Tierra Grande - June 2017

JUNE 2017 â„¢

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

COLLEGE STATION, TEXAS 77843-2115

In This Issue Manufacturing Employment Land Market Trends Cropland Prices Where are Austin Homeowners Moving To? Mortgae Debt Less in Texas Technical Tax Savings Oil Industry Drives Houjston Manufacturing

Helping Texans make better real estate decisions since 1971

JUNE 2017 â„¢

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

best in

HOUSTON

LEFT TO RIGHT david jones, charles gilliland, BOB BEALS, alden demoss, jp beato iii

Photo by Houston IABC

2017 bronZe quill awards

iii

TIERRA GRANDE

Visit us online at

www.recenter.tamu.edu

JULY 2017

VOLUME 24, NUMBER 3 ™

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

14 Beyond Austin City Limits

Director, GARY W. MALER

Long time East Austin homeowners are being priced out of their own neighborhoods by rising land values and property taxes. Where are they going? Center researchers took a long, hard look.

BY HAROLD D. HUNT AND CLARE LOSEY

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 Graphic Designer, ALDEN DeMOSS Circulation Manager, MARK BAUMANN Lithography, RR DONNELLEY, HOUSTON

ADVISORY COMMITTEE: Doug Roberts, Austin, chairman; Doug Jennings, Fort Worth, vice chairman; Mario A. Arriaga, Conroe; Russell Cain, Port Lavaca; Alvin Collins, Andrews; Jacquelyn K. Hawkins, Austin; Besa Martin, Boerne; Walter F. “Ted” Nelson, Houston; 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.

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

PHOTOGRAPHY/ILLUSTRATIONS: JP Beato III, pp. 1, 14–15, 21; Mike Stone for General Motors, pp. 2–3; Real Estate Center files, pp. 5, 6, 8, 10–11, 12–13, 27, 28; Robert Beals II, pp. 18–19. © 2017, Real Estate Center. All rights reserved.

2 Built in Texas

What’s Happened to Manufacturing Employment?

Manufacturing employment has been dropping for decades nationwide. Texas’ future lies in energy-related, high-skill manufacturing industries, which should give the state an advantage.

BY LUIS B. TORRES AND WESLEY MILLER

Summertime fun on the Guadalupe River, New Braunfels

PHOTOGRAPHER JP Beato III

JULY 2017

Compared with homeowners in the U.S. as a whole, Texans have lower mortgage debt.

This means they pay less in initial costs and mortgage fees, and worry less about housing expenses in general.

BY ALI ANARI AND JAMES P. GAINES

8 Land, Lots of Land

27 Tech Savvy, Tax Savings

10 Common Ground

28 Well-Oiled Machine

Midwestern cropland has declined 17.6 percent in the past three years while Texas cropland has fallen only 1.1 percent. What’s up with that?

BY ERIN M. HARDIN

Houston has something the other Texas metros don’t have: healthy manufacturing employment numbers. And it’s all thanks to the oil and gas industries, which need specialized machinery and equipment.

BY LUIS B. TORRES

The Lone Star State’s rural land prices increased overall during first quarter 2017, but regions varied and some were not so fortunate.

BY CHARLES E. GILLILAND AND TIAN SU

ON THE COVER

22 Eye on Texas Mortgage Debt

Comparing Texas and Midwest Cropland

Wow! Who ever thought real estate professionals would be showing properties using 3-D goggles? And getting a tax break to boot. The Jetsons’ world is just around the corner.

BY JERROLD J. STERN

Houston’s Manufacturing Sector

1

Texas Economy

BUILT T What’s

Happened to Manufacturing Employment?

By Luis B. Torres and Wesley Miller 2

he loss of manufacturing jobs has been discussed throughout the United States for decades. From 1939 to 2016, U.S. total nonfarm employment more than quadrupled and has continued to expand, while manufacturing employment barely increased by 30 percent (Figure 1).

Due to the regional economic diversity of the nation, labor force changes have varied significantly between individual states. Some states specialized in specific manufacturing subsectors, thereby attracting certain jobs away from others, while other states had employment declines across the entire manufacturing industry. This article examines the changes in Texas manufacturing employment beginning in the late 1970s.

Texas total nonfarm employment has steadily increased since the 1970s, except during the state’s recessions in 1982, 1985, 2001, and 2008. The trend for manufacturing employment has been less consistent. Manufacturing employment exhibited greater losses during economic downturns and less growth during expansion. Due to the lack of a continuous data series for Texas manufacturing employment from the 1970s to present, two separate series were used: data from 1976 through TIERRA GRANDE

GENERAL MOTORS ANNOUNCED a $1.4 billion investment for upgrades at its Arlington plant to more competitively produce full-size SUVs.

between manufacturing employment and the underlying business cycle. Despite similarities during the two periods, several unique characteristics developed as the industry transformed over 40 years.

1970s: Global Energy Impact The Texas economy expanded in the 1970s after two global energy crises shocked the price of oil. After accounting for inflation, the average price of oil appreciated 253.9 percent by 1979. In December 1976, there were 868,100 manufacturing jobs in Texas, 18.2 percent of total nonfarm employment.

Manufacturing employment growth kept pace with nonfarm employment through the latter half of the decade (Figure 2) and even surpassed nonfarm employment growth in 1979. Real manufacturing wages were flat during the boom period, suggesting stagnant labor productivity growth.

Turmoil in the Middle East led to a 7.0 percent decrease in the global oil supply between October 1978 and 1979, causing the second oil price shock of the decade. While Texas benefitted from higher oil prices in the short-run, the indirect effects on the national economy were unavoidable.

1980s: Double-Digit Unemployment

Figure 1. United States Employment (1939–2016) (Index 1939 = 100)

490

Manufacturing Total Nonfarm

430 Index

370

The 1970s oil shocks created inflationary pressures and drove the United States into the 1980 recession. However, the economic downturn was short-lived, and economic activity stabilized after just six months. In the fall of 1981, the U.S. entered another recession. Over four million jobs were lost nationwide, and the U.S. unemployment rate reached double digits for the first time since 1941. Almost 70 percent of the jobs lost were in manufacturing.

Texas entered its own recession in February 1982, and the manufacturing industry suffered similarly. By May 1983, manufacturing employment fell 14.3 percent (159,100 jobs), compared with only a 3.1 percent decline in Texas nonfarm

310

Figure 2. Texas Employment (End of Year 1976–89)

250

Total Nonfarm Employment Manufacturing Employment Real Manufacturing Wages

140

70 1939

1954

1969

Source: Bureau of Labor Statistics

1984

1999

2014

1989 were obtained from the Texas Workforce Commission’s Texas Labor Market Review publications, and data from 1990 through 2016 are from the Bureau of Labor Statistics.

Texas manufacturing employment was strikingly similar during these two periods, exhibiting employment growth until suffering from multirecessional decades. The magnitude of job losses during economic downturns illustrates the correlation

130 Index

130

JULY 2017

(Index December 1976 = 100)

150

190

120 110 100 90 1976

1978

1980

1982

1984

1986

1988

Note: Seasonally adjusted and detrended.

Sources: Texas Workforce Commission and Bureau of Labor Statistics

3

Figure 3. Manufacturing Employment Percentage of Total Employment (End of Year 1976–2016)

T

Percent

21 employment. The manufacthe manufacturing industry turing employment percentperformed exceptionally well, 18 age illustrates the magnitude as real manufacturing output of the manufacturing decline increased by 52.4 percent.

15 (Figure 3).

Manufacturing employment he manufacturing growth (10.5 percent) did 12 employment percentnot match the pace of total age hovered around nonfarm employment but 9 18.0 percent in the late 1970s was much stronger than in before collapsing to 15.0 perthe 1980s.

6 cent after the 1982 recession.

In 1990, four subsectors 1976 1981 1986 1991 1996 2001 2006 2011 2016 Multiple declines in the dominated manufacturing Note: Seasonally adjusted and detrended. Calculated as the ratio of Texas measurement coincide with production and accounted for manufacturing employment to total nonfarm employment, in percentage terms. The Texas Workforce Commission and Bureau of Labor Statistics Texas recessions over the over 50 percent of manufacmanufacturing employment data series were combined to estimate 40-year period, corroborating turing output: electronic and a continuous series from 1976 to 2016.

Sources: Texas Workforce Commission and Bureau of Labor Statistics manufacturing’s dependence electrical equipment (13.5 on the underlying business percent), chemicals and allied cycle. The employment contractions during the four Texas products (17.1 percent), petroleum and coal products (11.4 perrecessions confirm that economic downturns disproportionally cent), and industrial machinery and equipment (10.2 percent). damaged manufacturing jobs (Table 1).

Growth in the latter three subsectors reveals the expanding relationship between the manufacturing and energy Table 1. Employment Changes During Texas Recessions industries, despite Texas’ overall shift from oil and gas Manufacturing Total Nonfarm dependence.

Peak Date Trough Date Employment Employment The importance of the durable goods sector, measured by its employment and output percentages, February 1982 March 1983 –159,140 (–14.3%) –197,853 (–3.1%) expanded in the 1990s (Table 2). The durable goods October 1985 January 1987 –78,790 (–7.9%) –177,488 (–4.0%) employment percentage persisted above 57 percent March 2001 June 2003 –155,098 (–14.7%) –210,912 (–2.2%) through the decade and surpassed 60 percent between June 2008 November 2009 –120,423 (–12.9%) –404,421 (–3.8%) 1996 and 1998. The durable goods output percentage Note: Seasonally adjusted. steadily increased from 49.0 percent in 1990 to 57.4 Sources: Texas Workforce Commission, Bureau of Labor Statistics, and Dallas Federal Reserve percent by 1998.

In October 1985, the price of oil crashed, dragging Texas into The shift toward the durable goods sector influenced the a second recession. Manufacturing lost over 78,000 jobs after manufacturing industry’s path of expansion. U.S. spending cuts recovering only 25.0 percent of the employment losses from at the end of the Cold War negatively affected manufacturing, the previous recession. The two recessions, separated by a subparticularly in the transportation industry (a subsector within par recovery, severely damaged manufacturing jobs in Texas; durable goods). Under the standard industrial classification manufacturing employment fell from 1.12 million jobs in 1981 system, the transportation industry included several subto under 918,000 in 1987. In contrast, total nonfarm employsectors relevant to national defense, including aircraft and ment added 250,000 jobs during the period. parts, ship and boat building and repairing, and guided misThe Texas economy changed significantly in the 1980s. Fallsiles and space vehicles and parts. From 1990 to 1992, the ing oil prices and two economic downturns shifted the econFigure 4. Economic Growth (1990–97) omy away from the volatile energy industry, thereby stressing (Index 1990 = 100) manufacturing jobs. However, the relative importance of the 160 energy industry to the manufacturing industry endured. In Total Nonfarm Employment 150 addition to employment contractions, manufacturing wages Manufacturing Employment stagnated for several years before falling in 1987 (Figure 2).

Manufacturing Output 140 Gross State Product Diminishing wages indicated declining manufacturing labor 130 productivity levels. As Texas approached a long expansion in the coming decade, it appeared to be leaving manufacturing 120 behind.

110

1990s: Shift to Durable Goods

The Texas economy exhibited strong economic growth during the 1990s. From 1990 to 1997, real gross state product (GSP) and total nonfarm employment increased 38.8 and 21.3 percent, respectively (Figure 4). After a devastating decade,

4

100 90 1990

1991

1992

1993

1994

1995

1996

1997

Sources: Bureau of Labor Statistics and Bureau of Economic Analysis TIERRA GRANDE

PIPE, PIPEFITTINGS, and other products associated with drilling demonstrated the importance of the energy industry to the fabricated metal product sector.

Figure 5. Labor Productivity (1990–97) 140

Table 2. Durable Goods Percentages Year

Durable Goods Employment

Durable Goods Output

1990

59.2

49.0

1992

57.5

54.6

1994

57.7

56.5

1996

59.7

59.0

1998

62.3

57.4

Note: The durable goods employment percentage is the ratio of Texas durable goods employment to total manufacturing employment, in percentage terms. The durable goods output percentage is defined in the same manner, but in terms of nominal durable goods output.

Sources: Bureau of Labor Statistics and Bureau of Economic Analysis

Texas transportation equipment industry lost 13,800 jobs and continued to decline until 1996.

The Texas economy expanded in 1993 and accelerated after the signing of the North American Free Trade Agreement (NAFTA) in January 1994. This structural change occurred simultaneously with rising oil prices and a Texas technology boom. The direct impact of NAFTA on Texas manufacturing requires further analysis to separate the individual effects of these economic changes. This analysis will be presented in a future Tierra Grande.

From 1994 to 1997, the durable goods sector boomed and drove manufacturing industry growth. Durable goods employment increased by 77,800 jobs, accounting for 97.3 percent of manufacturing job growth. Three subsectors led this expansion: fabricated metal products, industrial machinery, and computer electronic products manufacturing.

The industrial machinery category, which included construction, mining, and materials handling, benefitted from rising oil prices and overall economic expansion. The energy industry also drove fabricated metal product sector growth, JULY 2017

130

(Index 1990 = 100)

Manufacturing Total Nonfarm

120 110 100 90 1990 1991 1992 1993 1994 1995 1996 1997 Sources: Bureau of Labor Statistics and Bureau of Economic Analysis

which included fabricated pipe, pipefittings, and other components associated with drilling. Reduced trade barriers, Texas’ business-friendly environment, and increased specialization (caused by Texas’ comparative advantage in durable goods production) enabled these leading industries to thrive. espite job gains, production increases across the manufacturing sector dwarfed employment growth, indicating improvements in manufacturing labor productivity (Figure 5), which is defined as the ratio of manufacturing output to manufacturing employment. Texas manufacturing productivity started to rise in 1991 before accelerating in 1993.

By 1994, manufacturing labor productivity nearly tripled and sustained 8.6 percent average annual growth through 1997.

While the long-term impacts of increased productivity on employment are widely debated, employment growth generally occurs during the productivity expansion period.

In general, the 1990s was a successful decade for the Texas manufacturing industry. Manufacturing output and productivity levels exceeded their aggregate counterparts and employment exhibited steady growth after the tumultuous 1980s.

D

5

CHEMICAL PLANTS line the coast of Galveston Bay in Texas City.

The growth of the durable goods industry supported Texas manufacturing but represented a shift toward more capitalintensive production, prompting the manufacturing industry’s massive productivity gains. While manufacturing employment approached record levels at the end of the decade, the manufacturing employment percentage continued its downward trend and fell from 13.4 percent in 1990 to 11.5 percent in 1999.

losses occurred in the three booming sectors of the 1990s— over 68,000 jobs were lost in the fabricated metal products, industrial machinery, and computer and electronic products 2000s: Manufacturing Under Stress subsectors. s in the 1980s, manufacturing struggled in the 2000s The recession officially ended in June 2003, but total because of two major recessions. The decade began employment growth remained stagnant until 2005. Manufacslowly with stagnant growth in 2000 after a minor turing employment growth was flat during the recovery period decline in 1999. The nation entered an eight-month recession and left the industry vulnerable at the onset of the Great in March 2001, and Texas manufacturing employment began to Recession. During the expansion phase of the business cycle, plummet (Figure 6). Economic losses in the nondurable conditions worsened in Texas, Figure 6. Texas Employment and Output (2000–15) goods sector offset much of where the recession lasted over (Index 2000 = 100) the employment gains in the two years before ending in June 190 fabricated metals production, Total Nonfarm Employment Manufacturing Employment 2003. Simultaneously, China’s industrial machinery, and 170 Manufacturing Output admission to the World Trade transportation equipment Gross State Product 150 Organization in December industries.

2001 altered the global ecoThe Great Recession began 130 nomic environment. The in December 2007, but the 110 impact of increased trade with major damage to the Texas China on Texas manufactureconomy occurred in 2009.

90 ing will be analyzed in a future Real GSP contracted annually 70 article. for the first time in over 20 The combination of an ecoyears, and nonfarm and manu50 nomic downturn and increased facturing employment had 2000 2002 2004 2006 2008 2010 2012 2014 global competition strained the Sources: Bureau of Labor Statistics and Bureau of Economic Analysis significant job losses: 301,300 Texas manufacturing industry, and 86,300, respectively. particularly manufacturing employment. From 2001 to 2003, Every manufacturing subsector except food manufacturing total nonfarm employment dipped by 143,200 jobs. The largest recorded employment contractions. The durable goods industry,

A

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Texas energy production to which had supported manuTable 3. Changes in Employment (Thousands) better adapt to major price facturing employment for Year Manufacturing Fabricated Metal Machinery swings. While the energyover 15 years, was particu2010 –25.8 –5.4 –1.7 related manufacturing larly harmed, accounting for subsectors staggered, wages 82.6 percent of the manu2011 24.4 9.6 9.2 remained stable. Increased facturing employment loss 2012 28.7 11.1 9.1 labor productivity and sus(71,300 jobs) in 2009.

2013 5.7 3.2 2.1 tained wages indicate the By 2009, manufactur2014 11.7 6.2 3.2 oil bust was a temporary ing employment fell below 2015 –8.5 –8.1 –4.4 shock affecting jobs, which 900,000—comparable with 2016 –32.0 –15.7 –16.1 may return as the price of 1970s levels—while techSource: Bureau of Labor Statistics oil recovers. nological advances allowed real manufacturing output Manufacturing’s Competitive Advantages to rise 40.5 percent during the decade (Figure 6). Consequently, apidly advancing technology poses a threat to many manufacturing labor productivity increased by 78.7 percent but workers across the globe, particularly in labor-intenwas unable to drive up production wages. Manufacturing labor sive, low-skill industries. The future of Texas manuconditions worsened as real wages for manufacturing producfacturing employment lies with its comparative advantage in tion workers fell 15.4 percent from 2001 to 2009. capital-intensive, energy-related, and high-skill industries.

2010s: Unprecedented Wage Gains The Texas economy began shifting this direction in the The Great Recession officially ended in June 2009, and Texas 1990s and this long-run trend continues. Subsectors such production returned to its long-run positive trend. While as chemical manufacturing, fabricated metal products, and production expanded immediately after the recession, the machinery manufacturing are examples of capital intensive labor force was slow to recover. Manufacturing employment industries with the largest growth. Look for Texas manufaccontinued to contract in 2010, falling 3.1 percent. The shale oil turing to become increasingly concentrated in these indusboom in 2011 pulled manufactries, which best suit the turing employment out of its Figure 7. Manufacturing Production Worker Real Hourly Wage state’s natural skill set. The prolonged slump, particularly challenge will be to maintain (Index January 2001 = 100) driving the industrial machina highly educated and skilled 135 Manufacturing ery and fabricated metal prodlabor force, relative to other Nondurable 125 ucts subsectors (Table 3). states and countries, which Durable In 2005, the fabricated can satisfy these demands.

115 metal products industry In the next article of became the largest, yet this series, the effects of 105 most volatile, manufacNAFTA and China’s admisturing employer in Texas. sion to the WTO on Texas 95 The employment changes manufacturing employment 85 illustrate the impact of this will be examined. Both of volatility on manufacturing these events are associated 75 employment (Table 3). Manuwith major changes in the 2001 2003 2005 2007 2009 2011 2013 2015 facturing’s dependence on manufacturing industry and Notes: Seasonally adjusted and detrended. Production wages were deflated these subsectors indicates the deserve individual analyusing the consumer price index for all urban consumers.

(Index 1982–84 = 100). further shift in employment ses regarding their specific Sources: Texas Workforce Commission and Bureau of Labor Statistics composition toward energycontributions. The impact related durable goods. of these two events may The shale oil boom’s largest contribution to the manufacprovide guidance for future decisions affecting international turing industry occurred in the form of wage increases (Figeconomic conditions. ure 7). After declining steadily in the 2000s, manufacturing Dr. Torres (ltorres@mays.tamu.edu) is a research economist and Miller wages made unprecedented gains in 2011. By December 2016, (wamiller@tamu.edu) a research assistant with the Real Estate Center at real hourly wages for manufacturing production workers had Texas A&M University. increased 42.1 percent relative to 2010 and 19.3 percent relative to 2001. Wages in the durable goods subsector performed THE TAKEAWAY even better, rising 59.9 percent higher than 2010 levels.

Manufacturing employment faltered when the price of oil The comparative advantage of Texas manufacturing lies in crashed in 2014, losing 40,500 jobs in 2015 and 2016. However, capital-intensive, energy-related, and high-skill industries. increased productivity and technological advances allowed

R

JULY 2017

7

Land Markets

Texas Rural Land Prices Nominal Real or Deflated

2,500 2,000 1,500

Nominal Real or Deflated

800 600 400 200 0 2005

1977

1987

1997

2007

Source: Real Estate Center at Texas A&M University

2017

Panhandle and South Plains regional markets took a breather in first quarter 2017 after expanding for five quarters following a three-quarter retrenchment in 2015. At $1,110 per acre, prices in this region inched down approximately 0.72 percent from first quarter 2016 levels. Volume of sales lagged from a year ago, settling in at 283. Low commodity prices have challenged farmers, threatening them with operating losses. However, abundant cotton yields saved the day in 2017 allowing many to cover costs and make modest profits. Dairy farmers contributed to upward pressure on irrigated land prices.

2011

2014

2017

Far West Texas observers saw industrial uses associated with the drilling boom in the Permian Basin drive prices dramatically higher in fourth quarter 2016 and continue at those levels in first quarter 2017. Overall prices in the region substantially exceeded 2013 prices and prior years. High bonus payments for mineral leases and purchases of land to secure water rights for municipalities put pressure on prices where the low level of activity in that region limits the statistical validity of indicated prices.

Far West Texas Region

1,000

0 1967

2008

Source: Real Estate Center at Texas A&M University

1,000 500

8

Panhandle and South Plains Region

1,000

Dollars per Acre

Dollars per Acre

3,000

1,200 Dollars per Acre

S

tatewide Texas rural land prices increased in first quarter 2017, moving up 3.26 percent to $2,563 per acre from the first quarter 2016 price of $2,482. The statewide typical size of 1,501 acres increased 240 acres over the first quarter 2016 size. The 5,343 sales pushed transaction volume up to 353 sales more than in first quarter 2016. Total dollar volume amounted to $915.857 million, falling short of the fourth quarter 2016 total by $38.8 million and exceeding first quarter 2016’s lackluster total of $903.7 million. The real price settled at $443 per acre in 1966 dollars.

These factors document another record-setting year throughout the state. However, market conditions in some regions of the state diverged, resulting in widely varied regional trends.

Nominal Real or Deflated

800 600 400 200 0 2005

2008

2011

2014

Source: Real Estate Center at Texas A&M University

2017

West Texas regional markets posted strong price growth but dwindling levels of activity. At a 9.2 percent annual growth rate, prices expanded to $1,486 per acre compared with $1,360 per acre in 2016. However, the 506 reported sales fell well short TIERRA GRANDE

of the 605 sales in first quarter 2016, suggesting potential buyers may be resisting current price levels. Observers reported variable market conditions during 2016 and look for modest future price growth.

Dollars per Acre

Dollars per Acre

Nominal Real or Deflated

1,200 800 400

2011

2014

2017

2,000 1,000

Northeast Texas Region

4,000

Nominal Real or Deflated

3,000 2,000 1,000 0 2005

2008

2011

2014

Source: Real Estate Center at Texas A&M University

2017

Gulf Coast–Brazos Bottom land markets saw prices decline for the fourth straight quarter, settling at $5,606 as low energy prices finally took a toll on the Houston economy. The 1.9 percent decline from the first quarter 2016 price marked the fourth straight quarterly price decline. Nevertheless, activity expanded, rising to 728 sales for an 18.5 percent increase in volume. In addition, the 1.9 percent price decline was the smallest since second quarter 2016, suggesting that retrenchment may be ending. Observers noted continued demand for cropland and pastureland.

Gulf Coast - Brazos Bottom Region

2011

2014

Nominal Real or Deflated

2,000 1,000 2008

2011

2014

Source: Real Estate Center at Texas A&M University

2017

Austin - Waco - Hill Country Region Nominal Real or Deflated

3,000 2,000 1,000 0 2005

2008

2011

2014

2017

At the close of first quarter 2017, emerging signs hint that the euphoric optimism following the election has begun to wane.

Despite OPEC cutbacks and an uptick in oil prices, petroleum storage totals continue to rise. In addition, supplies of agricultural commodities continue to outstrip demand, signaling weak operating conditions for farms and ranches. In short, the next six months promise to be confusing as the country and the world sort out the implications of this uncertain environment.

4,000 3,000

4,000

Source: Real Estate Center at Texas A&M University

5,000

0 2005

2008

The Austin–Waco–Hill Country area had price growth continue at muted levels in fourth quarter 2016, rising 1.8 percent and continuing at 1.9 percent in first quarter 2017. The inflation-adjusted real price declined a modest 0.2 percent. The nominal price was $3,571 per acre based on 1,527 transactions, a significant increase from 1,464 in first quarter 2016. Continued demand for development and recreation drives this market.

Although Texas’ statewide market price expanded to a new high, deflated prices have changed modestly since 2015. Prices suggest that price increases have moderated from rapid growth in 2013–14. As 2017 closed the book on a bruising election process, optimism reigned in the overall economy. Brokers reported noticeable increases in phone calls following the election. However, many have indicated the increase in inquiries has not translated into an uptick in transactions. Perhaps continuing uncertainty about the political and economic environment coupled with low commodity prices continues to weigh on potential land buyers as they struggle to make sense of the new world in Washington.

Dollars per Acre

2008

Northeast Texas reported robust market activity in 2016 with prices climbing more than 8.6 percent. The 1,781 sales eclipsed first quarter 2016’s total of 1,576 sales. At $3,748 per acre, prices continued their strong recovery from 2011 lows. An uptick in oil and gas activity in the Haynesville Shale as well as robust recreational demand contributed to this strong performance.

Dollars per Acre

3,000

Source: Real Estate Center at Texas A&M University

Source: Real Estate Center at Texas A&M University

Dollars per Acre

Nominal Real or Deflated

0 2005

0 2005

6,000

South Texas Region

4,000

West Texas Region

1,600

2017

South Texas markets appear to have turned a corner in fourth quarter 2016 with a 1.3 percent price increase continuing with a 3.1 percent rise in first quarter 2017 prices. Those positive results followed four quarters of declining prices beginning with fourth quarter 2015. The $3,507-per-acre price coincided with a sizable expansion in activity at 498 sales, a 27 percent increase JULY 2017

over first quarter 2016 levels. Observers suggested a reduced number of offerings contributed to strengthening of market prices.

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

THE TAKEAWAY Texas rural land markets increased overall. Market trends differed from region to region.

9

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id

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Land Markets

The Texas Panhandle and South Plains Region (Region 1), Net farm income (NFI) and cropland have seen similar increases in rural cropland prices (Figure values throughout the United States 1). From the beginning of 2005 to the peak in 2013, Region 1 values increased 118 percent. Since then, prices have have increased substantially in the last cropland remained relatively stable while Midwest land prices have decade, especially in the Midwest. NFI decreased close to 10 percent from their peak. in Iowa has expanded from about $2 Farm Sector Cycles here have been three major farm business sector boommillion in the mid-1990s to over $9 and-bust cycles in the last century: 1910–40, 1940–60, and 1970–80. The recent growth in the farm business million in 2011 in real terms. Cropland sector has a number of similarities to the boom periods of the prices in Iowa have increased over 200 three previous cycles. The 1970–80 cycle, the most recent and major one, ended in NFI and cropland prices crashing. This percent in the last ten years as a result. crash was largely attributable to overleveraging. The repercusmanifested as 2.3 farm bankruptcies per 1,000 farms per These increases are largely attributable sions year; nearly 70 agricultural commercial banks failing per year; to increases in crop prices, yield per and massive declines in revenue for suppliers, leading many to close operations. As a result, the government was forced acre, and demand. to intervene with supplemental appropriations and assistance

T

10

TIERRA GRANDE

Figure 1. Texas Rural Land Prices Panhandle and South Plains (Region 1)

250 200 150

S

100 50 0 1960

1970

1980

1990

2000

2010 2015

Source: Real Estate Center at Texas A&M University

programs to restrict agriculture production and boost prices and NFI. A general pattern has emerged in these cycles. Initially, NFI grows, usually due to increases in trade, exports, and prices. The surge in cash flow induces producers to deleverage, increasing their wealth positions. The increase in wealth JULY 2017

induces expansion and modernization of operations. As NFI reverses, capital expenditures continue to grow despite negative signals from the market. The relationship between historical U.S. NFI and capital expenditures is shown in Figure 2. Eventually producers are forced to restructure their newly created debt positions. ome question whether the recent boom in the farm business sector will have an outcome similar to the previous cycles. Texas in general has not been subject to the same factors that have affected the recent boom. The Midwest rural economy is dominated by row crop production, while less than 18 percent of Texas land is used for cropland. Region 1’s rural economy is most similar to the Midwest’s farm economy with close to 50 percent of the land used for dry or irrigated crop production. This region is most likely to endure stress from the recent downturn in commodity prices and contraction in NFI. The majority of Texas rural land—close to 65 percent—is used for pastureland. Texas also has substantial nonfarm income whereas Midwestern states do not. Hunting, fishing, and other tourism activities are prevalent in Texas.

11

The profile of the debt holders of the outstanding term debt also plays a part in the development of risk. According to the 2012 census of agriculture, the average age of U.S. farmers was 58, and 78 percent of the producers had been on the farm for more than ten years. This suggests that those holding most of the outstanding term debt may be relatively new entrants making significant capital expenditures. Thus, the majority of the risk could be concentrated within a minority of the most vulnerable producers. These structural differences in debt profiles of the market compromise the comparison of the DAR over time.

Financial Leverage Ratios The DAR is a single balance sheet statistic and considers common and popular distinction made between today both the liquid and nonliquid assets available to cover debt. and the 1980s is the lower debt positions of the overall Eighty percent of the farm business sector’s assets are land farm business sector. From 2000 to 2005, national debt values, which are nonliquid. Landowners may consider land levels remained stable, and sales to retire debt infeasible accumulation was minimal. in times of stress as demand Figure 2. National Net Farm Income During that time, the averfor land contracts. Asset values and Capital Expenditures age yearly debt accumulation are also a function of market 140 60 for the nation was about 1.5 strength. When the market 120 50 percent. In the latter part of the was stressed in the 1980s, the 100 40 decade, debt levels increased value of cropland (and therefore 80 about 9 percent, largely because assets) declined rapidly. There30 60 of the boom in ethanol producfore, ratios describing the farm 20 tion. In the past several years, business sector’s capacity to 40 10 debt levels have continued to service current outstanding debt 20 rise, increasing 8 percent in through asset liquidation may 0 0 2014. not truly represent the sector’s 1967 1975 1979 1985 1991 1997 2003 2009 2015 The debt-to-asset ratio (DAR) financial health.

Source: U.S. Department of Agriculture’s Economic Research Service 2016 is a statistic most commonly The debt burden ratio (DBR) used to describe the financial and the times interest earned health of the farm business sector. The DAR reached unsusratio (TIER) measure revenue or income relative to current tainable levels during the 1980s and reached its peak in 1985 debt obligations (Figure 4). The DBR is debt outstanding at 22 percent (Figure 3). In 2002, it reached 15 percent and divided by NFI and is an indicator of the repayment declined to 12 percent in 2015. Analysts point to this as a capacity of an entity. The TIER, on the other hand, is major distinction between the 1980s and now and a reason calculated as revenue divided by interest expense why the recent boom will not end like the 1980s. and describes the borrower’s ability to service However, the DAR does not account for important their interest payments. structural changes that have occurred in the sector. Debt in Figure 3. National Debt-to-Asset Ratio the farm business sector today is 0.25 more concentrated on a minor0.21 ity of producer balance sheets compared with the 1980s. Almost 0.17 two-thirds of producers reported no outstanding term debt on their 0.13 balance sheets in 2009 as opposed 0.09 to nearly 60 percent of producers in 1986. Additionally, 55 percent 0.05 of the outstanding debt was held 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 by farms with multiple loans from Source: U.S. Department of Agriculture’s Economic Research Service 2016 multiple sources.

12

Capital Expenditures (Millions)

Net Farm Income (Millions)

A

TIERRA GRANDE

14 12 10

Figure 4. National Times Interest Earned and Debt Burden Ratio TIE Ratio Debt Burden Ratio

8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: U.S. Department of Agriculture’s Economic Research Service 2016

L

enders use a general threshold in determining an enterprise’s access to credit. A DBR of four, or total debt outstanding not exceeding net income by a multiple of four, is most commonly used. The average DBR does not exceed that threshold for most of the historical period except from 1976 to 1986 (Figure 4). The DBR surpassed that threshold of four and reached a peak of 13 in 1983 but did not substantially surpass that threshold again until 2015 when it reached 4.4. It has continued to rise, and the USDA has projected it will reach 6.3 in 2017.

The spread between the DBR and the TIER ratios can also indicate stress. In 1977, the two ratios reversed their relationship when the DBR became larger than the TIER. This relationship continued throughout the farm business sector downturn and reversed in the late 1980s as the sector began to recover.

These ratios did not see a similar relationship reversal until 2016 when the DBR increased to 5.5 and the times interest earned decreased to 5.28. The USDA’s projections for NFI in 2017 imply further widening of the spread.

JULY 2017

The Panhandle and South Plains Region of Texas are most likely to be affected by the downturn in row crop commodity prices and NFI, but the rural land markets in this region may not be similarly affected like the Midwest. Recently, dairies in Region 1 have been buying cropland to grow their own feed. When crop prices reached record highs, dairies’ margins decreased due to the increased input cost of their feed. As commodity prices decline and crop producers become strained, dairies are benefiting from the decrease in input costs. Dairies are taking the opportunity to buy cropland as a way to eliminate future feed cost risk. This alternative demand for cropland has likely supported the rural land markets. The Midwest does not have this immediate alternative demand. Using Iowa again as a representative state for the Midwest, cropland has declined 17.6 percent from 2013 to 2016. Region 1 cropland prices have only decreased 1.1 percent during the same period.

As the current boom for the national farm business sector comes to an end, what happens next is mere speculation. Many state market participants will avoid the tragedies of the 1980s. Yet further consideration beyond the common, aggregated, balance sheet indicator shows the sector may not be in the stable environment currently touted. The other indicators considered here look at ability to service debt which, in the end, determines stability.

According to the 2012 census of agriculture, the average age of U.S. farmers was 58, and 78 percent of the producers had been on the farm for more than ten years.

Hardin (ehardin@tamu.edu) is a Ph.D. candidate in the Department of Agricultural Economics at Texas A&M University.

THE TAKEAWAY The Midwest has seen substantial increases in farmland values. As crop prices decline and profit margins tighten, the growth in land values may be coming to an end.

13

Residential

W

here do homeowners go when their neighborhoods become unaffordable? A growing number of urban communities within larger metropolitan areas are witnessing the dislocation of many of their most vulnerable residents. In Texas, East Austin is a prime example.

Demand factors driving this trend, including Austin’s strong population and employment growth, were discussed in the first article of this series titled “East Side Story.” A second article, “Change and Challenges,” primarily focused on local supply-side constraints. This article

14

completes the series by examining possible location alternatives for homeowners exiting East Austin.

Obtaining housing a similar distance from downtown is an important consideration for East Austin’s lower-income homeowners who work in the urban core. For decades, Austin’s east side has provided easy access to employees in service jobs critical to businesses located there. Many of the displaced homeowners face significantly higher transportation costs and commuting times along with loss of neighborhood and family ties.

Housing options are limited if they attempt to relocate within Travis County. A surge in the county’s median home prices and apartment rents during the past several years resulted in adjoining counties becoming more affordable alternatives. As a result, all five counties (Bastrop, Caldwell, Hays, Travis, and Williamson) within the Austin Metropolitan Statistical Area (MSA) are included in this analysis.

Detailed tracking of where displaced homeowners have relocated is not possible using currently available data sources. As an alternative, housing TIERRA GRANDE

affordability and income data across all Austin MSA ZIP codes act as a proxy to illustrate economic and demographic differences by geography.

Although not perfect predictors, affordability, demography, and proximity to East Austin and the urban core provide insight into more likely relocation choices for displaced East Austin homeowners.

Affordable Housing Within East Austin

F

or the purpose of this study, East Austin is defined as the area within the six ZIP codes listed in Table 1. The City of Austin, several nonprofit organizations, and private developers offer affordable housing to East Austin residents, either individuals or families that meet the income qualifications.

Affordable units in East Austin belong to one of three programs: the Developer Incentive Program, the Rental Housing Development Assistance (RHDA) Program, or the Acquisition and Development (A&D) Homeownership Program.

The Developer Incentive Program allocates additional entitlements or privileges to developers, such as additional density or height, in exchange for community benefits, including affordable rental and ownership housing units. The RHDA Program includes only rental housing units, and the

Table 1. Affordable Housing Units in East Austin

THESE HIGH-END HOMES are among many under construction in ZIP code 78723.

East Austin ZIP Code

Number of Affordable Units (Completed Rental and Ownership)

Total Affordable East Austin Units (Percent)

78702

572

24.0

78721

298

12.5

78722

174

7.3

78723

657

27.6

78741

525

22.0

78752

157

6.6

2,383

100

Total

Source: Affordable Housing Inventory, City of Austin

Table 2. Affordable Housing Units in East Austin by MFI East Austin ZIP Code

Units for Incomes <= 30% of Austin MSA MFI

Units for Incomes <= 50% & >30% of Austin MSA MFI

Units for Incomes <= 60% & > 50% of Austin MSA MFI

Units for Incomes <= 80% & > 60% of Austin MSA MFI

Total Affordable Units (Completed, Rental and Ownership Units)

78702

20

410

62

80

572

78721

21

3

250

24

298

78722

28

83

51

12

174

78723

37

192

127

301

657

78741

7

134

74

310

525

78752

0

157

0

0

157

113

979

564

727

2,383

Total

Source: Affordable Housing Inventory, City of Austin JULY 2017

15

A&D Program only includes ownership housing units. epending on the eligibility requirements of the program, residents must earn a certain percentage of the Austin MSA’s median family income (MFI) to qualify for an affordable unit. Unlike median “household” income (MHI), which is a single number, median “family” income varies by family size.

The U.S. Department of Housing and Urban Development (HUD) annually calculates MFI for program eligibility.

Typically, the residents must fit within one of the four income categories shown in Table 2.

HUD calculated $76,800 for the 2015 four-person family MFI for all five counties in the Austin MSA. To qualify for an affordable unit for incomes equal to or less than 80 percent and greater than 60 percent of the Austin MSA MFI, a family must have earned between $46,080 ($76,800 × 0.6) and $61,440 ($76,800 × 0.8). The 2015 four-person family MFI in ZIP 78723 was only $39,360 and $39,307 in ZIP 78752, the only two East Austin ZIP codes reporting income statistics.

The MFI for the two reported ZIP codes was about half that of Travis County. Since HUD uses the Austin MSA’s $76,800 MFI to determine affordable housing qualification, a number of East Austin residents would likely not have sufficient income to qualify for many of East Austin’s affordable units.

According to the Affordable Housing Inventory database managed by the City of Austin, as of January 2017 more than 2,300 affordable units were located within East Austin. This number represents affordable rental and ownership units that have been completed. Almost threequarters of the affordable units in East Austin are located in three of the area’s six ZIP codes: 78702, 78723, and 78741 (Table 1).

Overall, the number of affordable units within East Austin is similar across the various income categories except for those for residents whose income is equal to or less than 30 percent of MFI

D

16

(Table 2). However, within each of the six individual ZIP codes, the number of housing units offered at each income level varies widely.

Around three-fourths of affordable units within ZIP code 78702, which is closest to downtown, are for residents with incomes equal to or less than 50 percent but more than 30 percent of MFI. Alternatively, the proportion of affordable units in ZIP codes 78723 and 78741 is highest for residents with incomes equal to or less than 80 percent but more than 60 percent of MFI.

housing units offered for ownership are only available to residents with incomes greater than or equal to 80 percent of MFI. In 2015, the Census Bureau’s American Community Survey (ACS) reported that 60,584 housing units were located within the six East Austin ZIP codes.

The 2,383 affordable units represent less than 4 percent of that total housing stock. Even more striking, the 184 affordable housing units for ownership comprise less than one-half of 1 percent of the total stock.

Table 3: Affordable Housing Units in East Austin by Housing Type East Austin ZIP Code

Number of Units (Ownership)

Number of Units (Rental)

Total Affordable Units

78702

20

552

572

78721

8

290

298

78722

0

174

174

78723

115

542

657

78741

41

484

525

78752

0

157

157

184

2,199

2,383

Total

Source: Affordable Housing Inventory, City of Austin

Table 4: Home Price Affordability Based on Owner-Occupied Income of East Austin Residents Median Multiple

Sales Price Range (2011)

Sales Price Range (2015)

Affordable

3.0 & under

$160,017 and Below

$170,190 and Below

Moderately Unaffordable

>3.0 to 4.0

160,018–213,356

170,191–226,920

Seriously Unaffordable

>4.0 to 5.0

213,357–266,695

226,921–283,650

Severely Unaffordable

>5.0

266,696 and Over

283,651 and Over

Rating

Sources: Demographic International Housing Affordability Survey and Real Estate Center at Texas A&M University

Slightly more than 45 percent of all East Austin affordable units are for residents with incomes equal to or less than 50 percent but more than 30 percent of MFI. Less than 5 percent of all units are tailored to residents making 30 percent of MFI or less.

The bulk of East Austin’s affordable housing units—92.3%—are rentals (Table 3). Both single-family and multifamily properties are included. However,

Owner-Occupied Housing

T

he number of potential ZIP codes affordable to East Austin homeowners looking to purchase another home in one of the six East Austin ZIP codes decreased significantly from 2011 to 2015.

To calculate affordability, this article uses the median multiple, a standardized method for measuring housing affordability developed by Demographia. The TIERRA GRANDE

Table 5. Housing Affordability by Number of ZIP Codes for East Austin Owner-Occupied Households Travis County Categories Affordable

Median Multiple

Number ZIPs in 2011

Percent of Total

Number ZIPs in 2015

Percent of Total

3.0 and under

25

38

12

18

Moderately Unaffordable

>3.0 to 4.0

14

21

13

20

Seriously Unaffordable

>4.0 to 5.0

6

9

12

18

Severely Unaffordable

>5.0

21

32

29

44

66

100

66

100

Total

Williamson County Categories Affordable

Median Multiple

Number ZIPs in 2011

Percent of Total

Number ZIPs in 2015

Percent of Total

3.0 and under

19

56

13

38

Moderately Unaffordable

>3.0 to 4.0

11

32

7

21

Seriously Unaffordable

>4.0 to 5.0

1

3

9

26

Severely Unaffordable

>5.0

3

9

5

15

34

100

34

100

Number ZIPs in 2015

Percent of Total

Total

Hays County Categories Affordable

Median Multiple

Number ZIPs in 2011

Percent of Total

3.0 and under

8

40

2

10

Moderately Unaffordable

>3.0 to 4.0

5

25

8

40

Seriously Unaffordable

>4.0 to 5.0

3

15

4

20

Severely Unaffordable

>5.0

4

20

6

30

20

100

20

100

Total

Caldwell County Categories Affordable

Median Multiple

Number ZIPs in 2011

Percent of Total

Number ZIPs in 2015

Percent of Total

3.0 and under

10

63

10

56 28

Moderately Unaffordable

>3.0 to 4.0

4

25

5

Seriously Unaffordable

>4.0 to 5.0

1

6

1

6

Severely Unaffordable

>5.0

1

6

2

11

16

100

18

100

Total

Note: Two ZIP codes were omitted in 2011 due to no home sales.

Bastrop County Categories Affordable

Median Multiple

Number ZIPs in 2011

Percent of Total

Number ZIPs in 2015

Percent of Total

3.0 and under

14

78

9

50

Moderately Unaffordable

>3.0 to 4.0

2

11

6

33

Seriously Unaffordable

>4.0 to 5.0

1

6

1

6

Severely Unaffordable

>5.0

1

6

2

11

18

100

18

100

Total

Sources: Demographic International Housing Affordability Survey and Real Estate Center at Texas A&M University JULY 2017

median multiple is a simple ratio of median sales price divided by MHI. The Real Estate Center’s median sales price data used in the analysis was restricted to existing single-family homes sold through multiple listing services.

MHI is used in the median multiple calculations rather than MFI to represent all households in East Austin rather than just families. For a more detailed discussion of the median multiple, refer to the methodology section in “Change and Challenges.”

The 2011 MHI for East Austin was calculated by multiplying the number of owner-occupied units by the owneroccupied MHI for each of the six ZIP codes. The sum was divided by the total number of owner-occupied units in all six East Austin ZIP codes. The result is a weighted average MHI for East Austin homeowners. ast Austin’s 2015 MHI was calculated using the growth rate in MHI for Travis County from 2011 to 2015 as opposed to East Austin’s MHI growth rate. Owner-occupied MHI for East Austin increased approximately 16 percent from 2011 to 2015 versus just over six percent for Travis County.

The larger percentage increase in owner-occupied MHI that occurred in East Austin is likely the result of higherincome homebuyers migrating into the area. For this reason, the lower Travis County MHI growth rate is considered more indicative of the income growth experienced by East Austin’s long-time legacy homeowners.

The 2011 owner-occupied MHI for East Austin was estimated at $53,339. By 2015, it had increased to $56,730 assuming the 6 percent growth rate in MHI for Travis County. As discussed in “Change and Challenges,” MHI in East Austin increased at different rates among the six ZIP codes. Using the Travis County owner-occupied MHI growth rate also controls for the effect of variations in income among the six ZIP codes.

The MHI for East Austin was multiplied by the median multiple to derive the range of home prices within each

E

17

INTERSTATE

35

Lampasas

281

2

39 21

54

42

58

26

Blv d.

ar

97

Lam N.

64

66

The University of Texas Austin

62

Downtown Austin

100 290

35

70 63

35

12

281

969

72

27

46

44

73 88 90 68

50

24

93

49

41

290

111 53

107 110

43

37

106

16

20 23

Caldwell

112

33

109 105

INTERSTATE

10

Schulenburg

INTERSTATE

35

111

15

INTERSTATE

10

89

32 77

San Antonio

183

90

101 98 97

5928 52

13

21

108

103

64 667071 62 63 69 65 89

94

11

22

48

10

65 88

76

38 57

INTERSTATE

69

75

9

35

19

14

72

71

45

60

29

92

95 91

87

25

18

98

85

104

10

55 51

78 79102 99 100

83

84

290

101

96

86 81

67 77

74

82 80

Johnson City

275

30

61 56

190

77

3

31 47

Cameron

8 1

4 34

40

36

1

7

17

Austin MSA Affordability Map

by ZIP Code

183

5

6

183

2011

102

Temple

190

71

20 mi.

Affordable Moderately Unaffordable Seriously or Severely Unaffordable

1.

2.

3.

4.

5.

6.

7.

8.

76511 76527 76530 76537 76542 76549 76571 76573

9.

10.

11.

12.

13.

14.

15.

16.

76574 76577 76578 78130 78132 78133 78155 78602

17.

18.

19.

20.

21.

22.

23.

24.

78605 78606 78610 78612 78613 78615 78616 78617

25.

26.

27.

28.

29.

30.

31.

32.

78619 78620 78621 78622 78623 78626 78628 78629

33.

34.

35.

36.

37.

38.

39 40.

78632 78633 78634 78636 78638 78640 78641 78642

41.

42.

43.

44.

45.

46.

47.

48.

78644 78645 78648 78650 78652 78653 78654 78655

49.

50.

51.

52.

53.

54.

55.

56.

78656 78659 78660 78661 78662 78663 78664 78665

Note: East Austin ZIP codes are bold.

18

TIERRA GRANDE

INTERSTATE

35

Temple

190

5

6

281

7 2

17

3

39

54

42

58

56 35 55 77 76 51 75

Johnson City

290

26

85

45

25

18

98

62 63 69 89 65

94

57

27

24

93

20 23

49

41

10

281

44 106 290

16 111

53

107 110

102

1

109

43

33

112

105

64

INTERSTATE

10

66

62

35

15

INTERSTATE

10

32 77

San Antonio

JULY 2017

65.

66.

67.

68.

69.

70.

71.

72.

78704 78705 78717 78719 78721 78722 78723 78724

73.

74.

75.

76.

77.

78.

79.

80.

78725 78726 78727 78728 78729 78730 78731 78732

35

81.

82.

83.

84.

85.

86.

87.

88.

78733 78734 78735 78736 78737 78738 78739 78741

89.

90.

91.

92.

93.

94.

95.

96.

78742 78744 78745 78746 78747 78748 78749 78750

97. 78751 98. 78752 99. 78753 100. 78754 101. 78756 102. 78757 103. 78758 104. 78759

72

71

70 63

969

69 111

89 88

183

90

20 mi.

78666 78669 78670 78676 78681 78701 78702 78703

290

65 35

57.

58.

59.

60.

61.

62.

63.

64.

97

The University of Texas Austin

Downtown Austin

INTERSTATE

100

98

101 ar

37

183

275

Lam

5928 52

12

INTERSTATE

Caldwell

50

48 13

108

73 88 90 68

38

14

21

22

46

72

19

60

29

101

92 64 66977071

95 91

87

11

103

78 79 102 99 100

83

84

104

96

86 81

36

67

74

82 80

10 9

61

21

Austin MSA Affordability Map

by ZIP Code

190

77

30

31

2015

Cameron

1

34

40 47

8

4

Blv d.

183

N.

Lampasas

71

105. 78941 106. 78942 107. 78945 108. 78947 109. 78949 110. 78953 111. 78957 112. 78959

19

affordability category (Table 4). For a home in an East Austin ZIP code to be classified affordable in 2011, the median sales price had to have been $160,017 or less ($53,339 × 3.0). In 2015, the median sales price had increased to $170,190 or less ($56,730 × 3.0).

IP codes occasionally overlap county lines. This caused certain ZIP codes to be included in the calculations of more than one county in Table 5.

The East Austin MHI is held constant regardless of ZIP code. Additionally, the median sales price is the same within a particular ZIP code, even if it crosses county lines. As a result, the median multiple will remain the same for individual ZIP codes regardless of county.

The results for more rural ZIP codes are constrained by the limited number of home sales. Any one sale in a sparsely populated county will have a larger effect on the median multiple than it would in more densely populated ZIP codes where there tend to be more home sales.

The median multiple merely provides a benchmark for housing affordability.

Z

Caldwell, and Bastrop Counties and slightly less likely in Hays County. In Caldwell and Bastrop Counties, about half of ZIP codes were classified affordable in 2015 compared with only 18 percent in Travis County.

The portion of affordable ZIP codes in Williamson County (38 percent) was also higher than in Travis County. In Hays County, only 10 percent of ZIP codes were classified affordable in 2015, a significant decline from 2011.

Owner-occupied housing affordability for East Austin residents is contrasted in two maps, one for 2011 and one for 2015 (pg. 18–19). Along with the affordable category, the maps depict the moderately unaffordable ZIP codes separately from the seriously unaffordable and severely unaffordable categories. The assumption is that some displaced East Austin residents would be financially able to purchase homes in moderately unaffordable ZIP codes as well.

In 2011, the median sales price for affordable ZIP codes was equal to or less than $160,017 (based on a median multiple of 3.0). The median sales price

By 2015, a household earning the East Austin owner-occupied median household income could not afford a median-priced home in any East Austin ZIP code.

Due to a variety of individual circumstances, some East Austin residents might purchase a home within a ZIP code not classified as affordable. However, the increased housing costs that accompany owning a more expensive home, especially property taxes, would be a significant barrier to most displaced lower-income residents.

In 2011, 25 ZIP codes in Travis County were affordable to East Austin homeowners (Table 5). By 2015, the number had decreased by more than half to only 12. This assumes that the income for East Austin homeowners grew at the overall rate for Travis County.

By 2015, compared with Travis County, East Austin homeowners appeared more likely to purchase in Williamson,

20

for moderately unaffordable ZIP codes ranged from $160,018 to $213,356 (based on a median multiple of >3.0–4.0).

The median sales price for seriously or severely unaffordable ZIP codes was $213,357 or above (based on a median multiple >4.0).

In 2015, the median sales price for affordable ZIP codes was equal to or less than $170,190. The median sales price for moderately unaffordable ZIP codes ranged from $170,191 to $226,920.

The median sales price for seriously or severely unaffordable ZIP codes was $226,921 or above.

In all, 52 ZIP codes in the five counties were classified as affordable to East Austin residents in 2011 while 27 were moderately unaffordable, and 31 were

seriously or severely unaffordable.

(Two ZIP codes were omitted in 2011 because of no home sales.) By 2015, only 31 ZIP codes were still classified affordable while 26 were moderately unaffordable, and 55 were seriously or severely unaffordable.

Several ZIP codes overlap across county lines. Ignoring the overlap and summing the ZIP codes in individual counties listed in Table 5 yields a larger 76 ZIP codes that were classified affordable in 2011, dropping to only 46 that were affordable in 2015.

Using Demographics to Compare Across ZIP Codes Tracking the exact movements of dislocated East Austin homeowners from one home to another is not possible. To provide further insight into alternative areas they might find attractive, Tables 6 and 7 portray the median multiple and components in its calculation by ZIP code in the affordable category for 2011 and 2015, respectively. Tables 8 and 9 analyze the moderately unaffordable ZIP codes for the same periods. (For Tables 6–9, see this article online at recenter. tamu.edu).

ZIP codes are sorted numerically. The owner-occupied MHI for each ZIP code in column 5 demonstrates that East Austin homebuyers could purchase in some higher-income ZIP codes, depending on home price.

Distance from East Austin and the urban core is helpful in identifying patterns of relocation. This analysis assumes it is more likely for a household to relocate to the more affordable ZIP codes that are closer to those areas. he maps show that the number of affordable ZIP codes close to East Austin was higher in 2011 than in 2015. In 2011, the ZIP codes closest to East Austin indicate that East Austin homeowners could purchase homes north, east, or south of the area.

Only two ZIP codes within East Austin, 78721 and 78741, were affordable to East Austin homeowners in 2011 but not in 2015. In essence, by 2015, an East Austin household earning the East Austin owneroccupied MHI could not afford a medianpriced home in any East Austin ZIP code.

In 2015, the ZIP codes closest to East Austin—78719, 78724, 78725, 78742,

T

TIERRA GRANDE

EAST AUSTIN HOMEOWNERS priced out of their homes face a limited selection of Austin-area neighborhoods they can afford to move to.

and 78653—indicate that East Austin homeowners earning the East Austin owner-occupied MHI could purchase homes farther east and south of the area (Table 7). The owner-occupied MHI for these ZIP codes is similar to the East Austin MHI, with the exception of 78719, posing a higher likelihood for relocation. In 2015, ZIP code 78724’s MHI was 13 percent lower than East Austin’s while 78725’s was 9 percent higher, 78742’s was 1 percent lower, and 78653’s was 20 percent higher.

Overall, in 2011, homeowners likely moved north, east, and south (Map 2011).

In 2015, homeowners likely moved northeast and southeast (Map 2015).

Assuming some East Austin homeowners could afford to purchase homes priced above the affordable range, Tables 8 and 9 (online) depict the demographic profiles for moderately unaffordable ZIP codes to East Austin homeowners in 2011 and 2015.

Three ZIP codes in East Austin—78702, 78723, and 78752 were moderately unaffordable to East Austin homeowners in 2011. By 2015, only one ZIP 78741, was moderately unaffordable.

JULY 2017

Wayne Gerami, vice president of client services at Austin Habitat for Humanity, lives in East Austin. According to Gerami, “for the price I sell my home at, I could get something nicer if I looked farther east, really far south, or out in Bastrop, Del Valle, Pflugerville, or Buda, but then I’d be in a new area, farther from where I work, away from my established support structure.”

What the Future Holds Terry Mitchell, president of Momark Development, emphasized “the loss of community and family relationships is a primary challenge facing homeowners displaced from East Austin. In terms of the construction of affordable housing, most of the affordable products provided are studio apartments. Affordable housing serves few families.”

Mitchell also believes a major disconnect exists between the size of affordable units demanded and the size of affordable units supplied. “Developers are struggling to put affordable housing in the form needed,” says Mitchell. “Many of our citizens will be renters forever unless their income goes up.”

M

ounting single-family housing unaffordability will cause long-term East Austin residents to relocate farther from downtown.

These residents may face issues related to employment, transportation, schools, and social support systems.

The limited number of affordable housing units within East Austin poses a weak solution to relocation, particularly for those residents who desire homeownership. Ultimately, long-term East Austin residents who sell their homes face increasing separation from the city as they move farther away.

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

THE TAKEAWAY Austin’s growing unaffordability problem has especially affected East Austin homeowners. As a result, they have moved farther from their neighborhoods to purchase more affordable housing.

21

Texas Economy

Comparing Texas residential mortgage debt to national levels reveals four compelling points.

• Texas historically maintains a smaller percentage of homeowners with mortgages; • Texans typically incur lower levels of mortgage debt; • Texas households allocate a smaller percentage of household income for housing expenses; and • Texas mortgage rates generally exceed the national average rate.

All of these appear to be attributable to lower than national average Texas home prices.

22

TIERRA GRANDE

Dollars (Thousands)

500

Texas Residential Mortgage Status

Figure 1. Average Purchase Price of Single-Family Homes with Conventional Mortgages

A

Texas U.S.

400

mortgage is a loan secured by real property repaid from the future stream of income of the borrower household or firm. Since the current income of most households and firms is normally not sufficient to buy real estate for cash, the availability, terms, and cost of mortgage loans are the main drivers of the market. Like real estate in general, mortgage debt categories include all manner of residential or commercial loans depending on the type of the property used as security. This article focuses on residential mortgages, which include second mortgages and home equity loans. Technically, Texas loans are secured by real estate using a deed of trust rather than a mortgage instrument, but for purposes of this discussion, they are considered the same.

300 200 100 0 1980 1985 1990 1995 2000 2005 2010 2015

Source: Federal Housing Finance Board

72

Figure 2. Percentages of Single-Family Homes Purchased with Mortgages, Texas and U.S.

Percent

68 64 Texas U.S.

60 56 2005

2007

2009

Source: U.S. Census Bureau

2011

2013

2015

Table 1. Texas and U.S. Housing Units by Mortgage Status, 2015 Texas

Percent of Total

U.S.

Percent of Total

5,752,826

100.0

74,506,512

100.0

3,334,400

58.0

47,140,736

63.3

Second mortgage only

73,274

2.2

1,465,454

3.1

Home equity loan only

123,836

3.7

5,188,937

11.0

5,854

0.2

244,181

0.5

Total Average: Housing units with a mortgage

Both second mortgage and home equity loan No second mortgage and no home equity loan

3,131,436

93.9

40,242,164

85.4

Housing units without a mortgage

2,418,426

42.0

27,365,776

36.7

Sources: Housing Survey of American Fact Finder and Real Estate Center at Texas A&M University JULY 2017

According to the Census Bureau, Texas had 3,334,400 housing units with a mortgage in 2015, accounting for 58 percent of the total owner-occupied housing units in the state, compared with the 63.3 percent national average (Table 1).

The stateâ&#x20AC;&#x2122;s relatively smaller percentage of homes with a mortgage is mainly due to lower-than-national-average home prices in Texas that enable 42 percent of Texas households either to finance a home purchase using cash or to repay the mortgage sooner.

Since 1978, the price of a Texas home purchased with a mortgage averaged $161,000 or 82 percent of the national average price of $196,300 (Figure 1).

The percentages of homes purchased with a mortgage trended upward in both Texas and the U.S. before the Great Recession (GR) of 2007â&#x20AC;&#x201C;08, from 62.7 percent in 2005 to 64.2 percent in 2008 for Texas and from 67.9 to 68.4 percent for the U.S. (Figure 2). In the aftermath of the GR, these figures drifted downward, falling to 58 percent in 2015 for Texas and 63.3 percent for the U.S. Lower mortgage debt and lower mortgage costs in the state also result from significantly less secondary financing in Texas. Approximately 6 percent of the mortgaged homes in Texas in 2015

23

1,100

Figure 3. Median Monthly Mortgage Costs of Owner-Occupied Housing Units, Texas and U.S.

Dollars

carried a first loan and either a second loan or a home equity loan, whereas more than 14 percent of the mortgaged 1,000 homes nationally included either a second or a home equity loan (Table 1). Less 900 reliance on second mortgage Texas financing alleviated much of U.S. the housing foreclosures that 800 occurred around the country 2005 2007 2009 2011 2013 2015 during the housing collapse in Source: U.S. Census Bureau 2008â&#x20AC;&#x201C;10.

As well as having Table 2. Median Monthly Owner Costs a lower percentof Owner-Occupied Housing Units age of homes with a mortgage, Texas Texas U.S. homeowners gener2015 2005 2015 2005 ally incurred less $ $ $ $ mortgage costs due Total Average: 1,016 878 1,062 961 to lower average Housing units with a mortgage 1,453 1,220 1,477 1,295 home prices (Table Housing units without a mortgage 480 379 468 369 2 and Figure 3).

Mortgage Costs 973 841 1,009 926 Median monthly Sources: Housing Survey of American Fact Finder and Real Estate Center at Texas A&M University mortgage costs of

26

76

25

72

24

Percent

Percent

Figure 4. Median Monthly Housing Costs as Percentages of Household Incomes, Texas and U.S.

23 22 Texas U.S.

21 20 2005

2009

2011

2013

64 Texas U.S.

2011

2012

2013

2014

2015

2016

Source: Federal Reserve Bank of New York

16

Texas U.S.

36,000

2010

2015

Figure 5. Mortgage Loan per Capita, Texas and U.S.

40,000

Figure 7. Mortgage Contract Rates Texas and U.S. Texas U.S.

12

32,000

Percent

Dollars Per Capita

68

60

Source: U.S. Census Bureau

28,000

8 4

24,000

0

20,000 2010

2011

2012

2013

2014

Source: Federal Reserve Bank of New York

24

Figure 6. Shares of Mortgage Loans in Total Household Loans, Texas and U.S.

56 2007

owner-occupied housing units in both Texas and the U.S. trended upward before the GR, reaching $965 per month for Texas in 2010 and $1,090 for the U.S. in 2008 (Figure 3). This upward trend reversed during the GR due to falling mortgage rates engineered by the Federal Reserve Bank to help the U.S. economy recover from the GR. Monthly mortgage costs for Texas homeowners fell to $941 in 2013 and decreased to $995 nationally in 2014. As the state and nation recovered from the GR, average monthly mortgage costs reversed their downward trend and rose to $973 for Texas and $1,009 for the U.S. by 2015 (Figure 3 and Table 2).

Lower-than-nationalaverage mortgage costs

2015

2016

1980 1985 1990 1995 2000 2005 2010 2015

Source: Federal Housing Finance Board

TIERRA GRANDE

enabled Texas households to allocate smaller shares of their incomes for hous5 ing costs (Table 3). Since Texas U.S. 2010, the median monthly 4 homeowner costs as percentages of household incomes 3 in owner-occupied housing units in both Texas and the 2 U.S. trended downward. They 1 fell from 23.4 percent in 2010 to 21.1 percent in 2015 for 0 Texas and from 25.1 percent 1980 1985 1990 1995 2000 2005 2010 2015 to 22 percent for the U.S. Source: Federal Housing Finance Board (Figure 4). On average, Texas households with a mortgage allocated Table 3. Median Monthly Homeowner Costs 22.6 percent of their as a Percentage of Household Income income for housing costs compared with Texas U.S. a national average of 2015 2005 2015 2005 24.1 percent for the Total Average: 17.4 19.9 18.6 20.9 U.S. from 2005 to Housing units with a mortgage 21.1 23.5 22.0 24.2 2015 (Figure 4).

Housing units without a mortgage 11.4 13.0 11.7 12.6 Lower than national average Sources: Housing Survey of American Fact Finder and Real Estate Center at Texas A&M University Percent

Figure 8. Initial Fees and Charges for Texas and U.S. Mortgage Loans

JULY 2017

home prices also enabled Texas households to maintain mortgage debt balances smaller than national averages (Figure 5). Texas per capita mortgage debt in the second quarter of 2010 was $23,999 compared with $36,339 for the nation, or 66 percent of the nation’s per capita mortgage debt burden.

Per capita in this context refers to the number of individuals with a credit report.

The mortgage loan balances in both Texas and the U.S. have trended downward since 2010, falling to $23,770 in Texas and $31,830 in the U.S. in fourth quarter 2016 (Figure 5).

Texas’ household share of mortgage loans as a percentage of total household loans fell from 66.4 percent of total loans in the second quarter of 2010 to 60.1 percent in fourth quarter 2016 (Figure 6). The nation’s shares of mortgage loans fell from 72.9 percent to 67.4 percent over the same period (Figure 6).

Texas Mortgage Rates

T

exas’ average annual contract rate for conventional, singlefamily mortgage loans tracks close to the national averages (Figure 7), but the initial fees and charges for Texas mortgage loans display four distinct periods of difference compared with national levels (Figure 8). From 1978 to 1991, mortgage lenders charged higher initial fees to Texas borrowers, especially in 1982 when initial fees and charges for Texans equaled 4.4 percent compared with 2.7 percent nationally. From 1992 to 1997, average initial fees and charges in Texas were lower than national averages.

25

88

Figure 9. Loan to Home Price Ratios Texas and U.S. Texas U.S.

Percent

Figure 11. Loan Loss Reserve as Percentages of Total Loans for all Banks, Texas and U.S. Texas U.S.

5 4 3 2

O

84

1 1985

1990

1995

2000

2005

2010

2015

Source: Federal Reserve Bank of St. Louis

5.2

Figure 12. Net Interest Margin for all Banks Texas and U.S.

4.8 4.4 4.0 3.6 3.2 2.8 1985

Texas U.S.

1990

1995

2000

2005

2010

2015

Source: Federal Reserve Bank of St. Louis

80 76 72 1980 1985 1990 1995 2000 2005 2010 2015

Source: Federal Housing Finance Board

30 29

Figure 10. Term to Maturity (years) of Mortgage Loans, Texas and U.S. Texas U.S.

Years

28

third quarter 1988 compared with 2.59 percent for the U.S. (Figure 11). Net interest rate margin for all Texas banks fell to 2.99 percent in second quarter 1988 compared with 4.03 percent for the U.S. (Figure 12). The state’s adverse economic and banking conditions in the late 1980s led lenders to charge higher initial fees. The average initial fees and charges for Texas from 1978 to 1991 totaled

2.69 percent compared with 2.05 percent for the U.S. As the state’s economy recovered from the impacts of lower oil prices, Texas’ mortgage rates and fees converged toward national average levels after 1997.

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

27

THE TAKEAWAY

26

Texans typically have lower mortgage debt compared with the rest of the U.S. They have to set aside less for housing expenses, and they pay lower initial costs and fees for mortgages, although that wasn’t always the case.

25 1980 1985 1990 1995 2000 2005 2010 2015

Source: Federal Housing Finance Board

26

6

Percent

loan-to-value ratios because of lower-than-nationalaverage home prices (Figure 9). From 1978 to 2015, the average loan-to-value ratio for Texas was 80 percent compared with 76.1 percent for the U.S. The state also had mortgage loans with average term to maturity longer than national averages before 1987 (Figure 10). The average term to maturity for Texas mortgage loans from 1978 to 1987 was 27.3 years compared with 26.4 years for the U.S. n a macro level, Texas’ banking system was in turmoil in the late 1980s. Price per barrel of West Texas intermediate crude oil fell from close to $39.50 in 1980 to $13.90 in 1986. The average percent of loan loss reserves to total loans for all Texas banks climbed to 5.4 percent in

Percent

I

nitial fees and charges in Texas coincided with the U.S. average from 1998 through the GR until 2009. After 2010, average initial fees in Texas slightly exceeded the national average but converged again to the national average in 2015. From 1978 to 2015, the initial mortgage loan fees and charges in Texas averaged 1.49 percent compared with 1.26 for the U.S. or 23 basis points more. Initial fees and charges reflect various costs and risks associated with mortgage loans as well as general economic and banking conditions.

On a micro level, two main factors contributed to higher fees and charges for Texas mortgage borrowers, namely, higher loan-to-value ratios and longer terms to maturity.

Texans experienced higher

TIERRA GRANDE

Taxes

TAX SAVINGS

R

eal estate professionals buying new technology related to sales, accounting records, or for other reasons may benefit from tax rules that allow deductions under the “immediate expensing” provision. Tax benefits can reduce after-tax costs of cellphone apps, virtual reality goggles, and tax record-keeping software.

Electronic record-keeping for tracking business mileage, store receipts, and time spent working in real estate related activities can provide documentation that will be respected by the IRS and tax courts. For example, the passive activity limitation rules use various tests to determine the deductibility of losses against other income. Depending on circumstances, some of the tests pertain to whether the property owner spends 100, 500, or 750 hours per year managing the property. Furthermore, mileage from one property to another is deductible if the mileage can be documented. Mileage may be deductible for salespersons driving potential buyers from one location to another.

Another need for documentation pertains to the rental of vacation properties. Tracking the number of days of personal use, use by relatives, and use by unrelated parties is necessary to determine whether tax depreciation and operating expenses (such as utilities and maintenance) can be deducted.

Electronic record-keeping can be used for meeting the tax documentation rules for deducting meals and entertainment expenses as well as travel that is part business and part personal. Apps that may be useful for keeping track of mileage and expenses include Taxbot, SherpaShare, Everlance, and TrackMyDrive. The Ducky app can link to Intuit products such as like QuickBooks. But be aware that this column is not intended to advertise, promote, or recommend one type of technology or manufacturer over another. Specific technology and manufacturers are for illustration only.

Some apps are free, some can be purchased with one payment, and some require an annual subscription. All app costs are deductible if the app is used exclusively for business. Subscription costs can reach $80 per year. But since the costs are deductible, the after-tax cost is lower than the out-of-pocket cost. For example, a sales agent in the 25 percent tax bracket who purchases an $80 app would save $20 in tax (25 percent of $80), making the after-tax cost $60.

JULY 2017

Virtual reality goggles are another type of deductible technology. Such products are fast becoming essential for showing properties to prospective clients, particularly when the properties are located miles away. The best goggles can simulate a 3-D environment, enabling the viewer to see any aspect of the property from any angle (0 to 360 degrees).

The cost of virtual reality goggles varies greatly—from $20 to $3,000. As with apps, the tax deductibility can greatly reduce the after-tax cost. A 25 percent tax bracket sales agent would save $750 if he or she purchased $3,000 goggles (25 percent of $3,000 is $750).

As previously noted, the cost of apps is fully deductible.

The “immediate” deductibility of goggles is made available by a special tax provision called Section 179 expensing. Section 179 allows businesses to deduct up to $510,000 of the cost of “tangible personal property” purchased during 2017.

The deduction ceiling rises each year based on the level of inflation. mmediate expensing is only available to the extent of the amount of taxable income from the business. Thus, in the virtual reality goggles example, the taxable income of the business must exceed $3,000. If the taxable income were $2,000, only $2,000 of the $3,000 could be deducted this year. The excess $1,000 ($3,000 minus $2,000) could be carried over to the next tax year and deducted if taxable income is high enough.

As already indicated, the rules surrounding documentation and the deductibility of technology can be complex. Consultation with an accountant or attorney knowledgeable about real estate tax matters is recommended.

I

Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate Center at Texas A&M University and a professor emeritus of accounting in the Kelley School of Business at Indiana University, Bloomington. This is Dr. Stern’s final column. He has written for the Center 39 years.

THE TAKEAWAY Tax benefits can reduce after-tax costs on new technology from cellphone apps to virtual reality goggles and can help with tax record-keeping.

27

Texas Economy

HOUSTON’S MANUFACTURING SECTOR

BY LUIS B. TORRES

T

he United States has consistently lost manufacturing jobs since reaching a peak in the late 1970s. Job levels have not recovered from the losses during each recession since the 1990s (Figure 1). Losses accelerated after the 2001 recession and again when China entered the World Trade Organization, opening itself up for trade and commerce with the rest of the world.

Texas manufacturing employment followed this same track, although it did recover from the 1990–91 recession. The 2001 recession caused jobs to fall below the previous peak, and they did not recover after this recession (Figure 1). The same trend can be observed in most regions in Texas, including Austin, Dallas-Fort Worth, and San Antonio, which lost jobs.

But not all manufacturing situations are the same. Houston manufacturing jobs currently exceed their 1990s levels. They recovered and expanded after each recession. These contrary moves make Houston as rare as a male white rhinoceros (Figure 1).

Figure 1. Manufacturing Employment (Index January 1990 = 100)

140 120 100

Houston Texas United States

80 60 1990

1994

1998

2002

So why is Houston’s manufacturing employment history different?

The answer is because it supplies the oil and gas industry with machinery and equipment (Figure 2). The cluster of upstream and downstream energy firms creates a manufacturing base to supply the full spectrum of the energy industry. Moreover, proximity makes it difficult for foreign imports to compete against local manufacturers.

Fracking played an essential role in boosting Houston manufacturing jobs. At the beginning of 2014,

Figure 2. Nondurable Manufacturing Employment (Index January 1990 = 100)

250

Agriculture, Construction & Mining Machinery Fabricated Metal Products Chemicals Petroleum and Coal Products

200 150

1994

1998

2002

Note: Seasonally adjusted.

Source: Bureau of Labor Statistics

28

2010

2014

2017

2006

2010

before the fall in oil prices, jobs were more plentiful than before the Great Recession. Currently, jobs have surpassed 1990 levels, which cannot be said for the U.S. or Texas as a whole.

The question now is will Houston manufacturing employment fully rebound after the 2014 oil bust? This will depend on oil prices, of course.

And manufacturers will need to go forward with new technologies that require fewer workers but allow more machinery and other products to be manufactured.

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

THE TAKEAWAY

100 50 1990

2006

Note: Seasonally adjusted.

Source: Bureau of Labor Statistics

2014 2017

Manufacturing jobs have dwindled nationwide, but one Texas metro saves endangered jobs.

Houston supplies equipment and hardware for Texas’ energy sector, keeping area manufacturing jobs healthier than in other locations.

TIERRA GRANDE

JULY 2017

29