Tierra Grande - July 2019 by Texas Real Estate Research Center

JULY 2019 â&#x201E;¢

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

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

In This Issue Flood Protection Technology Homeownership Affordability Estate-planning Tools Wacoâ&#x20AC;&#x2122;s Housing Market Subprime Lending Real Estate Disputes

JULY 2019 â&#x201E;¢

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

Visit the Real Estate Center’s booth (801/900) at the Texas Realtors conference in September. We’ll show you how to attract more clients as the market expert using MarketViewer, the online warehouse of housing market information developed by Texas Realtors and the Real Estate Center.

Only at the Texas Realtors Trade Expo. September 14

Fort Worth Convention Center

MarketViewer is available to Texas Realtors at www.texasrealestate.com/marketviewer

iii

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Visit us online at

www.recenter.tamu.edu

JULY 2019

VOLUME 26, NUMBER 3 ™

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

Director, GARY W. MALER Chief Economist, JAMES P. GAINES Senior Editor, DAVID S. JONES Managing Editor, BRYAN POPE Associate Editor, KAMMY BAUMANN Creative Manager, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Graphic Designer, ALDEN DeMOSS

14 Waco’s Wild Rise

Baylor University. Dr Pepper Museum. Texas Sports Hall of Fame. Even with so much to offer, Waco has only recently emerged as a hot spot for homebuyers. It would be easy to give credit to a certain popular home-renovation show, but not so fast—other factors are at play. BY JOSHUA ROBERSON

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: JP Beato III, pp. 1, 14–15, 17, 18; GroundFORCE, pp. 2, 4; Liberty Science Center, p. 3; FloodFrame, p. 5; Alden DeMoss, p. 6; Getty Images, pp. 10, 13, 19, 20–21, 22–23, 24–25; 26–27, 28; Robert Beals II, p. 18. © 2019, Real Estate Center. All rights reserved.

2 Ahead of the Storm

New Ideas in Flood Protection Talk about necessity being the mother of invention. Homeowners in some parts of Texas have been hit by floods each of the past few years, prompting builders and engineers to find innovative ways to help. BY HAROLD D. HUNT

6 Keeping House

Location’s Impact on Homeownership Affordability Buying a house is one thing; keeping it is another. Homeownership affordability depends on a myriad of factors that vary from state to state and even city to city. Here’s how Texas and many of its cities measure up. BY ALI ANARI

10 Leaving a Legacy ON THE COVER Windmill overlooking Bushong Ranch in Kerr County

PHOTOGRAPHER JP Beato III

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Limited Partnerships, LLCs, and Corporations

Rural land management isn’t just big business— it’s family business. At least it can be for Texans hoping to teach heirs how to manage substantial real estate holdings. In such cases, business structures can be a practical option. BY ERIN M. KIELLA

19 Lingering Effects

of Subprime Lending

To say subprime mortgages single-handedly caused the Great Recession of 2006-07 would be over-simplifying things, but certainly they were a key culprit. More than ten years later, many Texans are still feeling their residual effects. BY LUIS B. TORRES, CARTER NEILL, AND CLARE LOSEY

26 It Depends

What Happens When Real Estate Disputes Go to Court? Don’t let Perry Mason or Matlock fool you. Court cases are seldom resolved in an hour. On top of that, they can be expensive and stressful. Understanding the legal process ahead of time can help. BY RUSTY ADAMS

Residential

Ahead of the Storm New Ideas in Flood Protection

By Harold D. Hunt

Weather-related flooding of homes in Texas is nothing new. Hurricanes and other heavy rainfall events have been damaging residential properties for decades. However, Hurricane Harvey’s unprecedented 50-plus inches of rain heightened many homeowners’ concerns about their vulnerability to flooding. In addition, strong population growth has led to more housing in low-lying and coastal areas of the state. As a result, home flooding has become more commonplace in Texas. To reduce the chances of flood-related damage, potential new-home buyers can familiarize themselves with effective flood-resistant techniques and products before construction begins when implementation cost is lowest. Existing homeowners can benefit from discovering what methods and products are most effective in protecting their current residence against flooding. Changes in residential construction materials and techniques occur slowly. Builders have little incentive to use advanced materials or methods to reduce flood damage if they feel no pressure from homebuyers or the government to do so. Adoption will occur much faster if it is demand-driven by informed consumers.

Governor’s Hard Look at Disaster Preparation Eye of the Storm, a report by the Governor’s Commission to Rebuild Texas, was published in November 2018. The report recommended ways Texas can be better prepared for disasters. It’s available online at www.rebuildtexas.today. A key strategy to avoid flooding involves establishing statewide standards or best practices to elevate structures above

the base flood elevation (BFE) in flood-prone areas. Currently, Texas has no statewide standards. BFE is defined as the elevation shown on the Flood Insurance Rate Maps for floodzones A and V inside the 100-year floodzone, an area with a 1 percent chance of a flood occurrence in any given year. The 100-year flood patterns help determine the National Flood Insurance Program (NFIP) rates for homeowners purchasing flood insurance. Zones A and V are in a Special Flood Hazard Area (SFHA). Homes with a federally backed mortgage that are in an SFHA must purchase flood insurance. If the Federal Emergency Management Agency (FEMA) provides a community with the flood hazard information that floodplain management regulations are based on, the community can adopt its own “model” floodplain management ordinance that best fits its particular flood risks. The ordinance must meet or exceed minimum NFIP standards. At that point, the community becomes responsible for floodplain management inside its corporate limits. Texas has no statewide model or best-practice ordinance. However, many communities have concluded that homes elevated up to the BFE are not sufficiently protected from flooding. The BFE does not account for the impacts of future development, increasing rainfall, subsidence, or rising sea levels. The report states that flooding above BFE is already fairly common in Texas. Additional elevation is usually expressed as “freeboard,” the number of feet the first inhabited floor of a building is above the BFE. A freeboard requirement is meant to provide an extra margin of protection that accounts for waves, debris, changing TIERRA GRANDE

future weather conditions, new development, and a lack of accurate data. Individual communities can adopt their own freeboard requirements. A national study by two professors, Wes Highfield and Sam Brody of Texas A&M University at Galveston, found freeboard requirements to be the most effective of all mitigation strategies in terms of avoiding flood damage to residential structures. Elevating structures above the BFE can significantly lower homeowners’ federal flood insurance rates.

Ways Homeowners Can Address Potential Flooding In another study published in 2017, Brody, Highfield, and Yoonjeong Lee (also of Texas A&M University at Galveston) surveyed coastal residents in parts of Texas and Florida. Results showed household actions to reduce flooding included a variety of activities and costs. Three primary categories of residential flood mitigation techniques were defined based on the expense, time, and amount of effort involved.

The least-expensive flood mitigation involves simply gathering and exchanging helpful information about the purchase of flood insurance, contacting different agencies for flood-hazard information, and attending meetings to discuss local flood hazards. The next level of mitigation entails “wet floodproofing” a home. With wet floodproofing, permanent or contingent measures are put in place to resist, not prevent, flood damage. Uninhabited portions of a home, such as crawlspaces or first floors used for parking or storage, are constructed or modified to allow floodwaters to enter and exit. Flood-resistant materials are used below the BFE along with vents or breakaway walls. In addition, measures are taken to protect utility systems. The highest level of mitigation involves the most time and greatest expense. Major changes are required, such as elevating the entire house or adding a new floor, erecting an earthen barrier or berm around the home, or “dry floodproofing” exterior walls and doors.

Weathering the Storm Through Innovative Thinking

he U.S. Department of Energy’s Solar Decathlon is a biennial collegiate competition that challenges student teams to design and build highly efficient and innovative structures. Stevens Institute of Technology’s SURE House was the 2015 award winner. In the wake of Hurricane Sandy, the Stevens team’s goal was to design a hurricane-proof home for a middle-class family with flexible, energy-efficient living space that would provide comfortable living in a mere 1,000 square feet. The team initially studied prior coastal construction methods to identify which had been successful and which had been prone to storm damage. To construct the home, the team then combined state-of-the-art building science, the latest solar energy technologies, and fiber-composite materials repurposed from the boat-building industry. The house was designed to be positioned so that storm shutters on the south-facing side act as shade and provide solar power from integrated solar panels when raised. When locked down, they act as a watertight seal during

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below BFE. “Dry floodproofing is only codeapproved for commercial buildings,” said project engineer Christine Hecker. “However, we built the house as an exhibition in how FEMA could allow it in residential applications while still maintaining safety.” Most of the construction was completed using standard building materials. The main exception was the storm shutters, which hurricanes and floods. The shutters also were custom-designed and built by the provide a defensive barrier that protects team as a research project. “The shutters the home from debris. would have to be specially designed and Thin, flexible, marine-grade, plastic, built by a fiberglass composite builder,” solar photovoltaic panels are extremely said Hecker. “Most of the construction lightweight, allowing a homeowner other than the storm shutters can be to easily raise and lower the shutters found off the shelf.” manually. The panels have much greater The Stevens team had the assistance impact resistance than glass to prevent of GURIT Engineering’s marine division damage when struck by debris. and the International Yacht Restoration A waterproof composite sheathing was School in the construction of the shutapplied to the bottom and sides of the ters. Students completed the home’s home. The result was a structure rated flood modeling at the Stevens Institute of to withstand up to six feet of floodwater Technology’s Davidson marine research against the exterior. laboratory. SURE House is currently on Currently, FEMA does not allow dry exhibit at the Liberty Science Center in floodproofing in residential applications Jersey City, N.J.

Raising the Standard in Modular Home Flood Prevention

roundFORCE Building Systems of Navasota, Texas, manufactures unique modular homes that use a high-strength concrete flooring system rather than traditional wood framing. Modules can also be constructed to Leadership in Energy and Environmental Design standards. The structurally suspended concrete floor is designed to virtually eliminate foundation damage common with traditional foundation systems. Base thickness of a module’s engineered perimeter

beams averages 20 to 22 inches in height. A typical module is 40 feet in length. Modules are delivered using the company’s patented delivery method, traveling only a few inches above the ground. The method allows modules with tenfoot ceiling heights to clear overpasses when being transported. On location, corner piers are drilled, modules are placed in position via the transport rig (eliminating the need for an expensive crane) and affixed to the piers.

Dry floodproofing involves making a home watertight below the level that needs flood protection. This requires sealing the walls with some type of waterproof coating or impermeable membrane. Floodproof doors and windows are sealed as well. FEMA states that “dry floodproofing may not be used to bring a substantially damaged or substantially improved residential structure into compliance with the community’s floodplain management ordinance or law.” However, new innovations and construction methods have been used to test the viability of dry floodproofing a home. Brody, Highfield, and Lee contended that some homeowners who were informed and aware of their flood risks may have already decided to locate outside of flood zones or at higher elevations. The study concluded survey respondents

Multiple modules can be used to create any size house desired. Elevations can be as high as homeowners specify. Every pier plan is engineered for the given site and soil situation. The design requires only a center pier and one pier at each corner of a module. In residential applications, modular units meet all International Residential Code requirements. Financing and appraisal of the modular homes is no different than for a site-built home. Installing and finishing a home on location takes an average of about one week. A two-section house can often be completed in as little as three to four days. Homes can be moved multiple times while still maintaining structural integrity. Piers can also be extended in height after installation much more inexpensively than raising a traditional home. “The time and money that can be saved to relocate or increase the elevation of a home gives us a huge advantage over site-built houses,” said GroundFORCE CEO Kenneth Neatherlin.

as a whole were typically not aware of the actual flood risk to their properties.

Educated Consumers, Informed Decisions An extensive investigation of all the methods and technologies currently available to protect against flooding is impractical. Three are discussed in the sidebars “Buoyant Solution to Home Flooding,” “Raising the Standard in Modular Home Flood Prevention,” and “Weathering the Storm Through Innovative Thinking.” Unfortunately, the frequency, timing, and severity of future flooding at a specific location cannot be predicted. Hurricane Harvey proved that, under the right conditions, areas thought to be safe from flooding may not be. As a result, homeowners TIERRA GRANDE

should ask questions and carefully consider their options before spending money on flood-protection upgrades. ach homeowner has a unique financial situation and level of risk aversion. If funds are available, how much should be spent on flood protection? Will the potential benefit exceed the cost? A traditional “payback period” calculation may not be appropriate when there is no way to know if flood-protection measures will ever be needed. Will money spent on flood protection add to the home’s market value? Does it matter if no value is added? Would it be better and more cost effective to just relocate to a higher elevation? This option may not be available to lowincome families living in vulnerable areas. At the basic level, becoming better educated on flood protection merely requires an expenditure of time and energy,

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

THE TAKEAWAY Population growth has pushed housing development into more flood-prone areas of the state. New products and methods can help residents in these areas protect their homes against floodwaters and minimize damage caused by hurricanes and other severe weather events.

Buoyant Solution to Home Flooding

loodFrame is a Danish company that opened its first U.S. location in Houston in 2019. Their product is an exterior flood-protection system concealed around the perimeter of a home. The system is buoyant, using the weight of water to move it into position. No electrical power is needed for its deployment.

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not money. When money is required, a significant degree of thought and self-evaluation is essential before making any final decisions. For links to resources with more information, read the online edition of this article at www.recenter.tamu.edu.

A waterproof cloth is rolled around a lightweight pipe custom-fitted to the home’s measurements. The cloth is placed in a pre-installed concrete box typically located about six inches from the home’s exterior walls on top of an inflatable plastic tube. As floodwaters rise, the plastic tube is inflated, lifting the cloth out of the box and onto the

ground. Manual deployment is also an option. The force of rising water pushes, unfolds, and rolls the cloth toward and up the wall of the home. The system can be tailored to protect at almost any water level the homeowner chooses. However, a typical house can withstand water to a height of about three feet before the walls are at risk for structural damage. “In fast-rising water, the system can deploy within seconds,” according to Tasha Nielsen, FloodFrame’s vicepresident of development. “If floodwater reaches the box before the cloth is fully on the ground, the water simply helps to push the cloth out of the box.” The system is designed so rainfall cannot come between the barrier and the home, since the cloth is pressed firmly against the walls by the surface water. The auto-release system deploying the cloth will be activated when the sensor is flooded from below by surface water.

Residential

Locationâ&#x20AC;&#x2122;s Impact on Homeownership Affordability By Ali Anari

Highest Affordability

Lowest Affordability

Average Homeownership Affordability Highest

#20 In Affordability

Lowest

ny homeowner will tell you thereâ&#x20AC;&#x2122;s a lot more to affording a home than coming up with enough money to cover a down payment and closing costs. There are monthly mortgage payments, insurance premiums, and property taxes, not to mention general home maintenance costs. These expenses factor into overall homeownership affordability, which is the ability to purchase a home and continue to own it with the least possible financial inconvenience and hardship.

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Homeownership affordability varies not only from state to state, but city to city. This could be important to potential homebuyers, particularly those looking to relocate to a different part of the state. What they pay each month to own a house in, say, Abilene, Pasadena, or Richardson may be quite different from what they’d pay in Laredo, Mesquite, or College Station. Homeownership affordability can be measured in terms of the ratio of homeowner income to housing costs or the ratio of homeowner income to home price. The higher (lower) the ratio of homeowner income to home price or housing costs, the higher (lower) the homeownership affordability.

How the Lone Star State Measures Up

eal Estate Center research shows the average ratio of homeownership affordability in Texas from 2005 to 2017 was 4.48, higher than the national average of 4.24, ranking Texas 20th among U.S. states (Table 1). Unlike the U.S., which experienced little change in affordability in the Great Recession (GR) of 2008-09, Texas affordability improved because of historically higher oil prices during the recession. Both Texas and the nation have experienced growing affordability since recovering from the GR, but the affordability gap between the state and the nation has narrowed since 2014 (Figure 1). Texas ranked 25th among states in 2017 mainly due to its recent slowdown in affordability (Table 2).

or this study, the Real Estate Center used the latest homeownership cost data from the U.S. Census Bureau’s American Housing Survey. The data are annual time series of median selected owner costs as a percentage of household income for housing units with a mortgage from 2005 to 2017 for the United States, individual states, and Texas cities. This percentage is an JULY 2019

Table 1. States Ranked by Average Homeownership Affordability, 2005–17 Rank

State

Affordability

Rank

1 2 3 4 5 6 7 7 9 10 11 12 12 14 15 16 17 17 19 20 21 21 23 24 25 26 27

North Dakota West Virginia Arkansas Iowa Indiana Oklahoma Kansas Kentucky Louisiana Nebraska South Dakota Alabama Wyoming Missouri Ohio South Carolina North Carolina Mississippi Tennessee Texas Minnesota Michigan Pennsylvania Georgia New Mexico Wisconsin Alaska

5.16 5.15 4.95 4.94 4.90 4.83 4.81 4.81 4.80 4.77 4.74 4.73 4.73 4.70 4.60 4.54 4.51 4.51 4.50 4.48 4.46 4.46 4.44 4.40 4.39 4.36 4.35

28 28 30 31 31 33 34 35 36 36 38 39 39 41 42 43 44 44 46 47 48 49 50 51 52

State Idaho District of Columbia Delaware Virginia Utah Montana Maine Colorado Arizona Maryland Illinois Vermont Massachusetts Washington Connecticut New Hampshire Oregon New York Rhode Island Nevada Florida New Jersey Hawaii California Puerto Rico U.S. Average

Affordability 4.33 4.33 4.32 4.31 4.31 4.30 4.29 4.23 4.19 4.19 4.16 4.03 4.03 4.02 4.00 3.99 3.98 3.98 3.91 3.88 3.77 3.70 3.60 3.51 3.49 4.24

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

About the Study indicator of homeownership burden. The higher the percentage, the higher the portion of homeowner income spent on housing. The inverse of this percentage (that is, 100 divided by the percentage of homeowner income spent on housing), is the ratio of homeowner income to homeowner costs and is an affordability indicator used in this research.

A higher ratio of income to housing costs indicates higher homeownership affordability. For instance, if homeowner costs account for 25 percent of the owner’s income, then the affordability ratio is four (100 divided by 25). For Texas cities, the Hodrick-Prescott filter is used to purge short-run fluctuations and derive long-term affordability trends.

Table 2. States Ranked by Homeownership Affordability, 2017 State

Affordability

Rank

State

Affordability

1 2 3 4 5 5 7 7 9 10 10 12 12 14 15 15 15 15 19 19 21 22 22 24 25 26 26

Indiana Arkansas West Virginia Iowa Kentucky North Dakota Missouri Ohio Alabama Kansas Michigan Nebraska South Dakota North Carolina Louisiana Minnesota South Carolina Tennessee Georgia Oklahoma Wisconsin Mississippi Pennsylvania Maine Texas District of Columbia Utah

5.52 5.41 5.38 5.35 5.32 5.32 5.26 5.26 5.24 5.18 5.18 5.13 5.13 5.10 5.08 5.08 5.08 5.08 5.05 5.05 5.03 4.98 4.98 4.83 4.83 4.76 4.76

26 29 29 31 31 31 34 35 35 37 38 39 40 41 42 43 44 44 46 47 48 49 50 51 52

Wyoming Arizona Virginia Delaware Idaho Illinois Colorado Maryland Montana New Mexico Alaska Nevada Massachusetts New Hampshire Washington Connecticut Florida New York Oregon Rhode Island Vermont New Jersey California Hawaii Puerto Rico

4.76 4.72 4.72 4.69 4.69 4.69 4.67 4.65 4.65 4.63 4.57 4.55 4.52 4.50 4.44 4.41 4.37 4.37 4.35 4.33 4.31 4.15 3.95 3.92 3.70

U.S. Average

4.24

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

Table 3. Texas Cities Ranked by Average Affordability, 2005–17 Rank

City

Affordability

Rank

1 2 3 4 5 6 6 8 9 9 11 12 12 14 15 16 16 18 19 20 21 22

Odessa Midland Abilene The Woodlands Longview Wichita Falls San Angelo Amarillo Richardson Sugar Land Allen Plano Frisco Lubbock College Station Baytown Beaumont Round Rock Tyler Carrollton Lewisville San Antonio

5.17 5.01 4.92 4.86 4.84 4.74 4.74 4.73 4.71 4.71 4.69 4.68 4.68 4.66 4.65 4.64 4.64 4.58 4.57 4.52 4.51 4.49

23 23 25 26 27 28 29 30 31 32 33 34 34 36 37 38 39 40 41 42 43

City Pasadena Arlington Corpus Christi Missouri City McKinney Fort Worth Denton McAllen Bryan Houston Killeen Austin El Paso Mesquite Irving Waco Grand Prairie Dallas Garland Brownsville Laredo Texas Average

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

Affordability 4.47 4.47 4.43 4.41 4.40 4.38 4.37 4.35 4.33 4.32 4.31 4.30 4.30 4.27 4.21 4.20 4.18 4.06 4.04 3.86 3.81 4.48

5.0 Affordability Ratios

Rank

Figure 1. Homeownership Affordability Ratios for Texas and U.S. Texas U.S.

4.5

4.0

3.5 2005

2007

2009

2011

2013

2015

2017

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

From 2005 to 2017, Texas’ homeownership affordability ratios remained well above those for more populous states like California, New York, and Florida (Figure 2). Texas’ affordability index in 2017, for which the latest data are available, was 4.83 compared with 3.95 for California and 4.37 for New York and Florida (Table 2).

Comparing Texas Cities

mong Texas cities for which data were available since 2005, Odessa ranked first in average homeownership affordability from 2005 to 2017 with an affordability ratio of 5.17 (Table 3). Midland followed with 5.01, then Abilene, 4.92; The Woodlands, 4.86; and Longview, 4.84. Laredo, with an affordability ratio of 3.81, was the least affordable city followed by Brownsville, 3.86; Garland, 4.04; Dallas, 4.06; and Grand Prairie, 4.18. Homeownership affordability is a dynamic race between growth rates of homeowners’ incomes and their housing costs over time. Consequently, city and state rankings change over time depending on the relative growth rates of homeowners’ incomes and housing costs. Abilene was the most affordable city in 2017 with a homeownership affordability ratio of 5.37 (Table 4). Next was Pasadena, 5.24; Richardson, 5.22; Tyler, 5.08; and Lubbock, 5.08. Laredo, with an affordability ratio of 4.15, was the least affordable city in 2017 followed by Mesquite, 4.35; College Station, 4.43; Killeen, 4.44; and El Paso, 4.46.

Tracking Affordability Trends

Each Texas city has its own historical homeownership affordability trend. Some cities suffered during the GR, and some did not. While affordability ratios in some cities are currently trending upward, in other cities they are trending downward or are stabilized. Here are TIERRA GRANDE

Figure 2. Homeownership Affordability Ratios for Texas, California, New York, and Florida

some findings from the Real Estate Center’s study of homeownership affordability trends since 2005.

Affordability Ratios

5.0

• Homeownership affordability ratios for Houston, Austin, San Antonio, and McAllen recently converged around 4.7.

4.0 3.5 3.0 2005

• Bryan, College Station, Sugar Land, and Wichita Falls are experiencing downward trends that began in 2015–16. • Affordability in Midland, Missouri City, Odessa, and The Woodlands has moved in tandem with oil price changes with some lags (Figure 3). For additional information, including figures showing homeownership affordability ratios for all Texas cities referenced here, read the online edition of this article at www.recenter.tamu.edu. Dr. Anari (m-anari@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Homeownership affordability—the ability to buy and own a home with the least possible financial inconvenience—has historically been higher in Texas than in the rest of the country, but that gap has narrowed since the Great Recession. Abilene, Pasadena, and Richardson were the state’s most affordable cities in 2017.

2011

2013

2015

2017

100 80

5.5 Affordability Ratios

Oil Price (right Axis)

Dollars Per Barrel

• Since 2014, ratios in Longview, Mesquite, Round Rock, and San Angelo have significantly trended downward.

2009

Figure 3. Homeownership Affordability Ratios for Midland, Missouri City, Odessa, and The Woodlands

• Ratios for Baytown, Beaumont, Denton, and Tyler rose in the GR then fell in the aftermath of the recovery from the GR. Since 2012–13, they have trended upward to converge around five.

• Since 2014–15, Amarillo, Corpus Christi, Frisco, and Plano have experienced mild downward trends.

2007

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

• Abilene, Arlington, Carrolton, and Pasadena are currently the most affordable Texas cities, with homeownership affordability ratios greater than five and trending upward.

• Affordability in El Paso, Laredo, and Killeen has not changed significantly since 2014.

New York Florida

4.5

• Affordability in Dallas, Grand Prairie, Irving, and Waco is trending upward between 4.5 and five.

• Allen, Lewisville, Lubbock, and McKinney are experiencing upward trends in homeownership affordability.

Texas California

40 5.0 4.5 4.0 3.5 2005

Midland (left Axis) Missouri City (left Axis)

2007

2009

Odessa (left Axis) The Woodlands (left Axis)

2011

2013

2015

2017

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

Table 4. Texas Cities Ranked by Homeownership Affordability, 2017 Rank 1 2 3 4 4 6 7 8 9 10 11 12 12 14 15 16 17 17 19 20 21 21

City Abilene Pasadena Richardson Tyler Lubbock Arlington Carrollton Baytown Lewisville Sugar Land Beaumont Denton Frisco Midland Allen McKinney Plano Irving Wichita Falls Amarillo Grand Prairie Fort Worth

Affordability

Rank

City

Affordability

5.37 5.24 5.22 5.08 5.08 5.06 5.05 5.04 5.02 5.00 4.98 4.97 4.97 4.96 4.94 4.92 4.89 4.89 4.87 4.85 4.80 4.80

23 23 25 25 27 27 27 27 31 31 33 34 35 35 37 38 39 40 41 42 43

Corpus Christi San Antonio Odessa Austin Longview Houston The Woodlands McAllen Dallas Round Rock Bryan Garland San Angelo Waco Missouri City Brownsville El Paso Killeen College Station Mesquite Laredo Texas Average

4.73 4.73 4.70 4.70 4.67 4.67 4.67 4.67 4.64 4.64 4.58 4.57 4.52 4.52 4.48 4.47 4.46 4.44 4.43 4.35 4.15 4.83

Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University JULY 2019

Legal Issues

Limited Partnerships, LLCs, and Corporations By Erin M. Kiella ndividuals with significant real estate holdings and asset portfolios desire managerial flexibility in their estate planning. They often wish to bring their heirs into the management of the estate prior to giving them full ownership of the assets. As a result, business structures such as limited or family limited partnerships, limited liability companies (LLCs), and corporations are now common in estate planning. As with a trust (which, along with wills, is discussed in “Leaving a Legacy: Wills and Trusts” at www.recenter.tamu. edu), assets transferred into limited partnerships, LLCs, or corporations are no longer owned by the individual but by the entity itself. Under those arrangements, it’s not the assets that are transferred to heirs but rather ownership interests in the entities. This strategy creates a management structure uninterrupted by a probate process and that potentially reduces one’s taxable estate. It also provides parents the opportunity to teach their heirs about the estate, hopefully ensuring a smooth transition of management when the time comes. Maintaining and sharing records with heirs so they can become familiar with them is key. Heirs should also be exposed to regular management tasks such as negotiating and preparing leases for farming, grazing and hunting; and negotiating and documenting surface damages, easement and pipeline right of ways, appraisal districts, CRP contracts, etc. The more the heirs learn about managing the assets, the more likely they will be successful in operating them when they take full ownership. The following scenarios illustrate the nuances of several business structures, highlighting some of the pros and cons of each.

Limited Partnerships Phil and Martha currently own 3,500 acres of noncontiguous land. They lease several parcels to farmers and have hunting leases on multiple parcels. They keep some of their land for personal use. Currently, they lease the land through their sole proprietorship under the business name PMC Properties. Phil

wants to keep the properties under a single ownership and teach his children, Jennifer and Justin, about operating the properties so they will have a complete understanding of the logistics of running the estate successfully when they inherit it. Phil and Martha establish PMC Limited Partnership, in which they each hold 49 percent limited partner positions. They form an LLC to own the 2 percent general partner position. The general partner controls all management and investment decisions and bears 100 percent of the liability. By forming an LLC that owns the general partner position, the couple maintains personal liability protection. The couple is still liable for any tortious or negligent acts they commit in the course of operating the business. They are liable for any and all money they invest in the LLC or partnership or anything they have personally guaranteed. Additionally, if the couple holds the general partner position and both of them pass away, the partnership terminates. When this happens, the entity loses its tax benefits and management structure, which negates Phil and Martha’s estate-planning needs. Under the partnership, Phil and Martha have joint authority through their management and officer positions in the LLC, which manages the operations of the partnership. Any individual holding a general partner position acts as an agent for the partnership and can enter into legally binding arrangements on behalf of the partnership. The joint authority of the partners makes all partners liable for the decisions or wrongful acts made by any partner if committed in the normal course of the business. The partnership agreement details the limitations of this authority. A partnership agreement, while not required for general partners, is highly recommended and extremely important for the partnership’s success. Limited partnerships require limited partnership agreements. Limited partnerships must file a certificate of formation with the Texas Secretary of State. TIERRA GRANDE

Partnership agreements outline the purpose of the business, limitations on business activities, limitations on an individual partner’s authority, contributions made by partners, the timing of those contributions, and share and distribution of profits as well as losses, among other things. Personal liability is limited for those holding limited partner positions. Limited partners usually invest in the company in some way but do not participate in daily management of assets or decision-making. The limited control of the partner grants them their limited liability. If the limited partner partakes in the management of the assets or entity, their limited liability protection can be revoked. The limited partner is still liable for any tortious acts they may commit, and they are liable to lose all they have invested in the partnership. iven the unlikelihood of the federal estate tax affecting most people, managing the income tax faced by the owners of the assets and their heirs has taken priority. If Phil and Martha believe their estate will surpass the federal estate tax threshold, they may consider gifting some of the ownership interests to their children while Phil and Martha are still alive. Some couples do this even if they do not believe they will surpass the threshold. They gift some of the limited ownership positions to give their children a sense of ownership and responsibility for the assets. If Phil and Martha are more concerned with managing income taxes, they will make decisions based on changes in the cost basis of the assets. When an asset is sold, the owners of the asset pay taxes on the appreciation of the asset, strategically transferring ownership of assets to step up the cost basis, which can minimize the taxes their children will pay on the assets’ appreciation. Assets transferred into the partnership maintain the cost basis as the original cost of the assets. The ownership interests gifted to the children while the parents are alive maintain the cost basis of the parents’ positions. If the assets are transferred when the parents die, those interests receive a step-up in basis at the time of transfer. Additionally, at the next tax return filing period, the heirs may elect for a step-up in basis for the assets held in the limited partnership. The value of the assets inside the partnership step-up in basis to match the basis of the ownership interest. When the parents transfer the majority of their assets on their death, their children minimize the taxes they would pay on the sale of the assets or ownership interest. If Phil and Martha plan to give a small portion of ownership interest to their children now, they will have to consider the federal gift tax exclusion and the federal estate tax threshold. The federal gift exclusion allows them to give gifts valued up to $15,000 annually to any recipient. Their tax accountant has informed them that their federal estate tax threshold will be eroded by the amount in excess of $15,000. The couple gifts each child 5 percent limited ownership positions. The value of the ownership interest greater than $15,000 is deducted from

their federal estate tax threshold, which is currently $22.8 million. For example, if each of the two 5 percent ownership interests has a value of $50,000, their federal estate tax threshold will decline by $70,000 ($100,000 – $30,000) to $22.73 million. Because decision-making and asset control are restricted in limited partnership positions, they are valued below general ownership positions. Similarly, limited partnership shares are valued less than the market value of the assets held by the partnership. Gifting limited partnership positions allows the owners of the assets to transfer more of an asset while eroding less of their federal estate tax threshold. Phil and Martha could have also put the limited partnership interests into a trust and made their children the beneficiaries, but they decided giving their children the limited positions directly accomplished their goals for the transfer of ownership. The limited partnership positions provide the assets similar protection from creditors as trusts do. Creditors cannot force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. Therefore, if one of Phil and Martha’s children fall on hard times, the assets are protected. Also common is the designation of a family limited partnership. In many family limited partnerships, the partnership agreement requires the ownership interest to remain in the possession of family members. If someone divorces, the partnership agreement can require a transfer back of ownership interest to the partnership for fair market value, keeping the asset ownership among family members. As time progresses, Phil and Martha plan to move away from operating the assets and bring their children into the operations by giving them officer positions in the LLC. Phil and Martha will remain the sole members and managers of the LLC. The children learn the management responsibilities of the assets through their officer positions while Phil and Martha retain control of the assets.

Limited partners usually invest in the company in some way but do not participate in daily management of assets or decision-making.

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Limited Liability Companies athy and Will are friends of Phil and Martha and have a similar real estate portfolio. They own several thousand acres with both agricultural and recreational leases. They also own mineral rights they have leased out. They like the idea of transferring ownership of these assets to their children but would like some of their children to take active management roles. Kathy and Will decide to transfer their assets into an LLC. They believe the structure and the limited personal liability of the owners accomplishes their estate-planning goals. Kathy has their attorney begin the process of filing the LLC with the Secretary of State. Their attorney also begins constructing their LLC’s governing document, the company agreement. The document outlines several details Kathy and Will need to agree on for the structure of their LLC.

The couple discusses the ownership and management structure, allocation and distribution of profits, taxing and voting structure, how they will handle transfer of ownership interest, and several other smaller details. The LLC ownership structure is divided among members who own membership interests. Kathy and Will each own 50 percent. The company also has managers who act as a board of directors. Kathy and Will decide to be the LLC’s sole managers, giving them control over decision-making and the hiring of officers who manage the entity’s daily operations. They will also hold officer positions but decide to appoint their children to some officer roles. LCs can allocate profits in any manner they wish, not necessarily according to ownership interests. The couple chooses to allocate their profits in proportion to their ownership interest. Determining the allocation structure is important for determining how taxes are paid. Unless the couple elects to be taxed like a corporation (often done when the majority of profits are retained by the company), the LLC is a pass-through entity. A pass-through entity means the owners are responsible for paying the taxes on the income made by the entity. The couple decides to distribute enough profits annually to cover income taxes as well as a small amount to cover a portion of their living expenses. If they require additional income from the LLC, they will take at-will draws. Kathy and Will considered organizing their assets as a corporation, but their attorney advised against this for several reasons. Owners of corporations have more reporting and payroll requirements and less structuring flexibility, and they are subject to double taxation when distributing profits to shareholders or when transferring assets out of the corporation. As noted, LLCs can allocate profits and losses that do not necessarily align with the ownership structure. Certain owners can also be paid before others. Tax obligations can also be allocated to a single member if, for example, one owner’s real estate contribution triggers a tax obligation. In a corporation, there is no separate treatment of individuals, meaning there cannot be special allocations or special tax treatments. In some instances, corporations are restricted by who can hold ownership positions. LLCs allow entities such as other LLCs, a corporation, or a trust to hold membership positions. S corporations do not allow entities to own shares of the corporation, and only trusts structured to own S corporation stock may own stock of an S corporation. LLCs are more passive vehicles when it pertains to payroll. LLC owners can pay themselves a guaranteed payment, which is subject to self-employment tax but not payroll taxes. Corporations, on the other hand, do not allow guaranteed payments and are required to pay payroll taxes on any salary paid. In addition, salaries paid by a corporation are required to be of reasonable amounts, whereas the LLC does not have compensation requirements. The biggest drawback of the corporate structure for Kathy and Will is the significant amount of real estate they are trying to manage. Corporations have two tax designations: C and S. An S corporation structures taxes similarly to an LLC, where it is a pass-through entity and the owners pay income tax on the profits made by the company. In a C corporation, the entity

itself pays taxes and is subject to different tax brackets and rates. The corporate structure discussed here is a C corporation. As such, if the shareholders of the corporation decide to transfer a piece of real estate out of the entity, the transfer triggers a tax consequence. The transfer must be considered a sale, and the proceeds are subject to double taxation. The entity pays capital gains tax on the appreciation of the asset, then the shareholders pay income tax once the asset is transferred as it is considered a dividend distribution or liquidating distribution. In addition to the double taxation, corporations do not have favorable capital gains tax rates. The couple would be subject to double taxation if they distribute any of the entity’s income to shareholders through dividends. Kathy and Will would like to take distributions as needed. In a corporate structure, distributions are made through dividend payments. Distributing profits to shareholders through dividends is subject to double taxation. The corporation pays corporate taxes on its income, and Kathy and Will pay income taxes on the dividend distribution. Given these characteristics of corporations, Kathy and Will decide the LLC structure makes the most sense for their estateplanning goals. After registering the LLC with the Secretary of State and developing and signing the company agreement, Kathy and Will transfer their assets into the LLC. They are no longer the owners of the assets, but they hold ownership positions in the LLC that now owns the assets. The limited liability of the company ensures only the assets transferred into the company are at risk to the claims and obligations of the company. Kathy and Will can lose only what they have invested and transferred into the company. The assets they do not transfer into the LLC, such as their savings and home, are not liable to the claims against the LLC. On the other hand, if Kathy and Will act negligently while working on behalf of the LLC, they will be held personally liable for their actions. athy and Will plan to remain the managers of the LLC indefinitely. They choose to retain their membership interests in the company and transfer them on their death rather than before so their children benefit from the step-up in basis. The couple worked with their accountant and financial planners to estimate their taxable estate, its expected growth rate, and how any proposed gifts would affect their federal estate tax threshold. They believe they will not be affected by the threshold. They believe that the LLC strategy will teach their children about the operation of the assets and minimize their heirs’ tax obligations.

LLCs can allocate profits in any manner they wish, not necessarily according to ownership interests.

Corporations Paige and Michael have a portfolio of assets they own through an LLC. They would like to separate the liability of operating those assets from the assets themselves. Their attorney recommends setting up a corporation to run and manage the operations. The corporation rents the assets from the LLC for the operations. Paige and Michael’s lawyer informs them that, like an LLC, a corporation is a legal entity separate from its owners and managers. The corporate structure gives Paige and Michael a “corporate shield” that limits their personal liability. Their personal TIERRA GRANDE

assets and the assets owned by their LLC are protected from the liabilities of the corporation. Therefore, Paige and Michael stand to lose only what they have invested in the corporation. Their lawyer informs them that the corporate shield can be lost if they do not follow the requirements of a corporate structure (for example, holding shareholder and director meetings, maintaining corporate records, and documenting major corporate decisions). They will lose the limited liability protection if they treat the corporation as an extension of their personal affairs rather than as a separate legal entity. A certification of formation is filed with the Secretary of State. Paige and Michael then create a set of bylaws to govern the corporation. They will be the sole owners, which are referred to as shareholders in a corporation. As shareholders, they approve the sale of any major corporate assets, and they elect and remove directors who serve on the company’s board. Paige and Michael decide to serve as the sole directors of the corporation’s board of directors. As directors, they authorize the issuance of stock; elect officers; set salaries; mortgage, sell, or lease real estate owned by the corporation; and approve loans. Until they decide their children are ready to take on more managerial roles, Paige and Michael will be the only officers for the daily management of the company. The couple’s attorney informs them of potential tax designations for a corporation—a C corporation and an S corporation. He emphasizes that the designation changes only how taxes are paid; it does not change the structure of the entity. For a C corporation designation, the entity itself pays taxes on the profits and losses of the company at the corporate tax rate. The C corporation designation is subject to double taxation if it distributes profits to shareholders through dividends. In an S corporation designation, the taxes are passed through to the owners similar to the tax structures of an LLC or limited partnership. The couple would choose an S corporation if they planned to retain profits in the company and would like to avoid the C corporation’s double taxation issues. Paige and Michael choose the C corporation structure to manage the payroll of their staff and the expenses associated with the operation. The couple does not intend for the corporation to own any assets or distribute profits to shareholders through dividends, thereby avoiding concerns about double taxation. They will set a lease rate for their assets such that the profits associated with the assets are transferred to the LLC. The salaries and bonuses paid to employees, interest payments on loans, rent payment, fringe benefits, and the cost of annual director and shareholder meetings are tax-deductible for the JULY 2019

corporation. To avoid additional payroll and benefit liabilities, the couple will not take a salary from the corporate entity. They will work with their attorney to set up the corporate structure and the lease agreements to lease use of their assets in the LLC, protecting their assets from the operational liabilities occurring in the corporation.

Assembling a SuccessionPlanning Team When considering any succession strategy, always consult with a team of experts to ensure the best decision is made for the assets owned and circumstances involved. An attorney can recommend legal strategies and tools to reach personal and financial goals. They will describe the options available and their implications. They will also be instrumental in forming the legal ownership and developing the necessary documents for the structure chosen. A certified financial planner will help you understand your current financial position, set goals for the future, and outline what is necessary to achieve those goals through investment, income, and retirement planning. They will determine, from a financial standpoint, given your management and income needs, what estate-planning tool will achieve your goals and minimize tax burdens. A tax attorney or certified public accountant determines the amount and types of taxes your estate may face given the estate-planning strategy chosen. inally, an appraiser will be vital in determining the market value of your assets, especially when significant real estate is involved. Anytime ownership interest or assets are transferred, the value transferred must be at fair market value. An appraiser may be required to determine the fair market value of the asset transferred for tax purposes. Dr. Kiella (ekiella@mays.tamu.edu) is an assistant research economist 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 Business structures such as limited partnerships, limited liability companies, and corporations can be useful estateplanning tools, especially when dealing with significant real estate holdings. However, each comes with different tax consequences and varying degrees of personal liability. Always consult a team of professionals before deciding on a plan.

Market Profile

or several years now, Texas’ four major Metropolitan Statistical Areas (MSAs) have posted some of the most impressive price and sales growth numbers in the nation, making it harder for most of the state’s other MSAs to grab the spotlight. That doesn’t apply to Waco, though, which has captured not only Texas’ attention, but the nation’s as well.

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Waco’s housing market began taking off around the start of the decade. Since then, sales volume has climbed steadily without any major bumps or boosts. Visible market pressure appeared in 2012 with falling forsale housing inventories (Figure 1). There was a major drop in active listings from 2012 to 2016 for reasons that are unclear.

Figure 1. Waco Median Price PSF, Monthly Inventory $100

Median Close Price PSF

$90 $80 $70 10 Months Inventory Adjusted

8 6 4 2

2012

2014

2016

Source: Real Estate Center at Texas A&M University JULY 2019

2018

That decline came right before the rise in buyer demand, which started around 2013. During that time, homes began to sell faster, as evidenced by shorter marketing periods, and they were selling at closer to the original list price. Overall housing prices, including price per square foot (Figure 1), started to rise by late 2013, and they haven’t shown any recent signs of slowing down.

Same Places, New Faces Interest in Waco as a place to live is visible based on household estimates from the U.S. Census Bureau. Household growth had a couple of big bumps in both 2014 and 2017 (Figure 2). The recent growth in households appears to have shifted the overall age mix (Figure 3). Sixty-somethings made the largest gains in population proportion. Interestingly, the 40–49-yearold population declined both by population proportion and in total. This could explain why the share of thirty-somethings, which includes older millennials, has grown. Twenty-somethings still make up the largest age group in Waco by far. This is most likely due to the presence of Baylor University, which is one of the largest private universities in Texas as well as in the region. Census Bureau estimates show the 20–29-year-old population has grown only slightly since 2011. However, this age group is more likely to be renters than

Figure 2. Waco Household Growth 95,000 Household Estimate

1.059%

92,500

1.025%

0.873%

0.483%

0.845%

90,000

0.902%

0.230%

2011

2012

87,500 85,000 2013

2014

2015

2016

2017

Source: U.S. Census Bureau, American Community Survey Five-Year Estimates

Figure 3. Waco Proportion of Age Cohorts

15.0% 12.5% 10.0% 7.5%

Oldie but a Goodie

Proportion of Total Population

17.5%

homeowners, and the breakdown of single-family versus apartment or dorm renters is not as clear. hange in household composition has increased age bifurcation in the workforce composition. For example, the drop in the 40–49-year-old population has resulted in fewer people this age in the workforce, both in total and as a proportion of the employed. At the same time, there was a large increase of sixtysomethings in the workforce, moving them from an insignificant to a major player in the labor market. Potential changes in working-age residents could certainly explain some of the housing and business trends occurring in the area. For starters, older millennial and retiree-aged households have different housing needs and resources to pursue those needs largely due to differing stages of life.

2010 2012 2014 2016 20–29 years 30–39 years 40–49 years 50–59 years 60–69 years Source: U.S. Census Bureau, American Community Survey Five-Year Estimates

According to a sample of Multiple Listing Service (MLS) sales data, Waco has a large stock of homes built in the 1950s as well as homes built since 2000. Given differences in size and quality, one can reasonably assume homes from each era would attract different buyer types. At the beginning of the decade, homes from the 2000s and 2010s appeared to be the most desirable to buyers based on sales volume and how close sellers got to their original listing price. Homes built in the 1950s in aggregate typically sold in the same amount of time as those in the rest of the market but often with more negotiated off the original list price. Move forward in time, and the market for these homes changes entirely.

Waco Home Sales by Decade Built

Decade Built 1950s 1960s 1970s 1980s 1990s 2000s 2010s

Sales Volume 2012 2018 285 170 206 262 229 485 40

398 253 275 344 251 536 483

Sales Proportion 2012 2018 14.9% 8.9% 10.8% 13.7% 12% 25.3% 2.1%

13.7% 8.7% 9.5% 11.8% 8.6% 18.4% 16.6%

Median Price 2012 2018 $75,700 $104,450 $122,500 $117,700 $150,000 $165,000 $188,550

$122,000 $152,900 $182,000 $175,000 $222,250 $230,550 $223,500

Median Days on Market 2012 2018 93 91 91 94 90 96 110

33 24 31 33 34 36 44

Median Close/ List Price Ratio 2012 2018 91% 91% 94% 94% 95% 95% 97%

96% 96% 96% 97% 96% 97% 98%

Source: Real Estate Center at Texas A&M University

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HOMES BUILT IN THE 1950s, like this one, have typically made up a large share of Waco’s total MLS sales. Last year, they accounted for almost 14 percent of homes sold, second only to homes built since 2000.

Homes built in the ‘50s, most of which are inside Loop 340, The Elephant (or Bear) in the Room have typically made up a large proportion of total MLS sales. Why are people drawn to Waco? One reason that often comes In 2012, when demand for these homes seemed softest, these up lately is the locally based home-renovation cable TV show homes made up about 15 percent of total sales (see table), “Fixer Upper,” which aired from 2014 to 2017. The show has behind only homes from the 2000s at just over 25 percent. been credited by many with significantly impacting local Last year almost 14 percent of homes sold were from the housing and tourism and boosting Waco’s overall pop-culture ‘50s while slightly over 18 percent were from the 2000s and relevance. Do these claims carry weight or is it more hype? 16 percent the 2010s. As demand intensified, a wider variety The Real Estate Center surveyed Waco residents to gauge of homes gradually caught the eye of buyers, and sales activity their opinion on the show’s impact on the city and on other improved. housing-related topics. One-hundred-seventy respondents on ven though newer homes are, on the whole, still selling Facebook provided a glimpse into local opinion. well, homes from the 1950s are, as of 2018, among the Overwhelmingly, respondents said the show had made a big fastest selling, and with fewer potential price discounts. positive impact on the local economy. When asked about the What is the potential profile of these buyers? Given the show’s impact on the housing market, however, opinions were change in area demographics, it’s reasonable to assume that almost split. Much of the negative sentiment regarding the older millennials and retirees have made a big impact on market growth. Figure 4. McLennan County Owner-Occupied Households In terms of homeownership rates, millennials by Age Group did not gain much ground over the past few years. 12,000 Retirees, on the other hand, did. Retirement-aged homeownership grew the most (Figure 4) and 10,000 might explain much of the boosts in home sales at both ends of the market price range. Less expensive homes inside the loop could be an option for 8,000 downsizing to more affordable payments. Alternatively, those seeking newer and pricier dream homes could be fueling expanding interest to the 6,000 southwest of town. Finally, there could also be increased investor activity seeking to gain passive income. As owner4,000 occupied housing activity has gained momentum, 2010 2012 2014 2016 so has renter-occupied housing activity, accord25–34 years 35–44 years 45–54 years 55–59 years ing to U.S. Census Bureau estimates. Most of this 60–64 years 65–74 years 75–84 years Source: U.S. Census Bureau, American Community Survey Five-Year Estimates growth appears to be from millennials age 25 to 34. Household Estimate

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WACO CONVENTION AND VISITORS BUREAU officials report tourism has quadrupled in the past four years. Among the city’s attractions is Magnolia Market, which opened in 2015 in the former Brazos Valley Cottonseed Oil Mill.

housing market had to do with higher prices, rising property Baylor University has also grown in size with big enrollment taxes, and the threat of gentrification. bumps in 2015 and 2016. Although it’s tempting to attribute here’s no doubt that Chip and Joanna Gaines have any gains after 2014 to “Fixer Upper,” Baylor had several helped put Waco back on the map, but Waco has also things going on that may have contributed to enrollment been swept growth. In 2015, the new into a much broader McLane Stadium opened Waco Home Sales, 2018 economic growth along the Brazos River, trend happening and several of Baylor’s Sales Volume A in Texas. Many of major sport teams had ≤10 ≤25 the fears regarding winning seasons, possiHighest Median Sales Price ≤50 home prices and bly boosting the school’s Sales: 27 ≤100 Median price: $470,000 affordability are recruiting appeal. 31 35 ≤150 Median year built: 2001 shared throughout Waco’s housing Median sf: 3,405 the state. The difmarket “miracle” may 6 Median days on market: 46 ference for Waco be due in part to a TV 84 B may be that its show, but the area has B residents associate much more to offer Shortest Marketing Period 5 Miles C celebrity faces with than that. Some of the 164 Sales: 25 340 A those fears. It may magic also comes from Median price: $115,900 McLennan be more accurate to the Texas economy, as Median year built: 1967 County Falls Median sf: 1,326 think of the Gainemany of the housing 84 County Median days on market: 5 ses as catalysts to trends are not unique to an already beginning the area but are occurC economic cycle. ring statewide. 77 7 Highest Sales Volume Waco’s economy Roberson (jroberson@mays. Sales: 300 was heading in a pos35 317 tamu.edu) is a senior data 6 Median price: $100,000 itive direction before analyst with the Real Estate Median year built: 1947 Sources: Esri, HERE, Garmin, © OpenStreetMap contributors, 2014. After peaking Median sf: 1,396 Center at Texas A&M GSI user community, and Real Estate Center at Texas A&M in 2011, the city’s Median days on market: 32 University University. unemployment rate began falling and, in THE TAKEAWAY 2015, leveled off at a historical low. Some of this turnaround was recovery from recession levels. Since 2010, demand for Waco housing has risen, boostOverall employment began to grow rapidly as early as 2012. ing home prices and shortening time homes spend on the Some industries, such as manufacturing, trade, and transmarket. Some argue the market owes its resurgence to portation, began growing before 2014 while others, such as the popular home-renovation show “Fixer Upper.” More education and health services, began afterward. In general, job likely, Waco is simply benefiting from the economic growth has been spread through numerous sectors with no growth that is sweeping across the state. clear standouts.

INTERSTATE

TAR

LONE S

INTERSTATE

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Residential

Lingering Effects of Subprime Lending By Luis B. Torres, Carter Neill, and Clare Losey

More than ten years ago, the United States entered the worst recession since the Great Depression. A confluence of factors prompted the Great Recession (GR), including a rise in mortgagebacked securities and predatory lending in mortgage origination markets. Widespread expectations for continued home-price increases spurred corporations, lenders, and borrowers to invest in the housing market. However, loosened underwriting standardsâ&#x20AC;&#x201D;driven partly by government policy to promote homeownershipâ&#x20AC;&#x201D;and easy access to credit facilitated the rise in mortgage products that posed considerable risk to both borrowers and lenders. JULY 2019

Pre- and Post-Recessionary Mortgage Originations In the years preceding the GR, mortgage purchase originations increased rapidly. From 1990 to 2005, the dollar volume of residential mortgage originations more than quadrupled, increasing from $390 billion to $1.5 trillion. A similar trend was observed in subprime mortgage originations. Nationally, subprime mortgage originations nearly tripled between 2003 and 2004 (Figure 1). Texas had slightly lower but still significant origination increases of just over two and a half times during that period. Both the nation and Texas reached a peak in subprime mortgage originations in second quarter 2007 (2Q2007). Access to mortgage credit also increased in the lead-up to the GR, with lending standards loosening. According to the

Mortgage Bankers Association’s (MBA) Mortgage Credit Availability Index (MCAI), mortgage credit availability increased by 230 percent between June 2004 and June 2006 (Figure 2). The spike in subprime residential mortgage loan originations corresponded with expanded access to mortgage credit, suggesting lending standards were slackened to generate more originations. After peaking in June 2006, mortgage credit availability declined sharply until June 2008. The MCAI peak and dramatic decline correlated with the height and fall of housing prices,

Percent of Total Mortgages

reater availability of mortgage credit made homeownership possible for low-income and minority borrowers, but lenders targeted these borrowers with risky mortgage products. Subprime mortgages—broadly defined as high-cost loans that carry higher interest rates than prime mortgages—increased from 5 percent of total mortgage originations in 1994 to 20 percent in 2006. The Department of Housing and Urban Development found subprime loans were three times more likely in low-income neighborhoods than in high-income neighborhoods and five times more likely in black neighborhoods than in white neighborhoods. The limited supply of prime lenders in low-income and minority neighborhoods left those households more susceptible to subprime lending. How has mortgage lending changed since the GR? How did subprime loans affect low-income and minority homebuyers in Texas? How have changes in mortgage lending standards affected the ability of low-income and minority households to qualify for homeownership in Texas? Addressing these questions requires an understanding of the mortgage-lending environment before and immediately after the GR.

Figure 1. U.S., Texas Subprime Loan Originations as Percent of Total Mortgages

12 10 8 Texas United States

6 4 2 0 1998

2001

2004

2007

2010

2013

2016

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

1,000

Figure 2. Mortgage Credit Availability Index

800 600 400 200 0

2004

2006

December December

2008

2010

2012

December December December

2014

2016 2018

December December

June

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

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which led into the GR. However, despite the improvement in the housing market since the recovery from the GR, the supply of mortgage credit remains sparse. Nationwide, mortgage purchase originations plummeted in the wake and immediate aftermath of the GR, tumbling to $505 billion in 2011 (Figure 3). Originations have since climbed but remain well below levels in the immediate run-up to the GR. The decrease in mortgage credit availability likely reduced Figure 3. National Residential Mortgage Purchases

Billions of Dollars

1,600 1,200

800 400 0 1990

1994

1998

2002

2006

2010 2014

2017

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

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007

Figure 4. Subprime Mortgages as Percent of All Mortgages

70% Texas Nation

Figure 5. U.S., Texas Homeownership Rates United States Texas

68% 65% 64% 62%

2009

2011

2013

2015

2017

Sources: Home Mortgage Disclosure Act and Real Estate Center at Texas A&M University

JULY 2019

aspiring homeownersâ&#x20AC;&#x2122; ability to purchase homes, particularly for low-income households that lack sufficient income, wealth, or other compensating factors. Texasâ&#x20AC;&#x2122; subprime mortgage originations closely followed the nation during and after the GR. Subprime originations for both Texas and the nation have declined substantially since 2Q2007 (Figure 4). In 2007, prior to the onset of the GR, subprime originations made up 16.9 percent of all purchase originations in Texas and 15.4 percent nationally. Subprime originations have comprised a slightly larger share of all mortgage loan originations in Texas than in the U.S. In 2017, several years following the recovery from the GR, subprime originations made up 5.8 percent of all purchase originations in Texas and 3.9 percent nationally. ne contributing factor may be the relatively high rate of home-price appreciation in Texas, which may increase demand for subprime loans. The high rate of price appreciation in Texas is due to strong demand caused by increased job and population growth outpacing housing supply. The increase in supply of Texas subprime originations could also be traced to mortgage lenders raising their number of subprime originations to remain competitive with other lenders. Nationally, the homeownership rate plummeted to a fivedecade low in 2016 (Figure 5). It declined more than 6 percentage

60% 1997 2000

2003 2006

2009

2012 2015 2018

Note: Seasonally adjusted and trend cycled. Sources: Federal Reserve Economic Data and Real Estate Center at Texas A&M University

points over a 12-year period, from a high of 69.2 percent in April 2004 to 62.9 percent in April 2016. Meanwhile, Texas homeownership fell to an over two-decade low in 2016. While the homeownership rate has since rebounded, it measures below the long-term average. In the 1990s and 2000s, both the Clinton and George W. Bush administrations pushed for federal policy to increase homeownership, particularly among lowincome and minority households. The number of low-income first-time homebuyers increased by over 40 percent from the late 1980s to the mid-2000s. The number of black and Hispanic first-time homebuyers increased by over 50 and 188 percent, respectively. ccording to the University of North Carolina, the rise in homeownership was accompanied by widespread mortgage loan fraud, which increased twelve-fold from 1996 to 2005. Much of this fraud was by lenders who overstated applicantsâ&#x20AC;&#x2122; incomes, offered loans without requiring proof of income and/or verified assets, and encouraged adjustable-rate or interest-only mortgages. Higher-risk borrowers who would have otherwise likely been unable to qualify for homeownership became responsible for mortgage payments they could not reasonably afford.

Fallout from Subprime Loans Texas subprime mortgage foreclosures appear to be highly correlated to delinquencies. During 1Q2010, subprime mortgage delinquencies had the largest spike in more than a decade (Figure 6), while foreclosures increased beginning in 2Q2010 and hit a more than ten-year high in 1Q2011 (Figure 7). This suggests subprime mortgage delinquency increases are good indicators of future increases in foreclosures.

The percent of delinquencies for subprime mortgages reached their high at over 11.7 percent of total subprime mortgages, but foreclosures peaked at only 2.7 percent. This clearly shows subprime mortgages are considerably more likely to go into delinquency than foreclosure. The significantly higher number of delinquencies was expected given that mortgages that go into delinquency do not necessarily fall into foreclosure. Due to the high volume of delinquencies and their relatively lower values, lenders did not pursue foreclosures on all delinquent homes as aggressively as they could have. The financial benefits of pursuing foreclosures would not have outweighed their costs. Foreclosures during the GR led to substantial financial losses of low-income and minority families. Families that underwent foreclosures suffered negative financial impacts such as credit rating damage, decrease in net worth, rise in personal bankruptcy,

Figure 7. Texas Mortgage Foreclosures

2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 Note: Seasonally adjusted. Sources: Mortgage Bankers Association and Real Estate Center at Texas A&M University

Figure 6. Texas Mortgage Delinquencies 14%

Percent of total subprime mortgages Percent of total mortgages

66%

10%

64%

62% 60%

58%

2% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 Note: Seasonally adjusted. Sources: Mortgage Bankers Association and Real Estate Center at Texas A&M University

Figure 8. Texas Owner-Occupied Households with a Mortgage as a Percentage of Total Households

12%

Percent of total subprime mortgages Percent of total mortgages

3.0%

56% 54% 2007

2009

2011

2013

2015

2017

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

TIERRA GRANDE

Table 1. Texas Subprime Mortgage Loan Origination Changes by Race, 2007–17 Race

Percent Change 2007–17

Percent of Total 2007

Percent of Total 2017

American Indian or Alaska Native

-67.0

0.3

Asian

-74.6

2.7

2.4

loss of savings, and increased Black -85.8 11.1 5.5 debt. The lower 30 percent Hispanic or Latino -73.1 30.5 28.5 of income earners observed Native Hawaiian or Other Pacific Islander -78.5 0.2 0.2 their real mean wealth White -71.8 42.9 41.9 decline by 31 percentage Two or more races -77.5 0.8 0.6 points since the onset of the Information not provided by applicant in GR. Additionally, states with -46.0 10.8 20.1 mail, Internet, or telephone application the highest rates of forecloNot applicable -75.4 0.6 0.5 sures during the GR had an Note: Percentages are out of the total number of subprime loan originations for a particular year. Due to the increase in the almost 20 percent jump in “Information not provided by applicant…” row, percentages could be affected. food stamp caseload. Sources: Home Mortgage Disclosure Act and Real Estate Center at Texas A&M University The GR ultimately did not affect higher-income houseTable 2. Austin Subprime Mortgage Loan Origination Changes by Race, 2007–17 holds the way it did lowerincome and minority housePercent Change Percent of Total Percent of Total holds. While lower-income Race 2007–17 2007 2017 families saw their wealth American Indian or Alaska Native -76.2 0.4 0.4 decrease in excess of 30 perAsian -69.4 3.3 3.4 centage points after the GR, Black -80.7 4.9 3.1 the top 10 percent of earners Hispanic or Latino -59.5 23.0 31.1 saw an 11 percent increase, Native Hawaiian or Other Pacific Islander -100.0 0.3 0.0 and the next 30 percent saw a White -79.2 53.6 37.2 17 percent decrease. Two or more races -33.3 0.5 1.1 The differences can be Information not provided by applicant in somewhat attributed to -48.7 13.8 23.6 mail, Internet, or telephone application the variation in families’ Not applicable -90.0 0.2 0.1 portfolios before the start of the GR. For the bottom 30 Note: Percentages are out of the total number of subprime loan originations for a particular year. Due to the increase in the “Information not provided by applicant…” row, percentages could be affected. percent of earners, 45 percent Sources: Home Mortgage Disclosure Act and Real Estate Center at Texas A&M University of total wealth was in their house, compared with only Table 3. Austin Population by Race, 2007–17 15 percent for the top 10 percent of earners. As a result, falling (Percent of Total) home values impacted the wealth of lower-income and minority households more severely than they did higher-income Percent Change households. Race 2017 2007–17

How Tightening Lending Standards Affected Homeownership Following the GR, Texas households with mortgages dropped from 64 to 58 percent of total households between 2007 and 2017 (Figure 8). Additionally during that same period, Texas subprime mortgage originations as a percent of total mortgage originations dropped by 11 percent (Figure 4). These declines suggest increased lending standards and an economic downturn have made citizens of lower socioeconomic status less able to purchase homes. In Texas between 2007 and 2017, subprime mortgage originations decreased 75 percent for Asian citizens, 86 percent for blacks, 73

JULY 2019

American Indian or Alaska Native

0.5

Asian

5.8

1.4

7.3

-0.2

Black Hispanic or Latino

32.5

2.6

White

52.0

-4.4

3.7

1.5

Two or more races

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

percent for Hispanics/Latinos, and 72 percent for whites (Table 1). The biggest changes in subprime mortgage originations for the Austin and Dallas-Fort Worth (DFW) Metropolitan Statistical Areas (MSA) were among the Hispanic/Latino and white populations. From 2007 to 2017, subprime originations for Hispanics/ Latinos in Austin increased 8.1 percent (Table 2). This could be because of the MSA’s higher average home price, which makes homeownership more difficult. In 2007, Hispanics/Latinos made up 29.9 percent of the metro’s total population, and by 2017 they made up 32.5 percent (Table 3). During the same tenyear period, the white population saw a 16.4 percent decrease

in subprime originations. Whites made up 56.4 percent of the Austin population in 2007 and 52 percent in 2017. In DFW, Hispanics/Latinos saw a 10 percent increase in subprime originations (Table 4). During the same timeframe, that population increased by just 2 percent (Table 5). The percentage of subprime originations decreased by 8.2 percent for whites, while the population decreased 6.3 percent.

In contrast to Austin and DFW, Houston and San Antonio experienced a decline in the percentage of subprime mortgage originations for Hispanic/Latino populations despite population growth for that demographic. Houston’s Hispanic/Latino community had a 3.8 percent decrease in subprime originations (Table 6), while that demographic increased from 33.4 percent of the total MSA population in 2007 to 37.3 percent in 2017 (Table 7). A similar phenomenon occurred in Table 4. DFW Subprime Mortgage Loan Origination Changes by Race, 2007–17 San Antonio. Total subprime Percent Change Percent of Total Percent of Total originations for HispanRace 2007–17 2007 2017 ics/Latinos declined by 4.1 American Indian or Alaska Native -69.7 0.3 0.4 percent (Table 8), but the Asian -71.3 3.2 3.5 demographic increased 2.8 Black -85.9 15.5 8.2 percent (Table 9). Hispanic or Latino -60.9 21.8 31.8 The percentage of Native Hawaiian or Other Pacific Islander -76.4 0.3 0.2 subprime originations decreased for blacks in all White -78.0 46.3 38.1 four major metros. The Two or more races -76.0 0.6 0.6 largest declines were in Information not provided by applicant in -58.5 11.2 17.3 Houston, 8 percent, and mail, Internet, or telephone application DFW, 7.3 percent (Tables 6 Not applicable -98.2 0.8 0.1 and 4, respectively). ConNote: Percentages are out of the total number of subprime loan originations for a particular year. Due to the increase in the versely, all four metros had “Information not provided by applicant…” row, percentages could be affected. Sources: Home Mortgage Disclosure Act and Real Estate Center at Texas A&M University an increase in the black population except Austin, Table 5. DFW Population by Race, 2007–17 which had a 0.2 percent decrease. This indicates a decline in (Percent of Total) subprime mortgage originations for blacks relative to that group’s population growth. Percent Change Race 2017 2007–17 Texas Housing’s Post-GR Challenges American Indian or Alaska Native

0.4

-0.1

Asian

6.8

2.1

Subprime mortgage loan originations have declined since the GR, returning to prerecessionary levels. Texas’ four major Black 15.6 1.5 MSAs decreased by an average of approximately 74 percent Hispanic or Latino 28.9 2.0 between 2007 and 2017. White 46.3 -6.3 However, the effects of subprime lending linger. Home Two or more races 2.9 1.1 values decreased 23 percent from 2007–10, particularly affecting lower-income families, many of which held a considerable Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University portion of their wealth in their homes. This widened Table 6. Houston Subprime Mortgage Loan Origination Changes by Race, 2007–17 the wealth gap between Percent Change Percent of Total Percent of Total higher- and lower-income Race 2007–17 2007 2017 households. American Indian or Alaska Native -80.0 0.2 0.3 In Texas, decreases in subAsian -81.4 4.1 4.3 prime mortgage loan originations have had different Black -90.6 17.3 9.3 impacts on differHispanic or Latino -84.6 30.7 26.9 ent races. Austin Native Hawaiian or Other Pacific Islander -87.7 0.3 0.2 White

-81.5

34.2

36.0

Two or more races

-80.0

1.0

1.2

Information not provided by applicant in mail, Internet, or telephone application

-67.2

11.7

21.8

Not applicable

-97.3

0.5

0.1

Note: Percentages are out of the total number of subprime loan originations for a particular year. Due to the increase in the “Information not provided by applicant…” row, percentages could be affected. Sources: Home Mortgage Disclosure Act and Real Estate Center at Texas A&M University

TIERRA GRANDE

and DFW have seen large increases in subprime originations Table 7. Houston Population by Race, 2007–17 (as a percent of total loan originations) among Hispanics/ (Percent of Total) Latinos, while San Antonio and Houston have seen decreases. Percent Change Though the black population has been growing, subprime origRace 2017 2007–17 inations in DFW, Houston, and San Antonio have decreased for American Indian or Alaska Native 0.4 0.1 that demographic by an average of approximately 82 percent, Asian 7.9 2.2 the largest percent decrease of any race. hile subprime lending has decreased, so has homeBlack 17.2 0.3 ownership for low-income households as mortgageHispanic or Latino 37.3 3.9 lending standards have tightened and the supply of White 36.1 -6.8 affordable homes has decreased. The dwindling access to lowTwo or more races 2.4 0.9 income homeownership in Texas is apparent in the decrease of Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University owner-occupied homes with mortgages, the MBA’s MCAI Table 8. San Antonio Subprime Mortgage Loan Origination Changes by Race, 2007–17 drop and relative flat growth since 2006, and real denial Percent Change Percent of Total Percent of Total rate increases for low-creditRace 2007–17 2007 2017 profile tenants. Low-income American Indian or Alaska Native -92.3 0.2 0.1 and minority households Asian -47.5 1.1 1.9 are finding it difficult to Black -72.2 4.2 3.7 purchase homes and build Hispanic or Latino -71.9 45.4 41.3 wealth due to higher home Native Hawaiian or Other Pacific Islander -70.6 0.3 0.3 prices and restricted supply White -70.6 35.1 33.3 of mortgage credit.

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

Two or more races

-72.7

0.8

0.7

Information not provided by applicant in mail, Internet, or telephone application

-52.8

12.2

18.6

Not applicable

-89.7

0.7

0.2

THE TAKEAWAY Subprime lending, which largely targets low-income homebuyers, has declined in Texas since the Great Recession, but the effects linger. Home values have dropped significantly for many subprime mortgage holders, reducing their overall wealth. In addition, tighter lending standards and a shortage of affordable homes have made homeownership difficult for many potential buyers.

Table 9. San Antonio Population by Race, 2007–17 (Percent of Total) Race

2017

Percent Change 2007–17

American Indian or Alaska Native

0.4

-0.2

Asian

2.3

0.4

Black

7.0

0.5

Hispanic or Latino

55.4

2.8

White

33.6

-4.4

3.4

1.2

Two or more races

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

JULY 2019

Legal Issues

As the old joke goes, a law professor was delivering a commencement address to law school graduates. “Three years ago, if someone had asked you a legal question, you honestly would have answered, ‘I don’t know.’ Now, however, you may emphatically declare, ‘It depends.’” 26

fter becoming embroiled in a real estate dispute, landowners or tenants sometimes find themselves in a lawyer’s office. Sometimes, they come in fired up and ready to file a lawsuit. More often, they just want to find out what their rights are. They schedule a consultation, tell their story, and lay out their vision of the dispute. Then they look expectantly at their lawyer. “What are my rights? What does the law say about my situation?” Many times, they are shocked to hear the lawyer’s answer: “I don’t know.” Or the statement that has become somewhat of a punchline: “It depends.” It’s funny because it’s true. Lawyers often don’t know, and, almost always, it really does depend. Understanding why requires some knowledge of how law is made. The law is at best an educated guess at what courts will decide.

When Lawsuits Are the Only Recourse Law exists, among other reasons, to provide order, set expectations, and resolve disputes. Many disputes are resolved by informal discussions between neighbors, TIERRA GRANDE

Regulations are rules made by federal or state agencies pursuant to power that is delegated to them by congress or the legislature. When most people talk about “the law,” they are referring to statutes or regulations, and they generally think of it as black and white, cut and dried. Unfortunately, no set of statutes or regulations could ever be written that covers every event that might happen across the length and breadth of human interaction. That’s where the courts come in. The statutes and regulations must be interpreted in relation to the facts. Often, words in the statutes must be defined. Sometimes there are no statutes or regulations that apply to the facts at hand. In all of these situations, the court may base its decision on the “case law” (i.e., previously decided cases, if any applicable case law exists; often referred to as “common law”). If the case goes to trial, the trial judge will make decisions on such things and will issue a judgment. The judgment is based on the facts as determined at trial and the law as applied by the judge. Most trial court decisions, particularly in Texas, are not published and do not “become law.” or by mediations conducted without the filing of a lawsuit. If these efforts fail, a lawsuit may be the only recourse. Once a lawsuit is filed, the law provides a framework for how the case will be decided. Sometimes the case will be decided at trial by a judge and/or jury. More commonly, it is settled before it reaches trial. When a case settles, it often settles based on the parties’ best guesses at how the law applies, how the evidence is likely to develop, and what a judge or jury is likely to decide. Usually, each side gives up something to obtain the certainty of the result. They are willing to sacrifice some of the money or property at stake rather than risk losing all of it. Also, when the lawsuit process stops, the legal bills soon stop. But when settlement efforts fail, the lawsuit forges ahead toward trial. Now, look at the law itself. Statutes are legislative acts passed by the United States Congress or the Texas Legislature.

Filing an Appeal If either side disagrees with the interpretations made by the trial court, it can file an appeal to a higher court. A factual finding can be challenged only on the basis of insufficient evidence, whereas a decision on the law is subject to review by the judges of the appeals court. Essentially, the appellant (appealing side) is asking the appeals court judges to grade the papers of the trial court. When the appeal is decided, the appeals court issues an opinion setting forth its decision and explaining its reasons. Once published, the opinion becomes part of the “case law” mentioned above, and it may be used as precedent in deciding later cases. There are many who rightly decry the practice of “legislating from the bench,” wherein judges “make law instead of interpreting it.” Certainly judges sometimes overstep their bounds, fail to exercise judicial restraint, or are just plain wrong. Certainly they may blindly follow precedent or make imprudent exceptions to

The law provides a framework for how the case will be decided. Sometimes the case will be decided at trial by a judge and/or jury. More commonly, it is settled before it reaches trial.

JULY 2019

existing rules. But make no mistake: Judges do make law—case law—every time they issue an opinion. It’s their job. ften, different courts of appeals reach different decisions on similar factual situations. If the Supreme Court has not decided the outcome of such a “circuit split,” then there may not be a clear answer as to what the law is in a particular dispute until the issue is decided by a higher court.* And that requires an actual dispute actually tried and appealed all the way to that higher court. Courts only decide actual controversies; they do not answer hypothetical questions. If a party disagrees with the decision of the court of appeals, it may seek further review from the Supreme Court—in Austin or in Washington, depending on whether the case is state or federal. The Supreme Court does not have to hear the appeal. If the Supreme Court does take the case, it also issues an opinion, which becomes the law of the land—state or federal, as the case may be. Even then, there are pitfalls. Even when the rule is clear, it is rare that two cases have exactly the same facts. One side will argue that the facts are the same and that a particular common law rule should apply to the dispute. The other side will argue that the rule is to be applied narrowly to a specific set of facts, and then point out where the facts are different so as to merit a different result.

Finally, sometimes judges simply don’t follow the precedent. When they don’t, litigants must decide whether an appeal is available and, perhaps more importantly, if it’s worth it. All of this, of course, takes a lot of time and money and is often very stressful, especially when it involves individuals. As a result, most cases are settled or finally decided without going up on appeal. When that happens, no new law is made. So, to recap: For new case law to be made, a lot has to happen. There has to be an actual dispute. There has to be a lawsuit. It has to make it through the process without settlement, all the way to trial. One of the parties has to have the money—and the stomach—to continue the fight through one or more levels of appellate courts. If all of these things happen, perhaps new law will be pronounced by a court. If so, then the ever-changing law will have changed again. But will it apply to your case? Well, it depends. Nothing in this publication should be considered legal advice. For specific advice, consult an attorney.

Things that have to happen before new case law is made: • • • • • •

There’s a dispute. Negotiations fail. Lawsuit is filed. Settlement efforts fail. Case goes to trial. Case goes through appeals process.

__________ *The Texas Supreme Court may imply approval of the decision of a Texas Court of Appeals by “refusing” a petition for review. This results in the lower court’s opinions becoming statewide precedent. In contrast, “denying” a petition for review does not create statewide precedent; it only means the Supreme Court has found that the petition presents no error that requires reversal or is of such importance to the jurisprudence of the state as to require correction.

Adams (radams@mays.tamu.edu) is a member of the State Bar of Texas and a research attorney for the Real Estate Center at Texas A&M University.

THE TAKEAWAY Many people think of the law as black and white. In reality, the law is constantly changing and rarely simple. Statutes and regulations can provide guidance, but some issues are not finally decided until parties take a dispute to trial and then through one or more appeals. TIERRA GRANDE

Coming in October Commercially one city but with two separate municipalities in different states, Texarkana is one of Texas’ most unusual border cities. How do these factors influence its economy and housing market?

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Helping Texas real estate professionals better serve their clients. ™

www.recenter.tamu.edu/articles/tierra-grande/

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