulated commercial environment have attracted businesses and people to the state. Naturally, this has increased

Table 1. Texas and U.S. Home Price Appreciation Dec. 2001–Dec. 2006 United States Texas *FHFA House Price Index **S&P/Case-Shiller Index MLS Median Sales Price

45.3 68.6 19.7

23.4 11.2 2.8

Dec. 2006–Dec. 2010 United States Texas –17.9 –29.8 –28.7

1.0 –6.8 –4.3

Dec. 2010–Dec. 2015 United States Texas 22.7 28.7 23.2

32.6 36.3 24.2

*FHFA Index data is quarterly. **Dallas is used to approximate Texas for the S&P/Case-Shiller Index. Sources: Federal Housing Finance Agency (FHFA) Purchase-Only House Price Index; S&P/Case-Shiller Home Price Index; Multiple Listing Service (MLS)

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100

Inventory levels for these entry-level homes are even tighter at the metropolitan statistical area (MSA) level, coming in at around two months for Houston and San Antonio and about one month in Austin and DFW. Given tight inventories, home sales in Texas’ major metros have been flat or declining in the under-$200,000 price range, while growing rapidly at higher price points. This trend is most evident in Austin, which has experienced a noticeable drop in sales of homes priced below $200,000 since 2011. The DFW

Figure 2. Existing Home Sales and Inventories

300

Figure 1. Net Migration to Texas International Migration Domestic Migration

250 200 150

0 1991

1995

2000

2005

2010

Note: Data are for July of the previous year to July of the year indicated, and are not available for decennial Census years. Source: U.S. Census Bureau

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300

250

8 200 6 150 4 100

2 0

Index, Jan. 2011 = 100

demand for housing, particularly in the major metros. While the number of households in Texas grew 1.5 percent on average annually from 2011 through 2015, the number of housing units (including apartments) increased 1.2 percent, drawing down existing-home inventories to record lows. he fast recovery from the Great Recession catapulted the Texas economy to breakneck job growth from 2012 through 2014, pushing demand for housing even higher. Existing-home sales began climbing in mid-2010. This picture is even more pronounced when home sales are divided into price ranges. Growth in sales of homes priced $300,000–$399,000 took off in early 2012 (Figure 2). At lower price points, sales have been constrained by the tightening supply. Inventory of homes below $200,000 has fallen to historically low levels of about 2.6 months (around 6.5 months of inventory is considered balanced).

Inventory ($300,000–$399,000) Inventory ($200,000 and under) Home sales ($300,000–$399,000) Home sales ($200,000 and under)

2015

Months of Inventory

Net Migration (Thousands)

350

2011

2012

2013

2014

2015

2016

Note: Seasonally adjusted. Sources: Real Estate Center at Texas A&M University and Multiple Listing Service

and Houston areas have reported similar trends. San Antonio has fared a bit better.

Falling Housing Affordability

single-family homes since the end of 2011, building has been limited by availability of lots, labor shortages, increased local government-imposed impact fees, lot costs from regulatory processes, and tight credit for land development. Initially during the housing recovery, vacant developed lots for building were plentiful. Supply dwindled in most major metros as delays in land permitting and shortages of skilled construction workers extended lot delivery times. Available vacant developed lots fell consistently from 2011 through 2013 in Texas’ major metros (Figure 3). Total lot supply appears to

ith greater available inventory at the higher price points, sales growth at the higher end of the market has taken off. This has shifted the composition of homes sold. In 2011, 68 percent of homes sold in Texas were under $200,000; by 2016, they represented only 48 percent of the market. The distribution of homes sold in each price range by metro so far in 2016 is shown in Table Table 2. Price Distribution, Homes Sold Jan. Through June 2011 and 2016 2, compared with the Austin Dallas-Fort Worth Houston San Antonio same period in 2011. The 2011 2016 2011 2016 2011 2016 2011 2016 largest shift is seen in the Percent Percent Percent Percent lowest price range, falling

Months Supply

in major metros by 21 <$200,000 51.5 18.7 65.9 38.8 64.3 41.1 68.7 47.7 to 33 percentage points. $200,000–$299,999 23.6 35.9 17.6 29.0 17.3 28.2 18.0 29.7 Noticeable increases $300,000–$399,999 11.5 19.7 7.6 15.5 8.1 14.5 7.2 12.4 are seen in both the $400,000–$499,999 5.3 10.8 3.5 7.8 3.9 6.9 2.7 5.6 $200,000–299,000 and >$500,000 8.1 14.9 5.4 9.0 6.5 9.3 3.4 4.6 $300,000–399,000 price Sources: Real Estate Center at Texas A&M University and Multiple Listing Service (MLS) ranges. DFW and Houston have similar distribuhave stabilized and in first quarter 2016 stood at around 20 tions, while Austin is skewed higher and San Antonio lower. months or higher in most Texas major metros, signaling a This low-inventory, high-demand market has contributed nearly normal market. Austin is the exception, with supply to median home prices rising faster than incomes. From 2011 remaining somewhat tight at through 2015, Texas house18 months. hold income rose at an averFigure 3. Vacant Developed Lot Supply The decline in lots availage annual rate of 3.6 percent, 60 able for building has been while the median sales price Equilibrium range particularly evident in the of existing homes increased for lot supply under $200,000 price range, by more than twice that—7.3 50 San Antonio where supplies have depleted percent per year on average. Dallas faster, ranging from eight As a result, Texas housing Fort Worth 40 months in Austin to 23 is less affordable, particularly Houston Austin months in Dallas in the first in certain metros. Dallas quarter. Lot supply for houshad the steepest declines in 30 ing at this price point is tight affordability from first quarter as higher land, labor, and 2011 through second quarter material costs have pushed 2016, dropping 17.9 percent20 developers and builders to age points to 50.9 percent of shift from entry-level to homes sold during the quarter 10 higher-priced homes. considered affordable to 2011 2012 2013 2014 2015 2016 In Fort Worth, the share of median-income families. AusSource: Metrostudy vacant developed lot inventin was a close second, falling tory for homes priced under 17.5 percentage points with $200,000 dropped by two-thirds from second quarter 2011 56.3 percent of homes viewed as affordable in second quarter through second quarter 2016 (Table 3). Significantly larger 2016, followed by Houston, which experienced an 11.7 point declines occurred in other major metros over the period. In decline to 60.6 percent. Fort Worth saw a drop of 15.0 points, contrast, the share of vacant developed lots has climbed for but remains the most affordable among the large metros, at 66 homes priced over $300,000 in all major metros—more than percent. San Antonio has experienced the smallest decline in doubling in Dallas and Houston. affordability since 2011. Data from the National Association of Home Builders Lot Supply Tight, Pricing Escalates (NAHB) construction cost survey show that the average lot Single-family permits in Texas remain below highs recorded cost per square foot in 2015 was $4.20, higher than $3.30 per during the U.S. housing boom. Despite strong demand for square foot in 2011—an increase of 27.3 percent. Although

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land remains expensive, prices have come down, and in 2015 were below their 2013 peak of $5.20 per square foot.

Low interest rates have helped support growth Table 3. Vacant Developed Lots by Price Range (Percent) in sales of higher-priced homes, but an increase Under $200,000 $300,000 and Over in mortgage rates will Metro 2Q2011 2Q2016 2Q2011 2Q2016 further pressure affordTight Credit Austin 36 10 37 55 ability. Among the major Dallas 39 8 32 73 The Federal Reserve’s senior metros, Fort Worth Houston 57 14 21 56 loan officer opinion survey appears to be better indicates that from 2008 positioned to supply new Fort Worth 49 17 24 48 to 2010, a higher share of homes at the entry level San Antonio 49 14 26 47 respondents nationwide due to its higher share Source: Metrostudy were tightening credit stanof vacant developed lot dards for commercial real inventory suitable for estate lending, which includes construction and land developthe under-$200,000 home price range (Table 3). By comparison, ment loans. The trend began reversing in 2011, with a pickup Austin and Dallas have the lowest share of vacant developed among those reporting loosening credit requirements for these lot inventory needed to build similarly priced homes. loans. More recently, in third quarter Figure 4. Texas Construction Wages 2016, the survey suggests that on net, financing was becoming more chalChange in Average Weekly Wage 1Q2012−1Q2016 lenging for construction and land development loans, although credit Texas Residential Construction standards for these types of loans were reported unchanged at most participating banks.

21.8%

Labor Short, Costs Rise

U.S. Residential Construction rowth in Texas residential 12.0% construction employment has been slow, despite strong statewide job gains. While it Texas Private Industry Wages took Texas about three and a half 2.2% years to regain jobs lost during the Great Recession, payrolls in residential construction in March 2016 remain slightly below their prerecession high of 50,550 workers. This slow labor recovery was partly Note: Inflation adjusted. Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages due to the shale oil boom, which created nonresidential construction jobs such as downstream energy plants and offices. Assanie (laila.assanie@dal.frb.org) is a business economist and Greer (Sarah. Strong demand for single-family homes combined with Greer@dal.frb.org) is a research analyst at the Federal Reserve Bank of Dala tight construction labor market has resulted in stronger las, and Dr. Torres (ltorres@mays.tamu.edu) is a research economist with the wage growth in residential construction in Texas versus the Real Estate Center at Texas A&M University. The views expressed in this nation. Inflation-adjusted average weekly wages in residenarticle are strictly those of the authors and do not reflect the positions of the tial construction climbed 21.8 percent from first quarter Federal Reserve Bank of Dallas or the Federal Reserve System. 2012 through first quarter 2016. This compares with 12.0 percent for residential construction wages in the U.S. and THE TAKEAWAY overall 2.2 percent growth in Texas total private industry wages (Figure 4). Texas’ strong demand for single-family homes coupled

Outlook Entry-level homes constitute a smaller share of the market today than they did when the housing recovery began following the Great Recession—a result of unprecedented home price appreciation in Texas. OCTOBER 2016

with constrained supply has led to tight inventories and rapid price appreciation. Residential construction is unable to keep up with demand because of constrained lot and labor shortages. The result: higher land and labor costs and declining affordability in the state.

Brokerage

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Selling of the Waggoner Ranch

By Charles E. Gilliland

n the end, clouds of doubt dispersed, seas of conflict parted, and everyone came together to accomplish the improbable sale of a storied Texas ranching empire that dated from the 1850s. Despite a legendary family feud that had fascinated generations of Texans, the transaction concluded with all parties agreeing to the terms. Rural land brokers Bernie Uechtritz (International Icon Properties, consultant to Briggs Freeman Sothebyâ&#x20AC;&#x2122;s International Realty) and Sam Middleton (Chas. S. Middleton and Son) guided the process to an ideal outcome despite repeated dark warnings about the futility of the undertaking. OCTOBER 2016

Middleton recounted early admonitions from formerly interested would-be buyers. “I don’t know how many people I ran into who said, ‘I tried to buy the Waggoner Ranch 15 years ago. You are wasting your time. You guys will never get this done.’” “Everyone thought it would never happen,” Uechtritz added. We are honored and privileged to have been given the trust and responsibility to do the deal. It wasn’t an easy assignment, but we had a fairy-tale ending. We got it done with the unanimous decision of the families and receiver. Getting a unanimous decision wasn’t easy initially. There wasn’t a lot of love lost between them and the court-appointed receiver. Technically and legally, the families had lost control of the process of winding up the trust, the assets of which included the ranch, but they had continued operating the business and ranch as usual for more than 20 years. It (the sale) was a big thing for them both emotionally and legally.

A ranch of mythic proportions, the Waggoner Estate occupies more than 535,000 acres spread across parts of six counties north and west of Wichita Falls. The celebrated spread came to market despite a family dispute that saw the members at odds on virtually anything dealing with the ranch. The family patriarch, Dan Waggoner, and his son, W.T. Waggoner, built the empire with W.T. succeeding as owner when Dan passed away. In 1923, after his attempt to divide the ranch among his heirs engendered family bickering, W.T. placed the sprawling property into a legal entity known as a Massachusetts trust. This ownership left the heirs with no individual controls over the ranch. By the 1990s, the two families, as beneficiaries of the trust, clashed openly. When the trust eventually expired, triggered by its own terms, the courts ordered a sale of the assets. But one family opposed the idea of a sale so two receivers had made little progress toward that end. Many tried to buy the ranch, but none succeeded. ventually, the receiver charged with effecting a sale opted for an auction conducted by a consortium of agents. The auction would likely have resulted in dissolution of the property. Under that scenario, the ranch would be no more, passing into history as an artifact from a bygone era. Meanwhile, Uechtritz convinced the families that marketing the property conventionally with the aid of an internationally connected broker would provide the best opportunity to maximize their return and preserve the ranch intact. As Uechtritz explained:

The proposal by the consortium was to divide it into parcels and sell it piecemeal. There would have been landlocked pieces, pieces with no water, pieces with no

value; it would have been the most illogical thing you ever saw. More importantly, it would have been a neverending saga for the families that had already been in litigation for 22 years. To cut up the ranch with an auction would have meant ongoing litigations for another 100 years. The estate would never have been settled. The purpose of the receivership was to dissolve and wind up the trust established in 1923 by liquidating all assets of that trust. A process that ended with only some of it solved would have been a never-ending litigation nightmare.

iddleton noted, “The families bought into the idea that an auction was not the way to go. It was the first time the two families united on anything. That’s how Bernie and I got involved. The ranch would have lost its identity if it had been cut up in ten to 15 different units.” Uechtritz and Middleton formed a working partnership charged, as Uechtritz describes it, with “a proposal, mandate, and plan to market the property to the four corners of the world, to market to every possible buyer at every possible level.” At the outset, the brokerage team faced unique challenges. First, Uechtritz and Middleton had never worked together. They began by establishing the roles each would play in guiding the transaction. As Uechtritz observed, “Sam Middleton and I were thrown into this deal together, and over the course of this deal became great friends; we’ve learned a lot from each other.” Middleton added, “When we started this process, it was evident that Bernie and I had vastly different styles, and he told me from day one, ‘Now mate, you’re going to be the steak, and I’m going to be the sizzle.’” So Uechtritz concentrated on technology, marketing to the ends of the earth, and organizing needed information. He summarized the marketing push, saying: We got on the covers of a lot of magazines. We started with the support of people around here, the Lands of America, Land Report, Dallas Morning News, Dallas Business Journal . . . to inform our state brokerage community and local markets that it was available. . . . So then I marketed internationally—CBS, Bloomberg News, CNN, and Sky News in Europe. We were on television a lot. I marketed the ranch in 180-plus countries in 40-plus languages in print, digital, and on television. There are only 193 countries in the United Nations, so we certainly reached a majority of them.

Meanwhile, Middleton focused on the physical and logistical aspects needed to show the ranch. After a 15-month marketing campaign, Uechtritz and Middleton had shown the ranch TIERRA GRANDE

SACHUEISTA WAS ONE of four divisions of the ranch and served as the headquarters in the early 1900s. The name refers to an abundant, tall grass growing on the ranch. The dates are W.T. (Tom) Waggoner’s birth and death.

to qualified prospective buyers from both the air and on the ground. Middleton explained, We were fortunate; the ranch had a four-passenger helicopter that was available to us anytime we needed. When people were serious buyers, I had a ground route pretty well done where I could show the high points of the ranch in about eight hours. So if the guy was interested, they would come in ﬁrst and take a two-hour tour in the helicopter with Bernie, and then go on the ground with us. When the people got really interested, they usually came back and spent several more days on the ranch.

In the end, a total of about 50 showings involved 15 different individuals or groups from as many countries. The second challenge came from the district judge and courtappointed receiver. “After all,” Uechtritz said, for the last 22 years, there had been a lot of brokers, both nationally and internationally, who wanted the deal. The ranch had not been ofﬁcially on the market with a broker previously. It had been a long, drawn-out litigious situation as brokers and receivers came and went. But it was never ready to sell. It didn’t have a survey; it didn’t have a title; there was no signed agreement between the shareholders.

The confirmation of the listing took place on August 6, 2014, when oil sold for $106 per barrel. Middleton envisioned the most obvious buyer as a Dallas oil man. However, Uechtritz’s compressed international marketing plan and timeline as submitted for approval by the judge included both a call for offers and for all contingencies to be removed before presentation to the judge for final approval, a daunting condition. As Middleton recalled that condition, he mused, “…everyone knows that in today’s world, I guess nearly every deal you ever have has a contingency or due-diligence period or inspection period.” With no completed title and no completed survey and at that time no signed agreement from the owners to sell, other than a OCTOBER 2016

listing from the receiver, Uechtritz and Middleton faced a challenge as they sought to deliver a viable buyer for the ranch who would also step up and accept the tough deal points. echtritz and Middleton realized that securing offers from potential buyers with no contingencies called for exhaustive disclosure of all relevant factors affecting operations of the enterprise. To meet these requirements, they assembled a due diligence virtual data room stocked with mountains of information about the ranch. The team aimed to anticipate and deal with any potential pitfalls before a buyer signed the “no contingency” contract. Assembling all of that information required teamwork and considerable knowledge about the technology used to organize and present it. As Uechtritz noted,

. . . deals like this don’t happen because of one guy, they don’t happen because of two guys. . . . We all knew what we were doing, but we had help, and we had layers of teams behind this and people in our company. Sam had his son Charlie as his right-hand tech and support guy who meshed with our team. And I had my right-hand guy, Will Beuck, back of the house. He organized all the data along with the rest of my team and various others on call on an as-needed basis. I also worked very closely with both lawyers and the Waggoner management the whole way through.

In the end, would-be buyers could use that data warehouse to manage the risk inherent in the purchase of real property thanks to the talent and hard work invested by the teams. “It was amazing the amount of information we had to have available to these serious players. We had to have anything that a buyer would want to know in that data room,” said Middleton. While noting that the envisioned Texas oil man did not emerge as a contender, Middleton observed, “Well, you know what happened to oil.”

The final chapter began when on September 1, 2015, a call went out for offers. As Uechtritz describes the process: I’ve had a lot of success by putting a definitive time frame to a campaign. By marketing for a period of time . . . while you have to keep your finger on the pulse of the marketing response, at a certain point, you should make a call for offers. It might be a call for first offers or final offers. You have to set metes and bounds. You have to be able to draw a line in the sand for everyone, for your sake and your client’s. That is a turning point in any campaign because it lets you know exactly where you are, and it lets your clients know where you are. That was exactly the case in this instance, and in fact, a critical part of my submitted plan for the Waggoner Ranch sale. We gave them (would-be buyers) 30 days to get their offers together and really show us the money. Everybody

Anytime you get into a multimillion-dollar transaction, at some point, maybe $20 million or so, you’ve got to have some minerals. . . . In fact, the existing wells are shallow, stripper wells producing only a few barrels a day. Royalty income was not a huge factor. Of

in the final group was financially prequalified. That was part of the process early in the marketing. It also kept us sane and sensible and kept us down to about 50 showings for people who could actually afford the ranch. Whether the ranch worked for them or not is another story. We were looking for proof of ability and competency to close.

rom the outset to finish, the marketing campaign generated about 900 inquiries. Geographically, approximately 48 percent came from Texas, 38 percent from the remainder of the country, and 15 percent the rest of the world. Many of the inquiries were not credible, so instituting financial and background checks plus drawing the line in the sand resulted in five making the final cut. Final conditions required those five to deposit $15 million in earnest money to have an

course, when we got started on this deal, oil was $106 a barrel, and we know what happened after that. Psychologically, the buyers wanted 42 percent of the minerals, but that was not a huge part of the income potential. Of course, there was the fact that there are still

450,000 acres that have never been drilled. The geologist for the Waggoner family called it an ‘unknown frontier.’ That played into the sale, too. Stan Kroenke, the buyer, is not an oilman. He did not buy the ranch for its minerals. — Sam Middleton

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opportunity to present their offers. The winning buyer then added a substantial sum to proceed to the closing. Choosing and approving an offer provided the final challenge for the team. The potential buyers assembled and presented their proposed offers to the families. Middleton noted, The good thing about bringing in the five finalists to meet was that the families did not have to approve the sale. The sale was approved by the receiver and the judge. However, we wanted the families to be on our side and not appeal the decision. By bringing in five different offers, the families knew we had researched the ranch, and this is what it’s worth. The five qualified groups or individuals made various offers that varied a couple of hundred million dollars. The families were convinced we had done our job, and this is the best we are going to do on the offers. So the families got on board, and they actually signed the contract. They approved the sale. When we went to the courthouse, it was a slam dunk.

he winning offer came from Stanley Kroenke, billionaire owner of the NFL’s Los Angeles Rams and a string of ranches in Montana, Wyoming, and Canada. His involvement also brought a third ranch broker to the transaction. Joel Leadbetter, managing director of the Bozeman office of Hall and Hall, served as a buyer’s representative in the acquisition. Leadbetter became an important contributor to the ultimate outcome of the sale. As Uechtritz noted, Sam and I were the listing brokers and— importantly for all you listing brokers out there—we had a great partner in Joel. You don’t get deals done by yourself. You’ve always got to have a buying broker to make us listing brokers look good, and he certainly did that. We had thousands and thousands of meetings in the listing and sale process and beforehand and certainly during the negotiation process. When I was on conference calls for hours at a time with 16 lawyers, never once did I hear a reference to “Brand X.” When we sat around countless meetings and countless tables, never once did I look across the table and see “Brand Y.” I saw Joel, I saw Sam, I saw lawyers, I saw family members. I never saw a “brand.” Joel and I established a rapport and a pact of absolute trust in each other from day one. I think that is important to remember when you’re out there trying to do tough deals or hard deals or any deal at all. It’s not a brand that comes in across the line, it’s you—your tenacity, your personality, your perseverance, your chutzpah, your ideas. It’s what you know. . . .

By putting aside ego and concentrating on guiding the process to a successful conclusion, the team (brokers, families, judge, receiver, and buyer) crafted a “fairy-tale” outcome. The families, the judge, and the receiver all approved the deal. OCTOBER 2016

“They unanimously, and I mean unanimously, agreed that Stan Kroenke was the right steward to take over the great legacy of the W.T. Waggoner Ranch,” said Uechtritz, speaking of the final decision. The closing on Feb. 10, 2016, was followed by a reception at the Red River Museum in Vernon. “Both families were among the 50 to 60 attendees. It was a very emotional affair. At that reception, Kroenke really learned what he had. He said, ‘I never realized how important this ranch was to these families.’ It really meant a lot to him,” said Middleton. Summarizing the experience, Uechtritz said, The sale of Waggoner Ranch, with a rough start, had a fairy-tale ending, and I think that’s very important. Important for agribusiness, for the rural sector, for some of our founding fathers and roots of this country, and this state, for the Texas and Southwest Cattle Raisers Association, the American Quarter Horse Association, the towns of Vernon, Electra, and Seymour, and all the towns in this great State of Texas. The new owner is a land steward, he’s not a subdivider; he’s not a developer. He runs a great cattle operation in the United States as well as Canada. Stan Kroenke is going to keep it together. He is going to make it bigger and better.

Middleton added: “I think the families now realize they did the right thing. They can separate and go their ways. Both sides are very wealthy. They can stop fighting. At the end of the day, everyone was glad it happened.” The sale of the Waggoner Ranch completed the dissolution of the trust as designed, and marked the final chapter of the compelling saga of the Waggoner family guiding this enterprise from the frontier to the current day. The new owner takes the helm with a unique appreciation for the traditions surrounding the ranch and its place in Texas history. In the end, what seemed to be an impossible task brought brokers, families, attorneys, and a host of affected employees and communities together to participate in a truly historic event as the stewardship mantle passed to a new owner, guiding the property into a new era. Dr. Gilliland (c-gilliland@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY The Waggoner Ranch dates back to the 1850s and encompasses 535,000 acres in six Texas counties. It recently sold after being marketed globally. The story of the transaction is good reading for anyone involved in real estate.

Legal Issues

he Environmental Protection Agency and the U.S. Army Corps of Engineers (the agencies) initiated major changes to the Clean Water Act (CWA) in August 2015. Because the changes were enacted under the agencies’ rule-making authority, no congressional oversight, review, or vote occurred. Many affected parties remain uninformed about the changes, the effects they may have on their property and property rights, and the severity of the penalties for a violation. Even though the changes refer to regulating the waters of the U.S., in essence, the revisions regulate, directly or indirectly, all lands in the U.S. lying within a watershed. The definitions, or lack thereof, reveal the potential for a massive, nationwide federal land-use regulation. For example, estimates place as much as 97 percent of Oklahoma’s land mass under the CWA’s jurisdiction. Because of the potential violation of the U.S. Constitution, the Sixth Federal Circuit of Appeals issued a nationwide injunction on August 28, 2015, staying

the regulation’s implementation one day before it went into effect. Later, Congress passed legislation voiding its enforcement, but that was vetoed by President Obama. If implemented, the revisions could potentially freeze the current use of most lands throughout the U.S. that do not have a federal permit. Permits under the CWA currently take one to three years to secure at a cost of $200,000 to $250,000, not including any mitigation costs. Violations result in penalties as high as $37,500 per day as well as possible imprisonment.

Why the Changes? One of the reasons given for the CWA changes is to comply with the decisions of the U.S. Supreme Court. In 2006, the U.S. Supreme Court decided the CWA’s jurisdiction should be extended to isolated wetlands. At the time, the CWA’s jurisdiction was limited primarily to navigable and interstate waterways. The court rejected the expansion. However, in a nonbinding, concurring opinion, Associate Justice Anthony Kennedy proffered the significant nexus test. Basically, if the isolated wetlands had a significant effect on downstream waters, then the CWA should have jurisdiction. Nine years later, the agencies modified the test and applied it to all U.S. nonnavigable waters (not just isolated wetlands). The test will be discussed later. TIERRA GRANDE

Waters vs. Lands If the revisions regulate waters, how can they be interpreted to apply to lands? Here is where the definitions, or lack thereof, come into play. The regulations and the explanation of the changes state that it is essential that discharges of pollutants be controlled at the source. The act states that “The CWA’s jurisdiction begins at the source of the waters and functions along a continuous flow to the watershed’s outlet.” The agencies recognized the difficulty in defining the “source.” They say it lies somewhere between being entirely aquatic (in a stream or lake) and short of being on “dry land.” However, the agencies refused to define the term dry land. Based on the language in the revisions, dry land appears to be all land lying outside of a watershed. A watershed includes the entire physical area/basin drained by a distinct stream system, separated from other watersheds by ridge-top boundaries. Texas has 23 major river basins that incorporate most, if not all, of the state’s land area. The agencies go on to say that dry land is an area with no water features such as streams, rivers, wetlands, lakes, ponds, and the like. It is not dry land simply because it lacks water at a given time. It may remain dry land even if it is wet after a rainfall event. According to the regulations, “there is no agreed upon definition given geographic and regional variability.” Without the definition, the agencies’ latitude in determining the CWA’s jurisdiction is practically unlimited. However, the revisions give the agencies the explicit authority to regulate all land within 4,000 feet of tributaries (and possibly ditches), navigable waters, or territorial seas. It also gives them the indirect authority to regulate all lands within a watershed.

Overview of CWA with Changes Before August 15, 2015, the CWA governed six categories of waters. Now there are eight. The first four include the traditional navigable and interstate streams and lakes initially covered by the CWA at its inception in 1972. The next two move the agencies’ jurisdiction upstream to include tributaries and waters near, but without surface connections to, navigable and interstate streams and lakes. Before the revisions, the agencies OCTOBER 2016

employed a case-by-case analysis to determine whether these waters were jurisdictional. After the revisions, these two are now jurisdictional per se with no case-by-case analysis. In this group, tributaries are the most significant because they impact a new category of water added by the revisions. Tributaries are defined as watercourses having a bed, banks, and an ordinary high-water mark. The presence of these physical features, especially the ordinary high-water mark, demonstrate sufficient volume and frequency of flow to establish a significant nexus to downstream waters. The ordinary high-water mark need not be visible to the naked eye and may be inferred. The rules permit the use of remote sensing sources or mapping, aerial photographs, light detection and ranging data, and hydrologic estimations of discharge sufficient to create an ordinary high-water mark such as regional regression analysis or hydrologic modeling to assist in the process. f the ordinary high-water mark can be located (or inferred), the revisions then give the agencies the authority to regulate all waters (lands) located 4,000 feet on either side of that mark on the tributary. So finding the ordinary high-water mark, by whatever means, expands the agencies’ jurisdiction. However, the authority to regulate all waters or lands within 4,000 feet of the ordinary high-water mark is not automatic. The agencies must determine, on a case-bycase basis, whether any alterations in land use within the 8,000-foot corridor would have a significant impact on downstream waters. To do so, the agencies apply the modified significant nexus test mentioned earlier. Here is how it now reads.

The agencies made several changes and added some definitions and explanations to Justice Kennedy’s original significant nexus test. • The term isolated wetlands was replaced with the term waters. • The term function was added and defined as any activity that increases or decreases the water flow or influences the export of provision for species dependent on aquatic habitat. • The term region was not defined by Justice Kennedy. The agencies defined the term as the watershed in which the land (or waters) is located, having a single point of entry into the nearest traditional navigable waters, interstate waters, or territorial seas.

Tributaries and Ditches The regulation of ditches, a subset of tributaries, raises several questions. The problem lies in the fact that the term ditches is never defined. Here is a summary of how the regulations address the subject. • The term significant nexus (the core of the test) was never defined but placed, more or less, at the agencies’ discretion. Justice Kennedy indicated that the term meant “more than speculative or insubstantial.” In the final rule, the agencies state significant nexus is not itself a scientific term but rather a determination made by the agencies in light of the law, science, and the agencies’ experience and expertise. • Finally, the similarly situated test underwent some explanations as to how it applies. If a landowner or developer contemplates a change in land use, the landowner would ask the agencies to see if a permit is needed. Assuming the land is within 4,000 feet of a tributary, the agencies apply the modified significant nexus test for the determination. However, the issue is not whether the contemplated change significantly affects downstream waters. The question is whether downstream waters would (emphasis added) be affected if all similarly situated lands in the watershed made the same alteration.

his aggregation allows the agencies to combine similarly situated land not only within the 4,000 feet on either side of tributary but also any similarly situated land in the same watershed. More importantly, the agencies’ use of similarly situated land in the test binds that land to the outcome even though the landowner is never contacted or informed of the decision. Based on the agencies’ authority to combine land that they feel is similarly situated in a watershed and their subjective authority to determine when the significant-nexus threshold is reached, it is difficult to imagine where any waters or lands within any watershed would ever be found not to be jurisdictional and require an extensive and expensive permit for a change in use.

The final rule does not include an explicit exclusion for roadside ditches. Ditches that drain wetlands, however, are jurisdictional because they degrade the quality of wetlands and may contribute to their demise. Most roadside ditches in Texas contain and drain wetlands. This, in turn, subjects all land 4,000 feet on either side of roadside ditches to the CWA’s possible jurisdiction.

Farming and Ranching Exclusions The rules contain several exclusions. The most important one for agriculture is the exclusion for normal ongoing farming and ranching operations. “Ongoing,” according to the American Farm Bureau Federation’s research, means only farming operations ongoing since 1977. Newer farms would not qualify. The definition appears much broader. Many commentators feel that the phrase normal, ongoing operations means the normal farming and ranching operations currently being practiced or conducted on the property on August 15, 2015. Any alterations from those practices would require a permit. This view is supported by the rules. The agencies recognize the work of farmers to protect and conserve natural resources and water quality on TIERRA GRANDE

agricultural land. However, the agencies also recognize that waters (lands) in which normal farming, ranching, and silviculture practices occur are often associated with modifications and alterations including drainage, changes to vegetation and other disturbances. The agencies believe these practices (alterations) should be considered regarding their significant effect on downstream waters. This interpretation was borne out on June 10, 2016, in the decision of Duarte Nursery v. Army Corps of Engineers decided by the Eastern District of California. The case, in part, dealt with the application of the agriculture exemption under the current CWA rules. The act exempts “normal farming activities such as plowing, seeding, cultivating, minor drainage, and harvesting for the production of food, fiber, and forest products. . . .” Duarte Nursery plowed a field that had been in grassland for the previous 24 years. The Corps charged Duarte with a violation of the CWA. Duarte defended under the agriculture exemption. The court held, in part, that plowing did not meet the applicable definition of an established and ongoing farming activity. It was an alteration. The new rules leave in place the exemption as well as seven other exclusions under the prior regulation. Five of the seven exclude activities conducted on dry land. But, as mentioned earlier, the term is never defined. Based on the authors’ reading of the regulations, dry land means any land located outside a watershed and/or more than 4,000 feet from the ordinary high-water mark of traditional navigable waters, interstate waters, territorial seas, impoundments, or tributaries.

Penalties for Violations Landowners, builders, developers, and oil companies, among others, who begin a project without a needed permit face civil penalties ranging from $16,000 to $37,500 per day. Criminal penalties range from one year in prison and/or $2,500 to $25,000 fines per day for negligent violations. For knowing violations, the penalties range from three years in prison and/or $5,000 to $50,000 fines OCTOBER 2016

per day. Repeat violations can go as high as six years in prison and/or $100,000 fines per day.

Broader Picture The regulations do not differentiate between rural and urban lands. Homeowners, builders, and developers are subject to the same rules and regulations. Likewise, oil and gas companies installing drilling pads, pipeline companies laying pipelines, and roadway companies constructing roads, all face the same costly, timeconsuming efforts in acquiring permits. Lenders must consider how the regulations affect the value of their potential collateral. Common activities from farming to homebuilding might now require a permit as more waters (and land) are deemed jurisdictional. Property owners may simply choose not to engage in certain activities due to the cost and time needed to secure a permit.

Challenging the CWA

rocedural issues have made it difficult, expensive, and time consuming for landowners to challenge a determination made by the agencies that the property contains jurisdictional waters (or lands). Landowners had to exhaust all administrative remedies before a federal court would hear the case. This meant the landowners risked accumulating large civil and criminal penalties if they lost in court. The risks did not outweigh the benefits. In May 2016, the U.S. Supreme Court ruled unanimously that landowners may judicially challenge a determination made under the CWA without the administrative delays. Justice Kennedy issued another concurrent opinion in which he expressed concerns about the CWA. “The Act . . . continues to raise troubling questions regarding the government’s power to cast doubt on the full use and enjoyment of private property throughout the nation.” A more detailed version of this article is on the Center’s website at www.recenter.tamu.edu. Fambrough (info@recenter.tamu.edu) is a member of the State Bar of Texas and former lawyer with the Real Estate Center at Texas A&M University and Hatfield (hat@hctc.net) is a real estate broker and past president of the Realtors Land Institute.

THE TAKEAWAY Recent changes to the Clean Water Act expand the act’s powers significantly. Property owners should be aware of the changes to avoid substantial penalties.

Residential

Selling Season By Ali Anari

Home sales activity in Texas tends to accelerate beginning in March, peaks in summer, and troughs in winter (Figures 1 and 2). Monthly shares of annual homes sold in Texas from 1990 to 2015 as well as the seasonal variations of monthly shares over a year measured by the standard deviations of monthly shares are shown in Table 1.

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Figure 1. Texas Monthly Homes Sold

Number (Thousands)

Great Recession

30 20 10 0 1990

1994

1998

Source: Real Estate Center at Texas A&M University

2002 Year:Month

2006

2010

2014

Figure 2. Texas Monthly Homes Sold as Percentages of Annual Sales

Percent

10 8 6 4 1990

1994

1998

Source: Real Estate Center at Texas A&M University

From 1991 to 2015, with the exception of 2008, January was the trough month in home sales activity, on average accounting for 5.5 percent of annual homes sold in Texas. June was the peak month for 13 years, while July and August were peak months in six and five years, respectively. The month of May was peak in 2002 and 2010. On average, June was the seasonal peak month for the entire period from 1990 to 2015. The seasonal pattern in the stateâ&#x20AC;&#x2122;s housing market was disturbed by the Great Recession and its recovery. November became the trough month in 2008 while in 2010 sales peaked in May and had the largest seasonal variation. OCTOBER 2016

2002 Year:Month

2006

2010

2014

Comparing the seasonal patterns of homes sold in Texas and the U.S., June is the peak month, accounting for 10.2 percent of homes sold in both the state and the nation (Figure 3). On average, the monthly shares of homes sold in Texas have been higher than the nationâ&#x20AC;&#x2122;s shares in February, March, May, July, August, and December, and lower in January, April, and September through November.

Seasonal Patterns in Texas Metros Using monthly and annual home sales data for 25 metropolitan areas of Texas, Table 2 shows the average monthly shares

Table 1. Texas Monthly Homes Sold as Shares of Annual Sales Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sep.

Oct.

Nov.

Dec.

Variations

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Average

7.49 5.76 5.40 5.43 5.72 5.22 5.44 5.28 5.11 5.29 5.17 5.52 6.09 5.67 5.20 5.17 5.34 6.06 6.22 5.01 5.10 5.26 5.07 5.42 5.34 5.27 5.50

6.00 6.07 5.81 6.08 6.09 5.73 6.51 6.11 6.33 6.43 7.09 6.76 7.07 6.34 6.38 6.25 6.60 7.13 7.68 6.24 6.51 5.91 6.20 6.08 6.24 6.05 6.37

8.27 7.65 8.61 7.41 9.20 7.79 8.46 7.73 8.57 8.78 9.08 8.89 8.23 8.05 8.44 8.41 8.99 9.16 8.84 7.82 9.67 8.55 8.06 8.15 7.81 8.23 8.42

7.98 8.32 8.55 7.81 8.99 6.94 8.88 8.13 8.59 8.62 8.25 8.52 8.89 8.13 8.91 8.59 8.09 8.82 9.35 8.00 10.82 8.77 8.36 8.94 8.58 8.55 8.55

9.01 10.25 9.00 8.72 9.68 9.51 10.15 9.47 9.31 9.22 10.04 9.92 10.05 9.31 9.24 9.63 9.81 10.29 10.34 8.92 11.25 9.49 9.79 10.31 9.72 9.31 9.68

9.48 10.21 9.97 10.43 10.33 10.49 9.64 9.77 10.51 10.83 10.49 10.37 9.50 9.76 10.39 10.39 10.74 10.36 10.48 10.23 10.80 10.62 10.23 9.79 10.21 10.42 10.25

9.79 9.94 9.75 9.91 9.45 10.00 10.28 10.52 10.57 10.14 9.50 9.95 9.76 10.15 9.99 9.80 9.42 9.94 10.18 10.52 8.19 9.48 9.76 10.48 10.12 10.69 9.93

10.80 10.27 9.60 10.21 10.15 11.22 10.12 10.07 9.62 9.80 10.06 10.04 9.51 10.25 9.74 10.27 9.98 10.07 9.69 9.30 8.43 10.27 10.43 10.27 9.79 9.81 9.99

8.00 8.41 8.81 8.93 8.39 8.75 8.01 8.84 8.19 8.27 8.13 7.52 7.89 8.88 8.19 8.33 8.20 7.14 7.68 8.74 7.58 8.66 8.07 8.34 8.63 8.92 8.29

8.28 8.04 8.12 8.30 7.52 8.58 7.92 8.75 7.83 7.58 7.84 7.57 8.00 8.38 7.79 7.81 7.81 7.37 7.23 9.14 7.08 7.68 8.46 7.90 8.62 8.04 7.99

7.85 7.85 7.79 7.92 7.05 7.91 7.02 7.05 7.33 7.27 7.21 7.35 6.95 6.68 7.34 7.38 7.25 6.92 5.47 8.44 6.80 7.28 7.69 6.85 6.76 6.37 7.22

7.06 7.23 8.59 8.86 7.44 7.87 7.58 8.27 8.03 7.79 7.16 7.60 8.05 8.41 8.38 7.97 7.76 6.73 6.86 7.63 7.76 8.03 7.87 7.47 8.18 8.33 7.80

1.29 1.57 1.43 1.54 1.55 1.82 1.55 1.59 1.60 1.58 1.57 1.53 1.24 1.48 1.51 1.58 1.54 1.59 1.71 1.56 1.93 1.62 1.60 1.69 1.57 1.71 1.49

Peaks are in red, troughs are in green Source: Real Estate Center at Texas A&M University

his article reports the findings of a research program at the Real Estate Center at Texas A&M University on seasonal patterns in the time series of monthly home sales in Texas and the state’s metropolitan areas. The research finds relatively stable and recurring patterns of seasonality in homes sold from 1990 through 2015. The research project also estimated and quantified seasonal patterns in the Texas home sales data to be used for forecasting and planning home sales transactions by homebuyers, home sellers, real estate sales agents, and financial institutions. The time series data used for the research were monthly homes sold in Texas and its metropolitan areas from January 1990 to December 2015 (compiled by the Real Estate Center) and U.S. home sales data. Time series of homes sold, like many other economic or financial indicators, are made up of four components:

secular trends, business cycles, seasonal patterns, and random events. Secular trends are long-term upward or downward trends in time series mainly due to long-term trends in population, aggregate outputs, and incomes. Business cycles are ﬂuctuations in economic indicators over several years comprising periods of contraction

because of growing population and incomes in Texas. The business cycle component is especially visible during the Great Recession of 2008–09 and during recovery. The state’s economy and the time series of homes sold experienced several random shocks mainly related to oil prices. The most notable ones occurred when the price per barrel of West Texas Intermediate crude oil climbed to more than $120 in 2008 and collapsed to less than $50 in 2009. In every year from 1990 to 2015, the time series of homes sold displays seasonal patterns with peaks in summer and troughs in winter. Dividing monthly home sales for each year by total homes sold that year and multiplying by 100 removes the secular trends, business cycles, and the impacts of random shocks on the number of homes sold and isolates the seasonality pattern in terms of monthly shares of annual homes sold (Figure 2).

Research Methodology

and expansion. Seasonal patterns are the dependence of the magnitudes of economic or ﬁnancial indicators on the time within the year. Random events are unexpected or unpredictable events that affect performance indicators. The time series of monthly home sales in Texas (Figure 1) comprises four components: secular trends, business cycles, seasonal patterns, and random shocks. The secular trend is displayed by a general long-term upward trend

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Percent

of annual homes sold in the state’s metro areas and their Figures 4 through 7 compare the seasonal patterns of home corresponding seasonal variations. On average, January has sales in the four largest Texas metropolitan areas with the been the trough month for all the state’s metro areas except state’s overall seasonal pattern. For additional figures showing Brownsville-Harlingen, El Paso, and Texarkana, which hit the rest of Texas MSAs, see this article at www.recenter.tamu. their troughs in February. June was the peak month for homes edu. sold in 15 metropolitan areas. The Victoria metro area peaked Causes of Seasonal Patterns in May while home sales for College Station-Bryan, KilleenSeveral factors are behind the seasonal patterns in home sales. Temple, and Waco peaked in July and Abilene, Beaumont-Port The most important ones are school calendars, holidays, Arthur, Brownsville-Harlingen, McAllen-Edinburg-Mission, weather, and jobs in the education industry. Families need to San Angelo, and Sherman-Denison peaked in August. move to their desired school districts before the beginning of Monthly home sales variation has been highest in College the school year in September. Station-Bryan (3.27) and Therefore, home sellers lowest in McAllen-EdinburgFigure 3. Texas and U.S. need to put their homes on Mission (0.49). College Seasonal Patterns of Home Sales the market before the school Station-Bryan had the lowest 11 year ends to allow plenty of share of monthly sales (4.48 U.S. 10 time to complete the sale of Texas percent) in January and hightheir homes as well as the 9 est share of homes sold in July purchases of the homes they (13.01 percent) among the 8 are moving to. Employment state’s metro areas as well as 7 in the education services the largest variation because industry normally peaks of the impact Texas A&M 6 before September and also has University’s calendar and 5 significant impact on homeuniversity employment have Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Real Estate Center at Texas A&M University buying and selling activities. on home sales.

Table 2. Texas Metropolitan Areas’ Monthly Homes Sold as Shares of Annual Sales Region

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sep.

Oct.

Nov.

Dec.

Variations

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

5.68 5.65 5.51 6.29 7.57 4.48 5.59 5.41 6.75 5.34 6.40 6.31 5.55 5.36 7.36 5.04 5.57 5.42 5.53 5.74 6.93 5.75 5.49 6.00 5.86

6.43 6.69 6.17 7.17 7.28 5.03 6.54 6.37 6.53 6.37 6.87 6.66 6.49 6.19 7.87 7.09 6.78 6.64 6.44 6.43 6.92 6.87 6.85 6.02 6.61

8.51 8.53 8.17 8.56 8.78 7.14 8.68 8.59 8.61 8.26 7.85 8.15 8.55 8.42 8.58 7.74 9.31 8.43 8.53 8.57 7.98 8.29 8.83 8.42 8.39

8.70 8.81 8.59 8.63 8.62 8.39 8.75 8.68 8.36 8.46 8.33 8.60 8.66 8.72 8.42 8.62 9.09 8.52 8.19 8.87 8.01 8.45 8.47 8.40 8.56

9.56 9.37 9.75 9.29 9.04 12.26 9.40 9.78 8.93 9.70 9.44 8.83 9.36 10.15 8.73 9.85 8.73 9.39 9.39 9.35 8.23 9.29 9.84 9.17 9.45

10.15 9.98 10.43 9.32 9.07 12.27 10.29 10.28 9.28 10.27 9.97 9.52 10.10 10.77 8.90 10.25 10.01 10.11 10.53 9.86 10.66 9.97 9.59 9.85 10.06

9.89 9.46 10.14 9.36 8.90 13.01 9.46 9.94 9.17 9.95 9.98 8.97 10.07 10.65 8.67 10.07 9.22 9.76 9.80 9.30 8.42 9.70 9.47 10.30 9.74

10.23 9.52 10.07 9.64 9.15 12.63 9.95 9.91 9.20 9.97 9.87 9.46 9.78 10.41 9.00 9.99 9.65 10.15 10.08 9.90 9.68 9.96 9.75 10.29 9.93

8.44 8.70 8.42 8.30 8.31 6.57 8.26 8.27 8.13 8.19 8.20 8.56 8.50 7.87 8.26 8.76 8.61 8.58 8.51 8.74 8.54 8.77 8.53 8.49 8.35

8.01 8.25 7.94 8.13 8.25 5.90 8.02 7.97 8.58 7.99 7.98 8.86 8.08 7.50 8.34 8.18 8.55 8.07 7.85 8.50 8.64 8.18 7.49 8.32 8.06

7.19 7.38 7.15 7.55 7.47 5.68 7.36 7.20 7.93 7.26 7.45 7.72 7.19 6.57 7.82 7.06 7.38 7.09 7.29 7.32 7.73 7.37 7.53 7.19 7.29

7.22 7.66 7.67 7.76 7.54 6.64 7.69 7.61 8.52 8.23 7.67 8.37 7.66 7.39 8.04 7.36 7.09 7.86 7.88 7.42 8.28 7.40 8.16 7.54 7.69

1.49 1.28 1.58 1.01 0.70 3.27 1.39 1.52 0.90 1.51 1.22 1.00 1.43 1.85 0.49 1.58 1.34 1.44 1.49 1.33 1.04 1.31 1.32 1.46 1.33

Peaks are in red, troughs are in green Source: Real Estate Center at Texas A&M University OCTOBER 2016

Understanding Seasonal Patterns

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

Figure 4. Austin-Round Rock and Texas Seasonal Patterns of Home Sales

Figure 6. Houston-The Woodlands-Sugar Land and Texas Seasonal Patterns of Home Sales Houston-The Woodlands-Sugar Land Texas

9 8 7 6 5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Real Estate Center at Texas A&M University

Austin-Round Rock Texas

9 8 7

6 5

10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Real Estate Center at Texas A&M University

11 10 Percent

Figure 5. Dallas-Fort Worth and Texas Seasonal Patterns of Home Sales Dallas-Fort Worth Texas

Percent

Understanding seasonal patterns in local housing markets can help homebuyers, home sellers, real estate agents, financial institutions providing mortgages, and all parties involved in housing markets to plan and optimize their housing transactions. For home sellers, the likelihood of selling their homes is greater if they put their homes on the market well before their areaâ&#x20AC;&#x2122;s peak month. For home buyers, there are more homes available to choose in early summer. Sales agents can optimize employing sales assistants and manage their resources consistent with seasonal home sales patterns. A knowledge of seasonal patterns of home sales can help financial institutions to plan their lending activities.

Figure 7. San Antonio-New Braunfels and Texas Seasonal Patterns of Home Sales San Antonio-New Braunfels Texas

9 8 7 6 5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Real Estate Center at Texas A&M University

9 8

THE TAKEAWAY

7 6 5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Seasonal patterns play a key role in home sales. The most important factors in seasonal patterns are school calendars, jobs in the education industry, weather, and holidays.

Source: Real Estate Center at Texas A&M University

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OCTOBER 2016