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In This Issue Homeowner Expenses Foreign-born Residents Stocks Versus Homes Land Market Update Home Values and School Quality Estate-planning Tools Amarillo Housing
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TIERRA GRANDE
APRIL 2019
VOLUME 26, NUMBER 2 ™
TIERRA GRANDE
Visit us online at
www.recenter.tamu.edu
JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY
26 Shifting Winds
Director, GARY W. MALER Chief Economist, JAMES P. GAINES Senior Editor, DAVID S. JONES
Amarillo’s Housing Market Slowdown
Managing Editor, BRYAN POPE
Most weather experts will tell you Amarillo is the country’s windiest city (take that, Chicago), but that doesn’t mean its housing market is breezing along. After several years of growth, sales are calming. BY JOSHUA ROBERSON
Associate Editor, KAMMY BAUMANN Creative Manager, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Graphic Designer, ALDEN DeMOSS Communications Specialist, HAYLEY RIEDER Circulation Manager, MARK BAUMANN Lithography, RR DONNELLEY, HOUSTON
ADVISORY COMMITTEE: Doug Jennings, Fort Worth, chairman; Besa Martin, Boerne, vice chairman; Troy C. Alley, Jr., DeSoto; Russell Cain, Port Lavaca; JJ Clemence, Sugar Land; Alvin Collins, Andrews; Walter F. “Ted” Nelson, Houston; Doug Roberts, Austin; C. Clark Welder, Fredericksburg; and Jan Fite-Miller, Dallas, ex-officio repre senting the Texas Real Estate Commission. TIERRA GRANDE ™ (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031. 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. Nothing in this publication should be construed as legal or tax advice. For specific advice, consult an attorney and/or a tax professional. PHOTOGRAPHY/ILLUSTRATIONS: Getty Images, pp. 1, 6–7, 14–15, 16–17, 18–19, 20–21, 22–23, 24–25, 26–27; Robert Beals II, pp. 2, 14, 19, 28; JP Beato III, pp. 9, 12. © 2019, Real Estate Center. All rights reserved.
2 Contrasting Costs
Location-Based Differences in Homeowner Expenses Location, location, location. Sure, it’s a cliché, but there’s some truth to it, and not just when it comes to a home’s desirability. Where you live in Texas can affect annual homeowner costs, such as real estate taxes, insurance premiums, and utilities. The numbers may surprise you. BY ALI ANARI
6 The New Texans
In recent years, Texas has welcomed a steady flow of international immigrants—not just from Mexico but from as far away as India, China, and the Philippines. Read how these new neighbors are changing the face of Texas and bringing diverse skills to the workforce. BY LUIS B. TORRES AND WESLEY MILLER
9
Buying Stocks or Buying Homes? A Real-World Scenario ON THE COVER Indian paintbrush scattered among bluebonnets at Mayfair Ranch, Brenham
PHOTOGRAPHER JP Beato III
APRIL 2019
Weighing the financial benefits of buying a home versus renting and investing in the stock market is complicated. Factoring in expenses associated with buying, holding, and selling a home or a stock portfolio is enough to make your head spin. BY HAROLD D. HUNT AND CLARE LOSEY
14 Over Hill, Over Dale
Texas Land Markets’ Peaks and Valleys If you hit the dusty trails just about anywhere in Texas, you’ll find land is still a hot commodity. Sales slowed in 2018, but prices continued trending positive, boosted by demand for recreational and investment properties. BY CHARLES E. GILLILAND, ERIN M. KIELLA, AND TIAN SU
18 Adding It Up
Texas Home Values and School Quality Conventional wisdom suggests better schools result in higher area home prices. While that’s generally true, the factors behind it are complex. Pull up a desk for a lesson in the relationship between school quality measures, home prices, and taxes. BY JOSHUA ROBERSON
22 Leaving a Legacy Wills and Trusts
Face it, landowners: You can’t take all that acreage with you, but you can leave it to your kids or other heirs. And there’s no time like the present to get started. Here’s information on two tools that can help. BY ERIN M. KIELLA
1
Residential
Contrasting Costs
Location-Based Differences in Homeowner Expenses
T
By Ali Anari
Texas homeowners with a mortgage pay an average of $18,156 per year in housing costs. Homeowner costs, however, vary depending on where the home is located. On the upper end of the scale, 2017 data compiled by the Real Estate Center show Frisco homeowners have the highest costs in the Lone Star State (Table 1). Annual costs in the North Texas city are $30,936. Residents of The Woodlands ($29,016), Sugar Land ($28,044), Flower Mound ($27,084), Cedar Park ($25,716), and McKinney ($25,008) pay some of the highest costs in the 59 cities studied. At $13,104 per year, Brownsville homeowners incur the lowest housing costs. Other Texas cities where costs are less than $14,000 are Pharr ($13,824), Harlingen ($13,812), Wichita Falls ($13,728), Abilene ($13,704), Killeen ($13,608), and Bryan ($13,572). Why should real estate agents care? The numbers offer comparative choices for buyers. All things being equal, having such data could be an important factor when choosing between homes in different cities. Would an undecided buyer, for example, appreciate knowing that housing costs vary in adjoining Bryan and College Station by $6,924? Perhaps. They likely would appreciate having the information.
2
Table 1. Annual Texas Homeowner Costs for Homes with a Mortgage, 2017 Rank
City
Dollars
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Frisco The Woodlands Sugar Land Flower Mound Cedar Park McKinney Pearland Allen Plano League City Austin Mansfield Richardson Round Rock Georgetown College Station Carrollton Atascocita Missouri City Irving Denton Lewisville Midland Dallas Conroe Houston New Braunfels North Richland Hills Fort Worth Odessa
30,936 29,016 28,044 27,084 25,716 25,008 24,276 24,216 23,412 23,196 23,028 22,920 20,940 20,880 20,784 20,496 20,328 19,824 19,596 19,572 19,476 19,332 19,224 19,104 19,056 18,696 18,684 18,384 18,168 17,832
31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59
City Grand Prairie Corpus Christi Arlington Lubbock Garland San Antonio Mission Pasadena Edinburg Mesquite Victoria McAllen San Angelo Baytown Laredo Longview Amarillo Waco Beaumont Temple El Paso Tyler Pharr Harlingen Wichita Falls Abilene Killeen Bryan Brownsville State Average
Dollars 17,748 17,568 17,112 16,548 16,212 15,924 15,756 15,708 15,660 15,636 15,504 15,444 15,420 15,408 15,252 14,928 14,700 14,676 14,640 14,556 14,472 14,136 13,824 13,812 13,728 13,704 13,608 13,572 13,104 $18,156
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University TIERRA GRANDE
Table 2. Homeowner Costs, 2017
Table 3. Housing Costs as Percentages of Home Prices, 2017
Rank
State
Dollars
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
District of Columbia New Jersey Hawaii California Massachusetts New York Connecticut Maryland New Hampshire Alaska Washington Rhode Island Virginia Colorado Oregon Illinois Vermont Texas Delaware Minnesota U.S. Average
29,184 28,176 28,044 27,228 25,296 24,432 23,712 22,980 22,488 22,128 21,672 21,384 20,616 20,172 19,548 19,236 18,324 18,156 18,084 18,000 18,180
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 16 18 19 20
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
Table 4. Annual Median Property Taxes, 2017
State Nebraska Kansas Ohio Oklahoma Illinois Iowa Texas Mississippi Indiana Michigan Wisconsin Missouri Pennsylvania Kentucky Arkansas Connecticut Alabama Georgia New Hampshire South Dakota U.S. Average
Percentage 9.66 9.54 9.49 9.33 9.21 9.16 9.15 9.12 8.83 8.79 8.76 8.75 8.68 8.66 8.61 8.53 8.53 8.42 8.31 8.32 8.48
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
Table 5. Annual Property Taxes as Percentages of Homeowner Costs, 2017
Rank
State
Dollars
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
New Jersey New Hampshire Connecticut New York Illinois Massachusetts Vermont Rhode Island California Texas Maryland District of Columbia Alaska Wisconsin Washington Pennsylvania Oregon Nebraska Maine Michigan U.S. Average
8,250 5,807 5,806 5,658 4,692 4,556 4,317 4,254 4,174 3,724 3,431 3,421 3,411 3,351 3,309 3,181 3,088 2,844 2,712 2,546 2,556
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
State New Jersey New Hampshire Connecticut Illinois Vermont New York Wisconsin Texas Rhode Island Pennsylvania Massachusetts Nebraska Iowa Michigan Maine Ohio Oregon Alaska California Washington U.S. Average
Percentage 29.28 25.82 24.49 24.39 23.56 23.16 20.56 20.51 19.89 18.43 18.01 17.77 17.26 17.24 17.21 16.79 15.80 15.41 15.33 15.27 14.06
• eighth in median property taxes as a percentage of homeowners’ costs at 20.51 percent (Table 5), and • fifth in property tax as a percentage of home prices at 1.88 percent (Table 6). The research found a positive relationship between home prices and homeowners’ incomes and a negative relationship between home prices and homeowner costs.
Homeowners’ Costs in Texas Cities
H
arlingen had the highest homeowner costs as a percentage of median home values in 2017 followed by Mission, Pharr, Brownsville, Wichita Falls, and Beaumont (Table 7). Austin homeowners had the smallest ratio of housing costs to home values followed by Plano, Flower Mound, Frisco, Allen, and Sources: U.S. Census Bureau and Real Estate Center Sources: U.S. Census Bureau and Real Estate Center Richardson. The smaller ratios in these at Texas A&M University at Texas A&M University cities are mainly because of higher home prices due to higher homeowners’ incomes. The average of The Center’s research used data on median homeowner median ratios of housing costs to housing values for Texas citcosts, median homeowner incomes, and median home prices ies was 9.15 percent. from the U.S. Census Bureau’s American Community Survey Property taxes also vary significantly across Texas cities. (ACS). The ACS defines homeowner costs as the sum of payThe Woodlands homeowners incurred the largest amount of ments for mortgages, deeds of trust, contracts to purchase, or similar debts on the property; real estate taxes; fire, hazard, and property taxes in 2017 followed by Frisco, Flower Mound, Cedar Park, and Sugar Land (Table 8). Longview homeownflood insurance on the property; and utilities. ers had the smallest amount of property taxes followed by Property taxes imposed by cities, counties, and school disHarlingen, Tyler, Brownsville, Odessa, and Abilene. The avertricts are important components of the state’s housing costs age annual property tax for Texas cities in 2017 was $3,724 given that Texas does not impose a state income tax and relies (Table 8). mainly on sales and property taxes for public finance. Property taxes accounted for 26.92 percent of housing costs Among all U.S. states, Texas ranked: in Cedar Park, the highest percentage in the state (Table 9). It th • 18 in average annual homeowner costs at $18,156 (Table was followed by The Woodlands, Mansfield, College Station, 2), Pearland, and McKinney. Odessa had the smallest percentage • seventh in terms of homeowner costs as a percentage of of homeowner costs followed by Longview, Mesquite, Tyler, home prices at 9.15 percent (Table 3), Harlingen, and Beaumont. The average percentage for Texas • tenth in amount of property taxes at $3,724 (Table 4), cities was 20.51 percent. APRIL 2019
3
Pharr homeowners incurred the largest effective property tax rate (that is, property tax as a percentage of median home values) followed by Mission, Pearland, Mansfield, El Paso, and Missouri City (Table 10). Longview had the smallest rate followed by Odessa, Tyler, New Braunfels, Richardson, and Midland. The average effective property tax rate for Texas cities was 1.88 percent.
Table 7. Annual Texas Homeowner Costs as Percentage of Median Home Values, 2017
Home Values and Housing Costs Homes are considered both consumption and investment goods. As an asset, home prices are the present values of expected future net cash flows from the property (net cash flow is rent income minus housing costs). Home prices are positively related to rents. That is, the higher (lower) the rental value, the higher (lower) the home values. However, home prices are negatively related to housing costs (the higher [lower] the housing costs, the lower [higher] the home values). Whether a home is rented out or occupied by its owner, its rental value depends on the occupant’s income because rents are determined by the occupant’s willingness to pay a higher rent. That willingness depends on and is determined by the occupant’s income. For owner-occupied homes, ACS assumes homeowners rent their homes to themselves and estimates owners’ equivalent rent Table 6. Annual Property Tax Rates Ratios of Median Property Tax to Median Home Values, 2017 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
State New Jersey Illinois New Hampshire Connecticut Texas Vermont Wisconsin Nebraska New York Rhode Island Pennsylvania Ohio Iowa Michigan Kansas Maine South Dakota Alaska Massachusetts Minnesota U.S. Average
for home rental values. Home mortgage is another channel of the positive relation between home prices and homeowners’ incomes because the mortgage amount depends on a homeowner’s income. Figure 1 shows a positive relationship between median home prices of 59 Texas cities and the median incomes of their own-
Percentage 2.42 2.25 2.15 2.09 1.88 1.85 1.80 1.72 1.71 1.64 1.60 1.59 1.58 1.51 1.38 1.35 1.26 1.19 1.16 1.09 1.19
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 27 29 30
City Harlingen Mission Pharr Brownsville Wichita Falls Beaumont Pasadena Lubbock Edinburg Baytown Corpus Christi McAllen Mesquite Missouri City Amarillo Odessa El Paso Laredo Waco Abilene Bryan Grand Prairie Victoria Temple Killeen Tyler San Antonio Arlington Fort Worth San Angelo
Percentage
Rank
City
Percentage
13.26 13.17 12.45 12.07 11.67 11.59 10.99 10.94 10.84 10.77 10.73 10.70 10.64 10.52 10.41 10.35 10.32 10.26 10.24 10.13 10.08 9.99 9.97 9.91 9.85 9.84 9.80 9.80 9.73 9.69
31 32 33 34 35 36 36 38 39 40 41 42 43 44 44 46 47 47 49 50 51 52 52 52 55 56 57 58 59
Garland Pearland Longview Atascocita Irving League City Mansfield Conroe Houston North Richland Hills Midland Dallas Carrollton Denton Lewisville New Braunfels College Station Cedar Park Sugar Land Round Rock Georgetown McKinney The Woodlands Richardson Allen Frisco Flower Mound Plano Austin State Average
9.63 9.46 9.38 9.32 9.09 9.08 9.08 9.07 9.06 8.85 8.68 8.33 8.31 8.22 8.22 8.14 8.09 8.09 8.06 7.91 7.83 7.64 7.64 7.64 7.46 7.41 7.24 7.13 6.83 9.15
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
Table 8. Texas Cities’ Average Annual Property Taxes, 2017 Rank
City
Dollars
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
The Woodlands Frisco Flower Mound Cedar Park Sugar Land McKinney Pearland Allen Mansfield Austin Plano College Station Round Rock League City Atascocita Georgetown Richardson Carrollton Missouri City Dallas North Richland Hills Denton Lewisville Fort Worth Irving Houston New Braunfels Midland Grand Prairie Arlington
7,683 7,501 6,937 6,922 6,913 6,457 6,268 6,188 5,976 5,900 5,588 5,335 5,149 5,098 4,798 4,480 4,451 4,410 4,249 4,183 4,135 4,076 3,979 3,849 3,755 3,744 3,715 3,672 3,591 3,521
31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59
City Conroe San Antonio Corpus Christi El Paso McAllen Laredo Victoria Waco Mission Edinburg Garland Temple Pharr San Angelo Lubbock Pasadena Baytown Killeen Wichita Falls Amarillo Beaumont Mesquite Bryan Abilene Odessa Brownsville Tyler Harlingen Longview State Average
Dollars 3,495 3,432 3,424 3,285 3,279 3,235 3,122 3,102 3,091 3,082 3,035 3,032 2,992 2,991 2,983 2,950 2,786 2,748 2,674 2,643 2,510 2,501 2,477 2,446 2,364 2,283 2,277 2,273 2,048 3,724
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
4
TIERRA GRANDE
Using 2017 data, the Center estimated median home prices across Texas cities are 2.85 times homeowners’ median income minus $6,837 for each percentage of homeowner costs. Dr. Anari (m-anari@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.
THE TAKEAWAY
Rank
City
Percentage
Rank
1 2 3 4 5 5 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Cedar Park The Woodlands Mansfield College Station Pearland McKinney Austin Flower Mound Allen Round Rock Sugar Land Frisco Atascocita Plano El Paso North Richland Hills League City Dallas Carrollton Missouri City Pharr Georgetown San Antonio Richardson McAllen Laredo Fort Worth Waco Denton Temple
26.92 26.48 26.07 26.03 25.82 25.82 25.62 25.61 25.55 24.66 24.65 24.25 24.20 23.87 22.70 22.49 21.98 21.90 21.69 21.68 21.64 21.56 21.55 21.26 21.23 21.21 21.19 21.14 20.93 20.83
31 31 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59
City Lewisville Arlington Grand Prairie Killeen Victoria Houston New Braunfels Edinburg Mission Corpus Christi Wichita Falls San Angelo Irving Midland Pasadena Garland Conroe Bryan Baytown Lubbock Amarillo Abilene Brownsville Beaumont Harlingen Tyler Mesquite Longview Odessa State Average
Percentage 20.58 20.58 20.23 20.19 20.14 20.03 19.88 19.68 19.62 19.49 19.48 19.40 19.19 19.10 18.78 18.72 18.34 18.25 18.08 18.03 17.98 17.85 17.42 17.14 16.46 16.11 16.00 13.72 13.26 20.51
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
Table 10. Texas Cities’ Property Taxes as Percentages of Housing Prices, 2017 Rank
City
Percentage
Rank
1 2 3 4 5 6 7 7 9 10 10 10 13 14 15 15 17 18 19 19 19 22 22 22 25 26 27 27 27 27
Pharr Mission Pearland Mansfield El Paso Missouri City Wichita Falls McAllen Atascocita Harlingen Cedar Park Laredo Waco Edinburg San Antonio College Station Brownsville Corpus Christi Pasadena Temple Fort Worth The Woodlands Grand Prairie Arlington Victoria League City North Richland Hills Killeen Beaumont Sugar Land
2.70 2.58 2.44 2.37 2.34 2.28 2.27 2.27 2.26 2.18 2.18 2.18 2.16 2.13 2.11 2.11 2.10 2.09 2.06 2.06 2.06 2.02 2.02 2.02 2.01 2.00 1.99 1.99 1.99 1.99
31 31 33 33 35 36 37 38 39 40 41 41 43 43 43 46 47 48 49 49 51 51 53 53 55 55 57 58 59
City McKinney Lubbock Round Rock Baytown Allen San Angelo Amarillo Flower Mound Bryan Dallas Houston Abilene Carrollton Garland Frisco Austin Irving Denton Plano Mesquite Lewisville Georgetown Conroe Midland Richardson New Braunfels Tyler Odessa Longview State Average
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University APRIL 2019
According to 2017 Census data, Texas ranks 18th among all U.S. states in average annual homeowner costs, which include real estate taxes, insurance premiums, utility payments, and any debts on a property. It ranks seventh in terms of homeowner costs as a percentage of home prices.
Figure 1. Relationship Between Texas Home Prices and Homeowners’ Incomes, 2017 Median Home Price (Thousands of Dollars)
Table 9. Texas Cities’ Property Taxes as Percentages of Housing Costs, 2017
Percentage 1.97 1.97 1.95 1.95 1.91 1.88 1.87 1.85 1.84 1.82 1.81 1.81 1.80 1.80 1.80 1.75 1.74 1.72 1.70 1.70 1.69 1.69 1.66 1.66 1.62 1.62 1.59 1.37 1.29 1.88
450 400 350 300 250 200 150 100 60
80 100 120 140 160 Median Income (Thousands of Dollars)
Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
Figure 2. Relationship Between Texas Home Prices and Homeowner Costs, 2017 Median Home Price (Thousands of Dollars)
ers in 2017. In other words, the higher the income, the higher the home value. Figure 2, meanwhile, shows a negative relationship between median home prices of the same Texas cities and homeowner costs as the percentages of home prices. That is, the larger (smaller) the percentages of homeowners’ costs, the lower (higher) the home values.
450 400 350 300 250 200 150 100 6 7 8 9 10 11 12 13 14 Homeowner Costs as Percent of Home Value Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University
5
Demography
By Luis B. Torres and Wesley Miller
6
TIERRA GRANDE
A
ccording to data from the U.S. Census Bureau’s American ComTexas’ economic munity Survey, the majority of Texas immigrants were born in Mexico. Parallel to the national trend, Mexican immigration to success after the Texas stagnated during the Great Recession and has remained on a flat Great Recession trajectory. Given its geographic location and historical ties to Texas, Mexico will remain a primary source of immigration for the foreseeattracted more able future, but the rate of that immigration has likely peaked. The proportion of foreign-born residents directly correlates with the U.S. residents than size of the Metropolitan Statistical Area (MSA). Economic diversity any other state. and the magnitude of capital flowing through larger economies better attract individuals regardless of their birthplace. These pull factors Similar pull factors outweigh more ostensible determinants of immigration, such as proximity to the border. Although San Antonio’s population is 55 percent drew a steady flow Hispanic (or of Latino origin), only 13 percent of the population was of international born abroad (Table 1). On the other hand, Houston is the most diverse MSA but has the lowest proportion of Mexican immigrants relative to immigrants. In fact, the foreign-born population (FBP) (Table 2). Texas ranks Who Works Where, second in the Table 1. Foreign-Born Residents as and Why? Percentage of Overall Excluding Mexican-born residents, number of Population, 2017 the distribution of origin is widely foreign-born dispersed throughout Texas. India Geography Percentage is the only other nation to account Houston 31.0 residents, who for more than 5 percent of the FBP DFW 22.9 (Table 2). At the aggregate level, account for just Texas 20.7 the proportion of Asian immigrants Austin 17.8 over a fifth of the jumped from 16 to 22 percent San Antonio 13.1 2005 and 2017, led by India state’s population Source: U.S. Census Bureau’s 2016 One-Year American between and Vietnam. The share of African Community Survey immigrants doubled over the same (Table 1).
Table 2. Distribution of Foreign-Born Population, 2017 Rank
Texas
Austin
Houston
Dallas-Fort Worth
San Antonio
1
Mexico (51%)
Mexico (41%)
Mexico (36%)
Mexico (44%)
Mexico (62%)
2
India (6%)
India (10%)
El Salvador (8%)
India (9%)
India (4%)
3
El Salvador (4%)
China (4%)
India (5%)
El Salvador (4%)
Philippines (3%)
4
Vietnam (4%)
Vietnam (3%)
Vietnam (5%)
Vietnam (4%)
El Salvador (2%)
5
China (3%)
Honduras (3%)
Honduras (4%)
China (3%)
China (1%)
Source: U.S. Census Bureau’s 2017 One-Year American Community Survey APRIL 2019
7
period, surpassing 5 percent of the FBP. Declines in Mexican of immigrants working in nail salons and 6 percent in restauimmigration pulled down the aggregate share from the rants and food services. Americas, but inflows accelerated from Honduras, Venezuela, Demographic Trends and Challenges and Cuba. he current family-oriented immigration system incentivTexas’ rich natural resources, advantageous geographic locaizes the formation of cultural clusters, which are evident tion, and entrepreneurial attitude have generated a globally in the foreign-born distribution at the MSA level. Variacompetitive economy over the past five decades. But many tions in the FBP have important implications on the local econchallenges lie ahead. The aging population and stagnating omy because different immigrant groups possess unique skills birth rate portend problems for future generations, weighing and economic profiles. For example, Mexican-born residents are on labor-force participation and shrinking the working-age tax three times as likely to work in construction and twice as likely base relative to the rest of the population. to work in agriculture as the native-born population. Immigration provides a tool to counteract some of the demoThe skill set of an immigrant population determines its graphic trends. Immigrants typically move to Texas during prime industry composition, affecting economic characteristics such working age, bringing a diverse set of skills to supplement the as income level. The concentracurrent labor force. The main Table 3. Economic Profile of Texas Residents, 2016 tion of Mexicans employed in industries for both domestic and Median Wage and Bachelor’s Degree manual labor (e.g., construction, international immigrants are Place of Birth Earnings Income or Higher landscaping, and restaurants) construction, restaurants/food India $70,974 78% resulted in a median income services, and elementary/secondPhilippines $43,326 59% below $23,000 compared with ary schools. The steady flow of China $42,319 67% $30,228 for Texas natives (Table workers suggests a shortage in U.S. (excluding Texas) $40,557 38% 3). The El Salvadorian populathese fundamental sectors of the Texas $30,228 24% tion’s employment and income state’s economy. Vietnam $30,228 24% distribution is similar to MexiImmigrants also fill gaps in Mexico $22,306 7% can immigrants’ with slightly the more specialized areas of the El Salvador $22,066 5% lower educational attainment. workforce. They play an imporSource: U.S. Census Bureau’s 2016 Five-Year American Community Survey The migratory stagnation of tant role in the growing tech (public use microdata sample) these two populations over the industry as well as in colleges, Note: Educational attainment was calculated for adults 25 years and older. past decade has contributed to universities, and hospitals. In labor shortages in construction, hindering growth in the state’s this case, Texas reaps the benefits of highly skilled workers housing market. without having to invest time and money to educate them. hile increasing immigration provides many advantages, In contrast, the Indian-born population is booming with it is not uniformly beneficial. Rapid population growth growth in the technology sector, particularly in Austin and can cause economic friction through higher unemployDallas-Fort Worth. Nearly a fifth of Indian immigrants work ment, job-market competition, and increased burdens on public in computer systems design and related services, which are services (e.g., school systems, health care, and municipal sertypically high-paying jobs that require post-secondary education. This highly trained immigrant group earns a median wage vices). Cultural and political tensions can arise as well. The ongoing immigration debate highlights many of these issues across the above $70,000, on par with its educational investment. political spectrum. It is necessary to consider all of the contribuThe Chinese population also has high educational attaintions as well as the costs of immigration to improve the current ment levels with 67 percent possessing bachelor’s degrees. In system and to maintain Texas’ thriving culture and economy. the workforce, their greatest impact is in Texas’ universities For an overview of U.S. immigration policy, read the online and colleges. On the other hand, a large proportion of Chinese edition of this article at www.recenter.tamu.edu. immigrants work in the restaurant and food-service industry, balancing the median wage around $42,000. Dr. Torres (ltorres@mays.tamu.edu) is a research economist and Miller The median wage for Filipino immigrants is slightly above (wamiller@tamu.edu) a research associate with the Real Estate Center at their Chinese counterparts at $43,436. Despite accounting for Texas A&M University. just 2 percent of Texas’ FBP, they are three times as likely as native-born residents to work in the health care and social serTHE TAKEAWAY vices sector, filling a critical void in the workforce. A quarter of Filipinos are employed by hospitals alone. Texas ranks second nationally in the number of foreignThe economic profile for Vietnamese immigrants matched born residents, who currently make up more than onethat of Texas natives in terms of median income and educafifth of the state’s population. That segment of the population. This population group, however, is heavily weighted tion is changing along with the skills of its workforce. toward the service-providing sector with more than 16 percent
T
W
8
TIERRA GRANDE
Investment
BUYING STOCKS stocks
OR
homes
BUYING HOMES? A Real-World Scenario
M
any factors come into play when deciding whether to purchase a home or to rent instead. One factor worth considering is the anticipated rate of return on invested capital from home ownership versus renting. This article provides a “real-world” comparison of the financial gain from renting and investing any remaining cash in the stock market with the financial gain from purchasing a home. For a more simplified scenario, read “Nest or Nest Egg? Hatching Best Investment Plan” in the October 2018 issue of Tierra Grande. By renting and investing in a stock portfolio, the household forgoes the potential to earn appreciation from homeownership but may benefit from selling the stock at a profit. Conversely, APRIL 2019
BY
HAROLD D. HUNT AND CLARE LOSEY
by purchasing a home, the household forgoes the future earnings from a stock portfolio as well as the potential to earn dividends. As in the previous article, the question being examined is, if between 2000 and 2016 a Texas household had the option of either renting (and consequently investing in the stock market) or purchasing a home, which provided the greater financial gain?
Real-World Financial Comparison Numerous differences complicate a comparison between renting and investing in the stock market and purchasing a home. The Real Estate Center’s analysis controlled for the differences
9
Table 1. Investment Matrix to Purchase or Rent and Invest at Year-End for Texas Statewide Year of Initial Investment or Purchase (Beg. of Year)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2000
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
p
i
i
p
p
p
p
i
p
p
p
p
p
p
p
i
i
i
p
p
i
i
i
i
i
p
p
i
i
i
i
i
i
p
i
Percent
2001 2002
i
2003 2004
i
2005
2017
i
p
p
p
p
p
p
i
p
p
p
p
i
p
p
p
p
p
p
p
p
p
p
p
p
p
p
i
i
i
i
p
p
p
p
p
i
i
i
i
i
p
p
p p
2006
i
2007 2008
i
2009
i
i
i
i
i
p
p
i
i
i
i
i
i
i
i
i
i
i
i
p
p
p
2010 2011
i
2012
i
i
p
p
p
i
p
p
p
p
2013
p
2014
p
p
p
p
p
p
p
p
2015 2016
i
Note: A “p” indicates that the IRR from homeownership was greater than from an S&P 500 stock portfolio. An “i” indicates that the IRR from an S&P 500 stock portfolio was greater than from homeownership. Source: Real Estate Center at Texas A&M University
Table 2. IRR From Homeownership at Year-End for Texas Year of Home Purchase (Beg. of Year) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Percent 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0.3
2.6 –1.4
3.1 1.8 –8.3
2.9 2.6 –3.2 –7.7
3.7 4.2 0.9 0.6 –4.7
4.7 5.8 4.1 5.4 4.3 1.7
5.2 6.5 5.6 7.5 7.7 7.6 0.8
4.6 5.8 5.1 6.9 7.2 7.2 2.2 –6.6
3.6 4.8 4.1 5.8 6.0 5.8 1.3 –4.6 –16.9
2.5 3.6 2.8 4.4 4.4 4.0 –0.4 –5.4 –14.1 –21.3
1.6 2.6 1.9 3.4 3.3 2.8 –1.5 –5.7 –12.6 –16.1 –23.7
1.6 2.7 2.1 3.6 3.7 3.4 –0.3 –3.3 –7.8 –8.6 –11.3 –14.9
2.3 3.4 3.0 4.6 4.9 4.8 2.0 0.2 –2.5 –1.5 –1.4 –0.8 1.6
3.2 4.4 4.2 5.8 6.3 6.6 4.5 3.6 2.3 4.2 5.8 8.1 13.1 12.8
4.0 5.2 5.2 6.8 7.4 7.8 6.3 5.9 5.4 7.7 9.8 12.5 17.5 19.5 17.9
4.7 5.8 5.9 7.5 8.2 8.7 7.5 7.5 7.5 9.9 12.1 14.8 19.4 21.6 22.3 19.8
4.4 5.5 5.6 7.1 7.8 8.3 7.1 7.1 7.0 9.2 11.2 13.3 16.9 18.0 17.4 14.8 5.1
Note: IRR based on statewide median home price appreciation. Sources: Real Estate Center at Texas A&M University and FHFA Home Price Index
through a number of assumptions (see “Real-World Scenario Assumptions” sidebar). The internal rate of return (IRR) from homeownership using statewide data as well as data for four major Texas MSAs provided a benchmark. The four metros considered are Austin, Dallas-Fort Worth, Houston, and San Antonio. Due to space considerations, metro-level results are available only online in the technical report Purchasing a Home versus Renting and Investing at www.recenter.tamu.edu. The IRR from homeownership is compared with that from renting and investing any savings in the stock market. Expenses associated with buying, holding, and selling a home or a stock portfolio in a typical, real-world situation are also considered.
10
The amount of the initial investment varies, but it is assumed to be the same for both investment options. The household either purchases a home or rents and invests the equivalent dollar amount in a stock portfolio at the beginning of the year. The point of initial investment ranges from the beginning of 2000 to the beginning of 2016.
Cash-Flow Fluctuations Net cash flow to homeowners is typically negative as the annual costs of homeownership usually outweigh the rent on a “comparable” property. However, upward pressure on rents has translated into positive cash flow for homeownership over the past several years. TIERRA GRANDE
H
omeownership costs tended to remain more stable than rental rates over the holding period as the sum of principal and interest is constant for a fixed-rate mortgage. Property taxes and insurance and maintenance can vary each year depending on factors such as the appraised value of the home. However, the sum of these expenses was generally less than the sum of mortgage principal and interest, thus having less impact on overall homeownership costs.
Winning IRR Tally Even if a household suffered an overall financial loss from a particular investment (as indicated by a negative IRR), the investment with the less negative IRR is assumed to provide the household with greater financial gain. In other words, a superior IRR does not necessarily translate into a positive IRR. The results for the investment decision (i.e., the number of times a household most often captured a higher IRR from purchasing a home or renting and investing in the stock market during the study period) vary by geography. However, the IRRs from homeownership exceeded the IRRs from renters investing in the stock market in all five MSAs and in Texas overall.
The IRR from homeownership in Texas surpassed that of renters investing in the stock market 97 times, or 63.4 percent of the time (Table 1). The results also indicate that either renting and investing in the stock market or buying a home would have produced more positive than negative returns. However, homeownership did result in a greater incidence of positive returns. The homeownership IRR based on statewide data was positive 126 times, or 82.4 percent of the time (Table 2). The IRR from renters investing in the stock market was positive in 113 instances, or 73.9 percent of the time (Table 3). Timing is critical in the decision but obvious only with hindsight. Neither house buying nor renting and investing in the S&P 500 from 2007–09 translated into a good investment for several years.
Comparing Outcomes Results under more real-world conditions vary significantly from those in the previous article. The first article found renting and investing in the stock market, on average, offered a greater IRR for households in Texas from 2000 to 2017.
as a Benchmark UsingUsing IRRIRRas a Benchmark
T
he IRR provides a direct numerical comparison between renting and investing the difference in a stock portfolio and purchasing a home. According to Property Metrics, the IRR “is the percentage rate earned on each dollar invested for each period it is invested.” While the two options share the same initial investment, the end-values may differ depending on the holding period, producing different IRRs. A household’s decision to rent and invest the difference in the stock market or purchase a home is displayed in the investment values and IRR at the end of each holding period. Holding periods range from a minimum of two years to a maximum of 18 (for a household that invests as early as the beginning of 2000 and sells as late as the end of 2017). This results in 153 holding periods to be analyzed. For this analysis, the S&P 500 represents the performance of the stock market. History shows the stock market is generally more volatile than the housing market. The annual returns for the S&P 500, which
APRIL 2019
include dividends and exclude the impact of capital gains tax, ranged from –36.6 percent in 2008 to +32.1 percent in 2013 (see table). This article adds to the complexity of the model by replicating more real-world conditions than the previous article. The dollar amount of the initial investment varies by the five different geographies and year of investment based on changes in median home prices. In regard to capital gains tax treatment, data for the average effective long-term capital gains tax rate from 2000 to 2014 was obtained from the Tax Policy Center. The 2014 rate is constant across 2015, 2016, and 2017. Passage of the Taxpayer Relief Act in 1997 enabled households to avoid capital gains tax as long as the home has been owner-occupied for at least two of the last five years and the gain on sale is $500,000 or less ($250,000 or less for single filers). Although capital gains tax is not considered for homeowners, it is taken out of a renter’s stock portfolio gains.
Annual Return from S&P 500 vs Annual Home Price Appreciation for Texas Year
S&P 500 (percent)
Texas (percent)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
–9.0 –11.8 –22.0 28.4 10.7 4.8 15.6 5.5 –36.6 25.9 14.8 2.1 15.9 32.1 13.5 1.4 11.8 21.6
6.1 6.7 3.5 3.1 2.7 4.4 5.6 5.1 1.9 0.1 –1.3 –1.4 1.5 4.5 7.3 7.6 7.8 8.2
Sources: Dr. Aswath Damodaran (New York University) and the Federal Housing Finance Agency (FHFA)
11
Real-World Scenario Assumptions Renter Stock Portfolio
Home Purchase
Stock portfolio expenses paid by renters typically include purchase and sale broker commissions (i.e., transaction fees) as well as capital gains tax on the sale of individual stocks or the portfolio itself. Stock portfolio assumptions: • As stock transaction fees are generally quite low (1 percent or less), they are excluded from the analysis. • Renters are expected to pay long-term capital gains tax on a stock portfolio, with the rate being 12.5 to 19 percent of the overall value of the portfolio, depending on tax law at the time. • Because a renter household does not make any transactions over the holding period of the portfolio, the tax is applied to the value of the stock portfolio only when it’s liquidated—as long as the portfolio realizes a gain in value. • If the portfolio loses value over its holding period, renter households are not subject to capital gains tax on the sale of the portfolio. • Renters face no constraints in the sale of the stock portfolio.
The following assumptions represent reasonable estimates of actual market conditions. Different loan terms or expenses associated with homeownership can alter the return on homeownership and potentially reverse the investment decision. • The sum of the down payment on a home plus closing costs represents the initial investment. The down payment for a home purchase is 20 percent. • The dollar amount available to either purchase or rent within the five separate geographies will vary by differences in median home prices during the stated year of investment. • According to the U.S. Census Bureau, 58 percent of the total owner-occupied housing units in Texas were mortgaged in 2016. This analysis assumes households require a mortgage and must pay principal and interest. • Homeowners must also pay property taxes, insurance, and maintenance costs. • Both homeowners and renters pay for utilities separately. Therefore, utilities are a wash, and this analysis does not consider them. • Because this analysis assumes a minimum twoyear holding period for a principal residence, no capital gains tax on a sale by homeowners is factored in. • A 30-year, fixed-rate mortgage at the effective mortgage interest rate was calculated for each geography at the time of initial investment. For the state, the rate ranged from a low of 3.75 percent in 2012 to a high of 8.16 percent in 2000. Mortgage interest rates varied slightly by Metropolitan Statistical Area (MSA). FHFA is the source for all mortgage interest rate data. • Closing costs are 2 percent of the purchase price. • Selling fees are 6 percent of the sales price. • Property taxes are pegged at 2 percent of the home value while insurance and maintenance costs are 1.5 percent. • Homeowner net cash flows equal the outflow of mortgage principal and interest, property taxes, and insurance and maintenance plus the inflow of rent on a “comparable” property. • Households choosing to purchase a home meet the qualifying requirements for purchasing a home. • Households face no constraints in the sale of the home. • The IRR results are the sole criteria for buying versus renting (see “Using IRR as a Benchmark”). The analysis does not account for qualitative differences or personal preferences between owning and renting. • Home purchasers are seeking a longer-term investment in a primary residence. Second home or investment property purchases are not considered.
12
Rental Property For households choosing to rent and invest in the stock portfolio, the following assumptions apply: • Monthly rent is the sole cash outflow for renters. No utilities are considered. • The rental property is comparable in quality and functionality to one a homeowner would purchase. • Annual cash inflows to renters are the annual expenses associated with homeownership offset by the difference between owning and renting. • A household that rents and decides to open a stock portfolio reinvests the difference between owning and renting. (Actual renters often lack the discipline to actually deposit such funds into a stock portfolio each month. This study assumes a disciplined investor.) No rental rate index for the five specific geographies was available. Therefore, annual rents were calculated by adjusting the 2015 median rent for each geography reported in the U.S. Census Bureau’s American Community Survey by the annual consumer price index reported by the U.S. Bureau of Labor Statistics.
TIERRA GRANDE
Table 3. IRR from S&P 500 Stock Portfolio After Tax at Year-End Year of Initial Investment (Beg. of Year) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Percent 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
–10.5
–14.5 –4.1
–5.3 –0.6 –7.8
–2.3 –2.5 –1.6 10.4
–1.2 0.3 –0.1 8.5 –0.2
–1.1 1.0 2.9 10.3 4.8 2.0
–0.3 –2.9 3.3 9.3 5.0 3.1 2.3
–3.6 0.0 –1.5 0.0 –2.1 –5.1 –8.2 –18.2
–1.0 0.0 –0.1 3.5 –0.2 –2.2 –0.6 –5.5 –10.6
–0.9 0.1 1.4 4.8 1.8 0.3 –0.5 –0.8 –2.8 12.2
–0.7 1.3 1.4 4.4 1.7 0.5 –0.2 –0.2 –1.6 8.5 0.8
0.5 3.0 2.6 5.5 3.2 2.3 1.9 –0.2 –1.3 10.3 5.5 1.1
2.1 3.7 4.3 7.1 5.2 4.6 4.5 3.0 2.6 13.0 10.0 8.4 11.7
2.8 3.5 5.0 7.6 5.9 5.4 5.5 4.2 4.1 13.0 10.6 9.6 12.2 10.4
2.7 4.0 4.7 7.1 5.5 5.0 5.0 3.9 3.7 11.3 9.0 7.9 9.4 7.3 –3.3
3.2 5.0 5.2 7.4 6.0 5.6 5.6 4.7 4.6 11.3 9.4 8.5 9.9 8.4 1.5 –4.1
4.1 0.0 6.1 8.3 7.0 6.7 6.9 6.1 6.2 12.4 10.9 10.3 11.7 10.9 6.2 3.8 5.1
Sources: Real Estate Center at Texas A&M University and Dr. Aswarth Damodaran (New York University)
Conversely, this more real-world set of assumptions revealed that purchasing a home generally provided households with a superior IRR (Table 1). A major factor in the different outcomes between scenarios was the effect of capital gains tax on a renter’s investment portfolio. The introduction of capital gains tax dramatically impacted the IRR from an investment portfolio. In most cases under current tax law, avoiding paying capital gains tax on the sale of a home gives homeownership a tremendous edge. Additionally, high rent growth over the past several years has diminished the financial gain from investing any excess funds in the stock market. An important factor to consider is the substantial up-front cost of purchasing a home versus renting and investing in the stock market. Potential homeowners should typically expect to remain in a home at least two years before the front-end costs are recouped. Finally, renters investing in the stock market at the end of a recession and disinvesting within a few years almost always captured the superior financial investment. The stock market tends to grow at a much faster rate than home prices coming out of a recession. However, over longer periods purchasing a home has shown to be the more rewarding option. APRIL 2019
A household’s decision to rent and invest in the stock market or purchase a home will be determined by a combination of personal and investment preferences, not just the IRR the household would have received from either option. Households are likely to consider factors such as each market’s historic performance and current conditions and the ease and ability of qualifying for homeownership. Other factors include the need for flexibility in living arrangements, the obligations of homeownership, available housing stock, nearby amenities, and the social and community aspects of owning versus renting. Dr. Hunt (hhunt@tamu.edu) is a research economist and Losey a research intern with the Real Estate Center at Texas A&M University.
THE TAKEAWAY When deciding between buying a home or renting and investing the down payment, the anticipated rate of return in both choices is a major consideration. Outcomes will vary depending on a complex range of factors pertaining to the home purchase or rental and the individual’s stock portfolio.
13
Land Markets
Over Hill,
Texas Land Markets
T
Region 1 PanhandleSouth Plains
By Charles E. Gilliland, Erin M. Kiella, and Tian Su
14
Land Market Regions
Region 3 West Texas
Region 4 Northeast Texas
Region 7 AustinWacoHill Country
Region 2 Far West Texas
Region 6 South Texas
Region 5 Gulf CoastBrazos Bottom
Figure 1. Texas Rural Land Prices
3,000 2,500 Dollars Per Acre
exas land market activity slowed in fourth quarter 2018 but continued to show positive price trends. Overall land prices climbed at a moderate pace, reaching $2,779 per acre (Figure 1). Energy sector activity stoked demand for recreational and investment properties, driving the statewide price up 5.1 percent over the fourth quarter 2017 price. Those results revealed a deceleration in the rate of increase posted in the previous three quarters. The 6,193 reported sales fell 79 short of 2017’s volume. Total dollar volume ($1.29 billion) expanded 5.5 percent from 2017, reflecting a move to fewer total sales of larger properties. Despite overall positive market conditions, some regions registered decidedly weak results. Prices declined in the energy-intensive regions of Far West Texas and South Texas, while the number of transactions declined in all areas except the Panhandle and South Plains and the Gulf CoastBrazos Bottom.
2,000 Nominal
1,500
Real or Deflated
1,000 500 0 2010
2012
2014
2016
2018
Source: Real Estate Center at Texas A&M University TIERRA GRANDE
Over Dale
s’ Peaks and Valleys
Panhandle and South Plains
Far West Texas
Prices inched up a weak 1.4 percent from fourth quarter 2017, ending five straight quarters of price declines (Figure 2). The $1,104 per-acre price fell slightly short of third quarter 2017’s price of $1,119 per acre. This appears to have slowed the retrenchment driven by challenging agricultural operating conditions. The number of sales expanded slightly to 422. Poor operating conditions contributed to weak prices throughout the year. The small increase suggests declines may be over. However, a burst of activity related to 1031 transactions may have artificially increased the regional price. Proof of a recovery will depend on developments in the first half of 2019.
Sand miners have satisfied their appetites for ranches in this region, but other oil-related ranch purchases boosted dollar volume slightly above the 2017 level. The number of sales declined. Industrial demand for land continued to support historically high prices. The regional price dipped below $1,000 per acre. At $788 per acre, prices were about 23.3 percent below third quarter 2018 prices but only 0.38 percent below fourth quarter 2017 prices (Figure 3). Continued high-bonus payments for mineral leases and land purchases for disposal wells and other oil field uses supported prices at historically high levels. Total dollar volume amounted
Figure 2. Panhandle and South Plains Rural Land Prices
1,400
1,200
Nominal
1,000
1,000 800
Nominal
600
Real or Deflated
400
Dollars Per Acre
Dollars Per Acre
1,200
Real or Deflated
800 600 400 200
200 0 2010
2012
2014
2016
Source: Real Estate Center at Texas A&M University APRIL 2019
Figure 3. Far West Texas Rural Land Prices
2018
0 2010
2012
2014
2016
2018
Source: Real Estate Center at Texas A&M University
15
1,400
to $51 million, up 1.9 percent from 2017 and 26.9 percent from the average of the first three quarters of 2017. Prices in 2019 will likely fall well short of last year’s prices, which were fueled by the sand-mine frenzy.
1,200
West Texas
Figure 4. West Texas Rural Land Prices
1,000
Nominal
800
Real or Deflated
600 400 200 0 2010
Northeast Texas 2012
2014
2016
2018
Source: Real Estate Center at Texas A&M University
Figure 5. Northeast Texas Rural Land Prices
5,000
Dollars Per Acre
Driven by increased activity near Dallas, this area’s remarkable price growth shifted into high gear, climbing 11.4 percent to $4,421 per acre (Figure 5). However, buyers appear to be resisting climbing prices as evidenced by the number of sales falling 10.6 percent and dollar volume dropping 2.9 percent as well. Property size declined slightly from 114 to 112 acres.
Gulf Coast-Brazos Bottom Hurricane Harvey recovery contributed to improved market conditions in this region. Total dollar volume increased a
Nominal 4,000
In the fourth quarter, West Texas markets sent mixed signals with prices rising a respectable 9.1 percent (Figure 4) while sales volume plunged 6.4 percent to 644 sales. Total dollar volume ($138 million) moved up 9.9 percent. At 415 acres, typical size expanded 2.1 percent.
Real or Deflated
3,000
Figure 6. Gulf Coast-Brazos Bottom Rural Land Prices
7,000
2,000
6,000
1,000 0 2010
2012
2014
2016
Source: Real Estate Center at Texas A&M University
2018
Dollars Per Acre
Dollars Per Acre
1,600
5,000 4,000
Nominal
3,000
Real or Deflated
2,000 1,000 0 2010
2012
2014
2016
2018
Source: Real Estate Center at Texas A&M University
16
TIERRA GRANDE
remarkable 79.1 percent over the depressed fourth quarter 2017. Sales increased by 29.6 percent. The increased activity did not translate into major price changes; prices also increased nearly 4 percent to $5,955 per acre (Figure 6). The region had a 6.7 percent increase in typical size.
South Texas markets produced a price of $3,695 per acre for a 3.4 percent decline from fourth quarter 2017 (Figure 7). However, size (–4.0 percent) and total dollar volume (–19.0 percent) contracted significantly, pointing to a weakening market. Eagle Ford activity still has not substantially increased. Booming sales volume of dry cropland and an absence of irrigated land sales in the Rio Grande Valley may have contributed to the price decline.
4,000 3,500 Dollars Per Acre
South Texas
Figure 7. South Texas Rural Land Prices
3,000 2,500
Nominal
2,000
Real or Deflated
1,500 1,000 500 0 2010
2012
2014
2016
2018
Source: Real Estate Center at Texas A&M University
Austin-Waco-Hill Country
Dr. Gilliland (c-gilliland@tamu.edu) is a research economist, Dr. Kiella (ekiella@mays.tamu.edu) an assistant research scientist, and Tian Su a research intern with the Real Estate Center at Texas A&M University.
THE TAKEAWAY Despite a slowdown in activity, Texas land markets showed overall positive price trends in 2018. Only Far West Texas and South Texas had notable price declines. However, the number of sales dropped in all regions except the Panhandle and South Plains and the Gulf Coast-Brazos Bottom.
APRIL 2019
Figure 8. Austin-Waco-Hill Country Rural Land Prices
4,000 3,500 Dollars Per Acre
The Central Texas market recovery finished 2018 strong with a 9.4 percent price increase to $3,792 per acre (Figure 8). That marked the fourth straight quarter of stable-to-rising prices and the largest percentage increase since 2014. However, sales dropped about 0.5 percent, and total dollar volume receded by 3.1 percent to $329 million. These changes suggest buyers may have returned to higher-priced counties in the fourth quarter.
3,000 2,500
Nominal
2,000
Real or Deflated
1,500 1,000 500 0 2010
2012
2014
2016
2018
Source: Real Estate Center at Texas A&M University
17
Residential
Adding It Up
Texas Home V alues and School Quality
H
By Joshua Roberson
Schools, Home Prices, and Taxes Homebuyers have much to consider when purchasing a home. How much home can they afford? How long will the commute To find the answers for Texas, look at district-level housing be? Which home and neighborhood amenities are they willing data alongside data from the Texas Education Agency (TEA), to pay for or sacrifice? The impact of local schools is high on which includes school district financials and accountability the list. Regardless of whether a homeowner has school-aged scores (Figure 1). TEA provides four different accountability children, consideration is still important because of school scores that measure various aspects of school district effectaxes imposed on the property and how they could affect tiveness. For this study, school accountability is the same as potential resale. Unlike with most public services, consumschool quality. ers can see school-related costs on Table 1. Statewide School Quality Variation by Home-Price Point their property tax bill and view the tangible results. Student Student Closing Postsecondary Does school quality matter in Achievement Progress Performance Gaps Readiness Index the home-buying process? The Price Group Standard Deviation short answer is “yes.� Numerous $150s and Below 0.15 0.14 0.12 0.14 studies have shown school quality $150s to $200s 0.13 0.14 0.12 0.11 contributes to higher home values. $200s to $250s 0.14 0.13 0.12 0.12 The bigger question is how much $250 to $300s 0.14 0.15 0.12 0.14 does school quality influence home $300s and Above 0.17 0.20 0.17 0.18 prices when other variables are Note: Higher standard deviation indicates more variation in scores. Lower indicates less. brought into the picture? Sources: Texas Education Agency and Real Estate Center at Texas A&M University 18
TIERRA GRANDE
TEA data about the Robin Hood program are limited to school districts that pay 0.8 into the program. In addition, cash-flow data strictly for Robin Hood funds are 0.6 not tracked. Rather, TEA tracks the entire funding pool that is redistributed 0.4 back to school districts. This includes Robin Hood and other state funding. The rela0.2 tionship between state funds and local funds collected by school districts is shown in 0.0 <150 150-200 200-250 250-300 >300 Figure 2. As designed, disHome Price (Thousands of Dollars) tricts with higher local tax Student Achievement Closing Performance Gaps resources tend to receive less Student Progress Readiness Index from the state. The Robin Hood program Student Achievement. Snapshot of performance across subjects. creates a disconnect between Student Progress. Year-to-year student progress. Closing Performance Gaps. Academic achievement of economwhat homebuyers would ically disadvantaged students and the two lowest-performing potentially pay in school racial/ethnic student groups. property taxes and how Postsecondary Readiness. How prepared students are for much funding their school college, job-training programs, the workforce, or the military. district would ultimately Note: Home prices come from 924 school districts throughout the state. School receive. In recent years, this data are from the 2016–17 school year while home prices are from 2018 has caused increasing ire sales (assumes 2018 purchases would have been made with 2016–17 school data). as home values and, subseSources: TEA, Real Estate Center at Texas A&M University, and 2017 quently, property taxes in Accountability Manual for Texas Public School Districts and Campuses Texas have grown rapidly. Also, despite the state’s redistribution of funding, the amount collected in local taxes Grouped by price cohort, or spent on student instruction does not relate as strongly to some metrics increase more school quality as home prices do. noticeably than others. For Factoring in additional socioeconomic data from TEA helps example, “Student Achieveidentify these relationships even further. For example, TEA ment” begins at an indexed data include the proportion of students within school districts score of 0.51 in the “$150s and Less” price cohort and Figure 2. State, Local Funds Collected ends with 0.73 in the “$300s Per School District, 2017 and More” cohort. “Postsecondary Readiness,” on the other hand, changes little, comparatively, between the same two cohorts. Interestingly, while the “$300s and More” cohort 10,000 contains the highest overall school quality scores, the variation across all cohorts is relatively high (Table 1). This is because of the student base’s wide economic range. For example, some 7,500 urban school districts have higher home prices than others but also a relatively higher proportion of economically disadvantaged students. 5,000 Higher home values also mean higher property taxes. Tax rates can vary considerably between school districts, cities, and other taxing entities. Overall, local school taxes make up a significant portion of the property owner’s tax bill and are a 2,500 major source of funding for public education. No conversation about Texas public education funding would be complete without mentioning the state’s school dis0 trict refinance program, known to many as the “Robin Hood” 0 2,500 5,000 7,500 10,000 12,500 program. The program aims to equalize school funding by Local Taxes Collected Per Student (Dollars) diverting tax dollars from property-tax-rich school districts to Sources: Texas Education Agency and Real Estate Center at Texas A&M University property-tax-poor school districts. State Revenue Received Per Student (Dollars)
TEA Scaled Score (0 to 1)
Figure 1: Median District Home Prices and TEA Accountability Scores
APRIL 2019
19
who are considered economically disadvantaged. Although a broad measure, it can provide a useful proxy for the economic makeup of school districts. Combining home price, school quality, finances, and socioeconomic data paints a better picture of how everything ties together.
Austin: A Case Study
W
within the school districts reveals fairly strong negative relationships with both home price and size. This is not surprising considering the restricted range of available housing options for students in lower-income households. However, this also suggests school districts with a higher proportion of economically disadvantaged students tend to have lower TEA ratings for accountability. Given these general relationships, what implications could be derived for either the existing homeowner or potential homebuyer? One major implication involves the state’s rising housing affordability problem, which is particularly troublesome in Austin. Does the quality of school help or hurt housing activity? In 2018, Austin’s median home price was $306,498. Table 2 groups districts below and above that median threshold and compares various housing and school-related attributes. In addition, state measures are provided as a comparative benchmark. ven accounting for Austin’s higher-than-state-average income, the median price in 2018 was a steep barrier for many households. Of the MSA’s 27 school districts, eight include homes priced above the overall median price. Sales volume per district and school size are also considerably larger, indicating denser student populations. Real estate market conditions appear tighter in school districts priced below the median price. Median days on market is comparatively lower, and the difference between what sellers ask for and what they get for their homes is narrower.
hile many of the relationships between variables remain consistent at the state level, regional analysis allows for a clearer and more intuitive interpretation of results. As a case study, school districts within the AustinRound Rock Metropolitan Statistical Area (MSA) were analyzed. This MSA has been in the middle of the Texas housing boom in terms of accelerated price and property tax growth and resulting housing affordability issues. The correlation between several key variables for AustinRound Rock is shown in Figure 3. Correlation is a basic measure of how one variable relates to another. Variables can move in opposite directions, denoted by negative values; the same direction, positive values; or no clear direction, anything close to zero. The strongest possible positive relationship is 1 while the strongest negative is –1. In the chart, red indicates a direct or positive correlation while blue indicates an inverse or negative correlation. White signifies little or no correlation. Starting with housing characteristics, higher median district home prices tend to relate positively with each of the four school quality measures. The same is true of square footage, which makes sense since home price and home size often go hand in hand. The two measures are also positively Table 2. Austin School District Metrics by Home-Price Category correlated with higher local taxes per student and lower state revenue per student. This fits in with how the state public education financing system works. Above Median 8 727 $165 43 2,424 96.9% 7,049 4,651 86 43 45 The proportion of Below Median 19 267 $130 30 1,691 97.2% 3,191 4,845 71 36 34 economically disadState 924 43 $94 49 1,773 95% 1,034 4,938 75 38 40 vantaged students Sources: Texas Education Agency and Real Estate Center at Texas A&M University
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Readiness Index
Economically Disadvantaged
Closing Performance Gaps
Student Progress
Student Achievement
Instructor per Student
Students
Close to Original List Price
Square Feet
Days on Market
Price PSF
Sales
School District Count
E
82 73 77
21% 63% 59%
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Figure 3: Austin School District Correlations Per-Student Local Tax
-0.93
Per-Student Instruction
0
Square Feet
0
Corr
0
0.4 -0.55
1.0
Closing Price
0.85
0
0.5 -0.58
0.5
Closing Performance Gaps
0.83 0.86
0
0.51 -0.63
0.0
0
0.57 -0.68
–0.5 –1.0
Student Progress
0.82 0.77 0.7
Readiness Index
0.66 0.52 0.46 0.47
0
0.57 -0.61
Student Achievement
0.42 0.78 0.93 0.75 0.82
0
0.51 -0.59
expenditure category, ranging in the 50 to 60 percent range of total expenditures for most schools. This category does not include athletics, extracurricular activities, or other auxiliary services. Instruction expenses per student relates neither positively nor negatively to the factors previously mentioned (Figure 3). This applies not only to Austin but to the other major Texas metros as well. To potential homebuyers, instruction funds spent on their children may end up being a near nonfactor in the homebuying decision.
Correlation, Not Causation
Finding associations is one thing, but identifying what causes what is another. For example, the analysis does not indicate that student achievement causes larger homes. More accurately, it shows that higher student achievement tends to correspond with larger homes at higher prices. The addition of variables such as percent of economically disadvantaged students reveals another major dimension to the home-buying process. The underlying “cause” may be something not even measured, such as household financial resources. Future analysis identifying causal relationships to home price may be most effective with a comprehensive set of variables including home characteristics, school quality, and neighborhood attributes.
in
ad
Re
Cl
St
ud
en
tA
ch i
ev em os e in Stu ess nt g de I Pe n rfo nt P dex rm ro an gre ss c Cl e G os a in ps Pe g r-S tu Squ Pric Pe den are e Pe rt r-S Stu Ins Fee tu de tru t de n c nt t L tio o n St at cal e T Re ax ve nu e
Economically Disadvantaged -0.95 -0.44 -0.74 -0.86 -0.72 -0.79 0 -0.55 0.63
Sources: Texas Education Agency and Real Estate Center at Texas A&M University
Homes also tend to be smaller, and district student counts are smaller. chool districts grouped above the median price correlate more positively to accountability scores than the state and school districts priced below. The latter correlates to below-the-state levels for all four accountability metrics. This could mean current demand in lower prices ranges remains strong despite below-average school performance. If a homebuyer can’t buy a home above the median price— and, therefore, access the top schools—can instruction costs be used as an alternative variable to pick good schools within their budget? TEA generally defines instruction expenses as those associated with activities directly between teachers and students. Instruction expenses make up the largest operating
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Roberson (jroberson@mays.tamu.edu) is a senior data analyst with the Real Estate Center at Texas A&M University.
THE TAKEAWAY The quality of schools in an area is a major consideration for many potential homebuyers. While studies show school quality impacts home values, the extent of its impact depends on a wide range of related variables.
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Legal Issues
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The average Texas landowner
is 60 years old. As that age increases, the discussion of estate and succession planning takes on a new sense of urgency.
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Experts estimate 10 percent of farmland in the United States will be passed down over the next five years. That represents approximately 91 million acres, an amount close to the size of Montana. Current estimates show 58 percent of Americans have not written a will. Lack of estate plans and insufficient communication between benefactors and heirs, especially for estates with large real estate holdings, could result in substantial amounts of land being sold, divided, or tied up in court proceedings. Estate planning provides the tools that define who gets which assets, and when. A will is the bare minimum estateplanning tool used for real estate assets. Other tools have emerged that not only manage oneâ&#x20AC;&#x2122;s assets postmortem but TIERRA GRANDE
allow the succession process to begin before the final transfer of assets. uccession planning allows benefactors and heirs to communicate their goals and introduce potential heirs to the management logistics of the estate. It uses estate-planning tools to prepare oneâ&#x20AC;&#x2122;s property for a change in ownership and oneâ&#x20AC;&#x2122;s family for a change in leadership. Succession planning can also help one avoid taxes, minimize court costs, make gifts, and transfer ownership to heirs before death. Previously, estate planning was instrumental in managing potential federal estate taxes. On January 1, 2019, the federal estate tax threshold increased to $11.4 million per person and $22.8 million for a married couple. That threshold is subject to expire in 2025. If an estate surpasses the threshold, it is taxed
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anywhere from 18 to 40 percent. The Tax Policy Center estimates this threshold affects only 0.1 percent of those who died in 2018 (about 1,890 people). Given that so few are affected by federal estate taxes, estate planning has shifted focus to the management and minimization of income taxes. Estateplanning tools can minimize taxes paid on the appreciation of assets, especially when a significant amount of assets is real estate. Many states also have a state estate tax and an inheritance tax. Texas has neither. The following scenarios serve as an introduction to two estate- and succession-planning tools: wills and trusts. Business structures such as partnerships, limited liability companies, and corporations will be discussed in a future article.
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Where There’s a Will Luke and Morgan have three children—Mary, Kyle, and Ronald. They have a home and some cattle on 400 acres outside Fredericksburg. After much discussion, Luke and Morgan decide to create a will to distribute all of their property and their ownership portion in jointly owned assets when they die. They will leave their land and all assets associated with it to their children to be co-owned in equal shares. Ownership like this occurs frequently and is referred to as “tenancy in common.” fter both parents pass away, the will goes through a probate process. The will takes legal effect when it is proven to be the true last testament of the deceased. The probate process can take two years or longer. Assets owned in multiple states go through separate probate processes in each state. During the process, the executor of the will chooses to either manage the assets or hire someone to manage them, which is common when the assets include land operations. In some cases, one of the children may manage the property and its assets. Ultimately, though, it is the executor’s responsibility to determine how the assets contained in the will are managed. The estate pays the cost of managing the assets during the probate period, including the cost of a manager. According to the will, each of Luke and Morgan’s children will own one-third undivided interest in the land and its assets. The tenancy-in-common structure gives each child the right to use the land so long as it does not restrict the other owners’ use of the land. Communication of Luke and Morgan’s goals for their property to their heirs is extremely important for the success of this ownership structure. Disputes are likely and can be costly to an estate. Open and continual communication helps reduce potential costs and minimizes stress on family relationships. Luke and Morgan must also know their children’s goals and management abilities. They must understand that the children are not bound by the parents’ stated goals unless conditions of or restrictions on land use are placed in the will. If the parents want the land kept and managed as it currently is but the children live several hours away from the property, it is likely not feasible for the children to uphold the current land use on their own. The children also may not be able to afford to pay someone to manage the land. If not, the parents and children should talk about the best outcome for the land.
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Tenancy in common can be a difficult structure if the children have different goals. Mary may want to live in the house and raise cattle like her parents did. Kyle may see the potential of increased tourism in Fredericksburg and wish to capitalize on it by selling the land to a developer. Ronald, meanwhile, may wish to have nothing to do with the land and want his portion of the value of the assets in cash. Disputes like these are common and may result in litigation or court-provided mediation. At any time, any of the cotenants has a right to partition the property. Partitioning can be costly for the heirs and the estate. Partitioning can be done in two ways—by agreement or by filing a partition suit. If an agreement can be made, the cotenants either sell the property and split the proceeds or agree on a physical separation and partitioning of the land. If an agreement cannot be made and a partition suit is filed, three special commissioners are appointed to determine whether the land can be partitioned in kind or if it must be partitioned by sale. Partitioned in kind means they can divide the land into nearequal-value parcels for each of the tenants. If the land cannot be divided into equal-value parcels, it will be partitioned by sale and the proceeds (minus court costs and sale costs) will be distributed to each heir according to the respective shares of ownership. The children receive a step-up in basis on the assets they have inherited from their parents. The basis is the value of the asset used in calculating capital gains on the appreciation of an asset for tax purposes (the sale price minus the cost basis). The basis determines the amount of tax paid or deducted on the asset after the sale of the asset. The assets need to be appraised to determine the new cost basis at the time of death. If the children sell any of the assets at that time or in the future, the new cost basis will be used to determine their tax liability. The step-up in basis has the potential to substantially reduce or eliminate the heirs’ income tax liability when assets are sold. A will leaving land to heirs in undivided interest is common, especially when land or property is involved. Other tools serve additional goals and help with the logistics of passing on ownership of assets that require operational management and experience, such as land holdings.
An estimated 10 percent of farmland in the United States will be passed down over the next five years, representing about 91 million acres.
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TIERRA GRANDE
Matters of Trust Ben and Jessica have been discussing setting up a trust to support their investment and retirement goals as well as to support their children if anything were to happen. They understand there are two types of trusts: revocable and irrevocable. Both create a management structure that will continue after Ben and Jessica pass away. Because a trust specifically outlines a succession process for the trustee and beneficiaries, the assets in a trust avoid the probate process and add a level of privacy. With a will, assets and the recipients of those assets become public record once the will is admitted to probate. Ben and Jessica like these attributes of a trust but would still like to maintain control of their assets. The couple wants to manage and build the assets’ value for their own benefit and the benefit of their children when the assets are passed on. Their lawyer tells them a revocable trust that becomes irrevocable when they die would achieve their estate-planning goals. They are happy to hear that but would like to know more about the advantages and disadvantages of both kinds of trusts. Their lawyer says if they were to set up an irrevocable trust, they would not maintain control of their assets and would no longer receive benefits from the assets transferred into the trust. One benefit of the irrevocable trust is the protection it provides assets from creditors. Creditors would not be able to force distributions from the trust to cover the beneficiaries’ or the trustor’s personal debts. he revocable trust allows them to maintain control of their assets as well as make amendments. The couple would also continue benefiting from the assets. Because Ben and Jessica maintain control of the assets and receive benefits from them, the revocable trust does not provide protection from creditors. Taxes also concern the couple since the majority of their assets are in real estate. They are not necessarily worried about surpassing the federal estate tax threshold, but they do worry about the income taxes that may need to be paid if their children sell the assets in the future. If the couple chooses to gift the assets to an irrevocable trust, the assets would not benefit from a change in basis. Therefore, the original cost basis would be used when calculating the taxes paid on the asset. In a revocable trust, the assets step up in basis at the time of the parents’ death. The appraised value of the assets at that time are used to calculate the taxes paid on the appreciated value. For example, a piece of property Ben and Jessica bought for $100,000 is now valued at $250,000. If they gifted the property to an irrevocable trust, the property would maintain the
$100,000 cost basis. If the asset is sold, taxes would be due on the $150,000 in appreciation. The revocable trust, on the other hand, steps up the basis to $250,000. Therefore, the children have a new cost basis of $250,000, reducing or eliminating their income tax liability. If Ben and Jessica decide on a revocable trust, the assets will still be included in their estate. This is not the case with an irrevocable trust (this is an important caveat). Trusts reach the highest income tax rate of 37 percent at $12,000. Ben and Jessica would not reach a similar income tax rate until $600,000. By keeping the assets in their estate, they reduce the potential tax liability associated with the assets. The couple agrees with their lawyer that a revocable trust that becomes irrevocable on their death is the best strategy. They will designate their children as beneficiaries of the irrevocable trust. They have also identified a trustee to manage it. Ben and Jessica create strict guidelines and conditions for the trustee role to ensure the assets are managed effectively. They have outlined steps to remove and replace the trustee if those conditions aren’t met. The trust defines the procedure for transferring the trustee position to the successor trustee, which avoids court involvement. The court may determine incapacitation of a trustee; otherwise, management of the assets transfer to the successor trustee and operations continue. Ben and Jessica work with their lawyer and others on their estate-planning team to create their revocable trust. Each estate- and succession-planning tool has advantages and disadvantages. Individuals should work with experienced professionals—estate and tax attorneys, certified financial planners, certified public accountants, and appraisers—to determine the best estate-planning strategy.
Lack of estate planning could result in substantial amounts of land being sold, divided, or tied up in court proceedings.
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Dr. Kiella (ekiella@mays.tamu.edu) is an assistant research scientist with the Real Estate Center at Texas A&M University. Special thanks to Thomas C. Baird of Baird, Crews, Schiller & Whitakers, P.C. for his contributions to this article.
THE TAKEAWAY With the average age of Texas landowners increasing, estate and succession planning has taken on a new urgency. Lack of proper planning could result in large amounts of land being sold, divided, or tied up in court. Tools such as wills and trusts can help, although each has its own advantages and disadvantages.
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Market Profile
Amarillo’s Housing Market
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he 2010s have been generally good to Amarillo’s housing market. The area had several consecutive years of sales growth before slowing in 2016. Despite the slowdown, prices continued to rise until recently. What factors have influenced these trends, and where is the market headed? Making sense of the city’s housing market begins with understanding the overall economy. 26
With over 96,000 households, Amarillo is a major hub for much of the nation’s beef and dairy industry. In addition, although Chicago is known as the “Windy City,” Amarillo has more reason to claim the moniker. Texas is the nation’s leading producer of wind energy, with the Panhandle playing a major role. Wind farm investment continues to expand in the region, including a few recent projects in Randall and Armstrong Counties (see table). These farms will provide not only longterm employment but also a short-term boost in construction employment. Overall, Amarillo had a downturn in job growth beginning in 2016. Employment turned around mid-2017 before slowing
Wind Farm Projects Armstrong County Carson County Oldham County Randall County Amarillo Panhandle
2014
2015
2016
2017
2018
1 5 3 0 9 19
0 2 0 1 3 9
0 0 0 0 0 1
0 0 2 0 2 12
2 0 0 1 3 5
Source: Texas Comptroller’s Office TIERRA GRANDE
Slowdown By Joshua Roberson
3,500
Sales Volume
down again in late 2018. Major industries such as manufacturing, which includes food manufacturing, grew 2.9 percent year over year in August 2018, the highest growth rate since 2011. Mining and construction grew almost 10 percent year over year from 7,100 to upward of 7,800 by year-end 2018. The city’s population growth has been steady for much of the decade but has not exceeded 1 percent annual growth since 2011. Between Potter and Randall Counties, the Panhandle’s two biggest counties, Randall has seen the most population growth since 2000 (Figure 1). Potter County had positive growth for much of the 2000s but has been in the negative for most of the 2010s. Randall County, on the other hand, has been positive the entire time and experienced a 4 percent population spike in 2010.
Figure 2. Amarillo Annual Home Sales
3,000 2,500 2,000 1,500 2000
2003
2006
2009
2012
2015
2018
Source: Real Estate Center at Texas A&M University
was a year-over-year sales drop, rising inventories, and stagnation of home-price growth. By contrast, until recently prices in the latest cycle rose despite all other indicators pointing to a downturn. The lag between sales slowdown and slowing price growth may mean recent economic events, such as rising mortgage rates, have more influence on price than area employment cycles.
Comparing Counties
A
Amarillo recently completed a residential real estate cycle that peaked in 2016. At that time, home sales totaled 3,368 with an annual growth rate of 2.7 percent. The year before was even more impressive with a growth rate of almost 11 percent. Total sales for 2018 ended up between 2016 and 2017 levels at 3,264 (2.7 percent growth rate). As home-sales growth has continued to stall, active listings have gradually risen, resulting in a rise in months inventory and the bottoming out of average marketing time, all signs of a slowing housing cycle. Amarillo had another cycle in the 2000s that peaked in 2006 before the start of the Great Recession (Figure 2). What followed
marillo is divided by a county line with Potter County to the north and Randall County to the south. Potter County contains downtown Amarillo and most of the local industry. A larger proportion of existing homes is sold there. Randall County includes the southern half of Amarillo as well as Canyon, has a higher household count, and contains the bulk of new-home sales (see map on next page). The Federal Housing Finance Committee’s Home Price Index (HPI) for both counties (Figure 3) includes purchases and refinances and reveals a slowdown in price growth from 2007 to 2011. This is followed by tandem growth until year-end 2017. The Real Estate Center’s HPI for Amarillo (Figure 4), which extends to year-end 2018 and includes only purchases, reveals a similar trend of continued price growth despite declining sales. Prices peaked in third quarter 2018 before dropping significantly in the fourth quarter. Multiple Listing Service data show new-home sales in these two counties have been up and down compared with overall sales (Figure 5). Homes from this sample are believed to represent speculative homes or new homes built without contracts. New-home sales reached a high in 2012 then declined for the next three years. This is counter to the overall sales growth during the same period (Figure 2).
Figure 1. Population Growth, Potter and Randall Counties
Figure 3. Home Price Index, Potter and Randall Counties
Growth Rate (Percent)
4 3
Potter Randall
150 Index 2000=100
Housing Cycle Ups and Downs
140
Potter Randall
130
2
120
1
110
0
100
–1 2001 2003 2005 2007 2009 2011 2013 2015 2017
2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: U.S. Federal Housing Finance Agency
Source: U.S. Census Bureau APRIL 2019
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Figure 6. New Single-Family Price Distribution, Potter and Randall Counties
Amarillo Home Sales, 2018
2010 median price 2014 median price 2018 median price
Potter Carson
Oldham INTERSTATE
40
Deaf Smith Armstrong
287
Sales Volume
$100,000
≤10 ≤25 ≤50 ≤100 ≤150
Randall
2010
2014
$400,000
$500,000
2018
Source: Real Estate Center at Texas A&M University
INTERSTATE
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Sources: Bureau of Land Management, Texas Parks & Wildlife, Esri, HERE, Garmin, USGS, NGA, EPA, USDA, and NPS
P
rice points for new housing units have changed quickly since the start of the decade. Figure 6 illustrates the price distribution of new single-family homes in four-year increments. In 2010, the median new-home price was approximately $160,000. At that time, the price range of new homes
Figure 4. Amarillo Home Price Index
135
$200,000 $300,000 Closing Price
was narrow and in the $100,000s with a comparatively smaller proportion of new-home sales in the $200,000s and beyond. Over time, the price distribution flattened as fewer homes sold in the $100,000s and more sold in the higher price ranges. By year-end 2018, the median price finally rose to $230,000. According to Census Bureau data, year-to-date November 2018 building permit counts have already exceeded year-end 2017 levels (Figure 7). However, with only December data remaining (at time of publication), year-end 2018 permit levels may still fall short of the decade’s annual average of 536 permits.
Figure 7. Amarillo Single-Family Building Permits
130 Index 2004=100
800
125 Building Permits
120 115 110 105 100
600 400 200
2005 2007 2009 2011 2013 2015 2017 2019 Source: Real Estate Center at Texas A&M University
Figure 5. New Single-Family Home Sales, Potter and Randall Counties 300
21.8%
11.5%
–14.2%
–12.6%
25.8% –1.0% –6.7% –6.4% –9.4%
200
0 2000
2003
2006
2009
2012
2015
2018
Source: U.S. Census Bureau
Amarillo’s housing market began to slow after peaking in 2016. While sales dropped, prices kept rising until the end of 2018. This could be a seasonal lull. On the other hand, other major Texas markets are showing price softness, a trend that may have finally reached the Texas Panhandle. Roberson (jroberson@mays.tamu.edu) is a senior data analyst with the Real Estate Center at Texas A&M University.
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THE TAKEAWAY 0
2010
2012
2014
2016
MLS Sales Volume Randall County Potter County
2018
Amarillo’s housing market had its most recent sales peak in 2016 with almost 3,400 sales. Since then, signs have pointed toward a slowing housing cycle.
Source: Real Estate Center at Texas A&M University
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