TG - Spring 2022 by Texas Real Estate Research Center

SPRING 2022

TM ™

TEXAS REAL ESTATE RESEARCH CENTER

TEXAS A&M UNIVERSITY

Texas Real Estate Research Center COLLEGE STATION, TEXAS 77843-2115

In This Issue Texas’ Population Boom Changes in POA Rules Build Back Better Act Materials Escalation Clauses Emerging Trends in Real Estate Interest Rates and Homebuying Great Resignation Urban Land Prices Q&A: Client Rebates

Helping Texans make the best real estate decisions since 1971

SPRING 2022

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TEXAS REAL ESTATE RESEARCH CENTER

iii

SPRING 2022

Demography

e M e Tak

Post-Pandemic Population Boom The number of people moving to Texas from out of state has risen since the beginning of the pandemic. Most have come from California, and many are settling in North Texas. By Joshua Roberson

Figure 1. National Interstate Migration Patterns Homeowner Households

1,500,000 Net Movers

exas has been an attractive relocation destination for the past decade thanks to its pro-business environment, relatively affordable housing, and friendly charm. While population growth has been strong all ten years, some years have stood out more than others. A wave of Californians came to Texas in 2018, shortly after the Tax Cut and Jobs Act of 2017, which prompted numerous moves due to the loss of state and local tax (SALT) deductions. The onset of COVID in 2020 brought another wave of newcomers. Nationally, U.S. Census Bureau data show homeowners made the largest push across state lines over the past ten years (Figure 1). Meanwhile, renters have largely remained in-state for almost a decade, a trend that has accelerated since the pandemic. Although the total number of interstate homeowner moves has increased, the share of those moves compared with local

1,00,000

500

2011

2013

2015

2017

2019

2021

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

moves has not. Since the pandemic, homeowners have been more likely to move to nearby suburbs or exurb counties. For Texas, there’s even more to the story.

In-Migrant Boom

hile the number of Texas households moving to less dense areas of the state has greatly increased, especially within the “Texas Triangle” (the region bordered by I-35, I-45, and I-10), the number of in-migrants has grown well beyond the national average. In fact, Texas had an almost 200,000 net increase in out-of-state moves between the summers of 2020 and 2021, second only to Florida, which had slightly more than one-quarter million. The number of newcomers from California has been especially high over the past few years (Figure 2). The big question is, how many more Golden State residents will call Texas home because of the post-COVID scramble? According to the Dallas Federal Reserve, the inflow of Californians to Texas since the start of the pandemic has been significantly higher than it was the two years before the pandemic began. While tech-heavy Austin has a reputation for attracting newcomers, the biggest total count of Californians belongs to Dallas-Fort Worth. Most are coming from Los Angeles. The next highest number of moves to DFW were from New York and New Jersey. Before COVID, the number of New Yorkers usually totaled half of the current estimates, signifying a massive shift. Houston also received a massive boost of residents from both L.A. and New York.

Housing Market Impact

50,000

Net Residents

40,000

30,000

20,000

10,000

SPRING 2022

Almost two years into the pandemic, the Texas housing market is still operating well above normal. Year-end sales for 2021 set a new record, for-sale inventory levels remained scarce, and Figure 2. Net New Residents from California prices rose rapidly. Signs indicate housing may cool in 2022, especially as mortgage rates increase. In some ways the cooling has already begun. The Texas Real Estate Research Center’s Home Price Index showed price growth in both Austin and DFW slowed in fall 2021, dragging down Texas’ overall price growth. While DFW quickly recovered, 2005 2007 2009 2011 2013 2015 2017 2019 Austin prices continued Sources: U.S. Census Bureau and Texas Real Estate Research Center at Texas A&M University

to decelerate (that’s not saying much, though, because home price growth near the capital is still well into the double digits). This shows buyers can get frustrated by continued homeprice growth and eventually give up house-hunting. Mortgage rates have already begun to creep up and are likely to continue doing so in alignment with Fed policy aimed to curb high inflation. The loss in purchasing power will only make it harder for many households to buy new homes. Meanwhile, home prices are likely to remain high compared with pre-COVID years. While mortgage rates and housing supply will likely work against total home sales, home prices

could remain high thanks to strong migration levels even if the growth rate slows down. For the past decade, Texas’s migration levels have been significantly higher than the national average, but it’s uncertain whether 2022 levels will be like those of the past two years. However, because of Texas’ strong job potential and relatively affordable housing, they probably don’t need to be to keep the housing market from cooling. Roberson (joshuaroberson@tamu.edu) is a lead data analyst with the Texas Real Estate Research Center at Texas A&M University.

Figure 3. Top Reasons for Moving

he drop in mortgage rates set off a frenzy of homebuying in Texas shortly after the start of the COVID pandemic. With travel options limited, Texans mostly stayed home, giving them ample time to reprioritize their housing needs. In fact, U.S. Census Bureau data show housing needs, such as the desire to upgrade, were once again on the minds of most people who chose to relocate in 2021 (Figure 3).

Homeowners and Renters

Reason Rank

Why People are Moving

1 15.98%

16.38%

17.02%

14.57%

17.23%

2 11.53%

12.59%

12.05%

11.41%

10.64%

3 11.26%

11.08%

11.44%

10.65%

9.17%

9.92%

10.33%

10.37%

8.72%

8.90%

8.30%

7.89%

6.73%

7.82%

8.82%

2017

2018

2019

2020

2021

Reason Cheaper housing

To establish own household

New job or job transfer

Wanted newer/better/larger house or apartment

Other family reason Other housing reason

Wanted to own home, not rent

Sources: U.S. Census Bureau, Current Population Survey, Annual Social Economic Supplement 1999-2021 (CPS ASEC), and Texas Real Estate Research Center at Texas A&M University

Meanwhile, new job/job transfer as a reason for moving fell below double digits for the ﬁrst time since 2017.

Residential

Legislature Gives Property Owners More Rights Property owners, association board members, management companies, and real estate license holders should all become familiar with the changes in the law under S.B. 1588. It is a lengthy bill, touching on many subjects. By Kerri Lewis

hen people talk about their subdivision’s property owners’ association (POA), also referred to in Texas as a homeowners’ association (HOA), handwringing or eye-rolling is usually involved. Many feel POA boards overreach, especially when determining what property owners can do with their own property. Although POAs are not licensed or regulated by any state agency, there are laws that apply to them and their dedicatory instruments. During the 87th regular session, the Texas Legislature passed S.B. 1588, which amended Chapters 202-209 of the Texas Property Code (TPC) to clarify and refine certain POA powers and duties. Perhaps some members of the Legislature live in subdivisions run by overzealous HOAs, because many of these changes give more rights to the property owners and demand more accountability and transparency from the POAs. SPRING 2022

Many of the provisions in the law limit what can or cannot be in the POA’s dedicatory instruments, which Section 202.006 of the TPC defines as any document “governing the establishment, maintenance, or operation of a residential subdivision . . .” It includes restrictive covenants, bylaws, adopted rules and regulations of a POA, and any amendments to those documents. POAs are required by statute to file all dedicatory instruments in the real property records of the county where the property is located. This allows a prospective buyer to review existing rules and requirements on a piece of property located in a POA before buying the property. The following summary of the provisions of S.B. 1588 is organized by TPC section and subject matter for easy reference to the revised statutory provisions.

202. 006 TPC

Collection of Regular Assessment

A new subsection (c) was added to prohibit POAs from collecting regular assessment amounts if the dedicatory instrument authorizing the assessment is not filed in the real property records of the county in which the property is located. 202. 018

TPC

Display of Religious Items

TPC

This section was amended to prohibit POAs from enacting rules, covenants, or bylaws that prohibit the display of religious items anywhere on an owner’s property. Previously the prohibition applied only to an owner’s dwelling, not the whole property. However, the amended law does allow a POA to prohibit a religious display on an owner’s property if the display: • threatens the public’s health or safety; • violates a law other than a law prohibiting the display of religious speech; • contains language, graphics, or any display that is patently offensive to a passerby for reasons other than its religious content; • is installed on property: 0 owned or maintained by the POA, or 0 owned in common by POA members. • violates any applicable building line, right-of-way, setback, or easement; or • is attached to a traffic control device, street lamp, fire hydrant, or utility sign, pole, or fixture. 202. 022

207. 003c

Swimming Pool Enclosures

POA Fees for Information and Resale Certiﬁcates

This amendment established that fees for resale certificate information must be “reasonable and necessary” and cannot exceed $375 for assembly and delivery of the information or $75 for an updated resale certificate. 207. 004 TPC

Timeframe for Delivery of Resale Certiﬁcate Information

The deadline for the POA to deliver the requested information changed from seven days after second request to five days after second request. The judgment penalty for failure to timely deliver the information increased from $500 to $5,000. 207. 006

Online Subdivision Information

TPC

A POA that has 60 or more lots or that has contracted with a management company must provide the association’s current dedicatory instruments on a website maintained by the POA or the management company. The website must be available to association members. A management company is defined in section 209.002 (5-a) TPC as “a person or entity established or contracted to provide management or administrative services on behalf of a property owners’ association.”

TPC

Under this new section, a POA may not adopt or enforce a provision that prohibits or restricts a property owner from installing a swimming pool enclosure in accordance with state or local safety requirements. However, the POA can adopt and enforce rules related to the appearance of a swimming pool enclosure, including permissible colors, with one exception: the POA cannot prohibit a simple black transparent mesh set in metal frames as a swimming pool enclosure. 202. 023

Security Measures

TPC

This is another new section. It says a POA may not adopt or enforce a restrictive covenant that prevents a homeowner from building or installing security measures such as security cameras, motion detectors, and perimeter fences. However, the POA can regulate the type of fencing and prohibit installation of a security camera in a place other than on the property owner’s private property.

209. 004

Management Certiﬁcate

TPC

There were two important amendments to this section. First, the statute was amended to require more information be included in Management Certificates, which have historically been required to be recorded in the county where the subdivision is located. In addition to the basic information previously required (name and address of the association and the person managing the association), POAs must now include a telephone number, email address, web address where dedicatory instruments can be found, and the amount of fees charged by the POA relating to a property transfer. The second change involves filing the Management Certificates and any amended Management Certificates with the Texas Real Estate Commission (TREC), which will maintain an online database of all Management Certificates for public access. POAs are required to file their Management Certificates and any amendments with TREC no later than the seventh day after it is filed with the county. The only exception to TG

this rule is for Management Certificates that were filed with the county prior to Dec. 1, 2021. Those POAs have until June 1, 2022, to electronically file them with TREC. TREC’s new website dedicated to POA Management Certificates can be accessed using the QR code. This website allows POAs to upload their Management Certificates to a central database that can be searched by the general public. Although TREC is responsible for maintaining the website and database, it was not given any regulatory authority over POAs. This means TREC does not have jurisdiction to hear complaints against POAs or take action against a POA that violates the statute. A property owner is not liable for attorney fees incurred by the POA relating to collection of a delinquent assessment if the fees were incurred during a period where a Management Certificate was not recorded with the county clerk or uploaded to TREC’s website.

209. 0065 TPC

Under this new section, a POA cannot report any delinquency to a credit reporting service unless prior written notice is given to the property owner by certified mail. Notice must be given at least 30 days prior to POA sending a report to the credit reporting service, and the property owner must be given an opportunity to enter into a payment plan to cure the delinquency. A POA or collection agency may not report a delinquent fee or fine to a credit reporting service while there is a pending dispute about the delinquency between the property owner and the POA. 209. 007 TPC

209.

00505 TPC

Architectural Review Authority (ARA)

This new section sets out the process for hearing and appeal of a POA architectural review committee’s decisions when property owners want to make property improvements. The process applies to POAs with 40 or more lots. Board members and anyone in their household cannot serve on the ARA, as the board holds the hearing if there is a disagreement. Specific timeframes and notices must be followed. 209. 0051 e h TPC

Notice of Regular and Special Board Meetings

These amendments increase the minimum number of hours notice that must be given prior to a regular meeting of the board from 72 to 144 hours and add a minimum notice of 72 hours to owners prior to holding a special meeting of the board. 209.

0052c TPC

Contracts Over $50,000

This new subsection provides that a POA board must solicit bids using a bid process established by the association for any contract for services proposed to be more than $50,000. 209. 064b TPC

Collection Action

The amount of time a property owner has to cure a delinquency before a POA can begin collection action was increased from 30 to 45 days. SPRING 2022

Report Delinquency to Credit Bureaus

Right to Hearing on Curing Violation

If a property owner who is entitled to an opportunity to cure a violation requests a hearing, the association must provide one. No later than ten days prior to the hearing, the POA must give the property owner all documents, photographs, and communications relating to the matter. The property owner is allowed an automatic 15-day postponement of the hearing if the POA does not send all documents on time. At the hearing, the POA presents its case first, followed by the property owner. 209. 016

Leasing

TPC

Amendments to this section confirm that POAs can establish restrictions regarding occupancy or leasing of property within the POA. It also adds new subsection (e), which allows a POA to request information be submitted to the association regarding a lease or rental application, including the name, mailing address, phone number, and email address of each person who will reside at the property under a lease, along with the start and end date of the lease. Rent is not set out in the statute as one of the items a POA can request. 209. 017

Jurisdiction for Violations

TPC

A new section gives the justice court of a precinct in which all or part of the subdivision is located jurisdiction over any Chapter 209 violation by the POA. Lewis (kerri@2oldchicks.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission.

Taxes

Legislation Limbo Tax Bill’s Uncertain Future

President Biden’s Build Back Better Act has proven controversial, and whether it (or a smaller version of the tax bill) will pass remains uncertain. By William D. Elliott

he end of 2021 was confusing when it came to federal tax legislation. House Democrats passed President Joe Biden’s Build Back Better Act (BBBA) on Nov. 19, 2021, but the Senate was unable to pass the legislation. Speaker of the House Nancy Pelosi and Senate Majority Leader Chuck Schumer kept saying a tax bill would be enacted by Christmas. The house of cards collapsed Dec. 19 when Senator Joe Manchin said he would not vote for the “mammoth” 2,000-plus page BBBA, essentially killing it. Biden then issued a statement officially ending all negotiations of the BBBA. Congressional leaders remain optimistic that a tax bill can pass in early 2022, but the BBBA’s precarious tax status has many real estate investors and real estate business people wondering whether their tax fears will come to pass, and when. Questions over the near-term future of taxes add to the economic uncertainty already present because of inflation and the new COVID-19 variants.

BBBA’s Open Issues Apart from Manchin’s refusal to support the BBBA and the question of whether he is willing to negotiate a smaller-scale

BBBA (see sidebar), several issues would need to be addressed before any tax legislation could be considered. One of the biggest is the proposed expansion of the child tax credit. Second, any changes to BBBA will need to conform to the Senate’s budget reconciliation rules. Third, the limit or cap on the deduction for state and local property taxes (commonly called the SALT deduction cap), will need to be determined. Timing of legislation is an issue. On the one hand, politicians want to score a legislative victory before the mid-term elections, even if that means a reduced or scaled-back bill. On the other hand, voting for a large tax-and-spend legislative package becomes problematic as the November elections approach. All of this suggests a tax bill sooner rather than later, if at all.

Key Dates and Timelines Several key dates could force legislative action. The State of the Union address was March 1. Government funding expired Feb. 18, under the current agreement. The most probable deadline, though, is the end of March (the end of the first quarter of 2022), by which time any tax legislation TG

would need to be passed. If a tax bill is not enacted by then, the odds are virtually zero that BBBA will be passed. (Editor’s note: As of this issue’s publication date, the bill had not passed.)

How Big Will Tax Legislation Be? Manchin has indicated that inflation and the rising federal debt are key drivers for him in considering any tax legislation. Inflation seems to be broad-based and continuing, so news about inflation is not likely to improve in the first part of 2022. Federal Reserve Chairman Jerome Powell has indicated interest rates hikes are expected in 2022, much earlier than previously predicted. These influences suggest that any tax bill will need to be much smaller than the one proposed by Biden and the Democratic congressional leaders, or they will need to raise taxes to pay for the BBBA package.

How Will Tax Provisions Change? Despite the commotion surrounding enactment of the BBBA, its tax provisions seem less controversial than its social spending aspects. Perhaps, then, Manchin’s framework for tax rates SPRING 2022

(see sidebar) might have broad congressional support. The SALT deduction cap issue will need to be resolved in any bill. Sharp lines are drawn, with congressional members from New York and California solidified against any SALT deduction cap. The problem with the cap, however, is that it benefits the wealthiest people. The Senate Finance Committee version of the BBBA was released on Dec. 11, 2021. It offered changes and technical fixes, but the Senate parliamentarian has yet to approve this bill. At a minimum, further changes are required.

Importance of the SALT Deduction Cap

ny tax legislation in 2022 will almost certainly have to confront the limitation on the SALT deduction cap. The Biden administration has consistently used $400,000 as the income cutoff. This means the SALT deduction cap would apply to those with income above $400,000. The $400,000 is effectively a marker for who is wealthy and who is not. The problem is that amount means something different to taxpayers in smaller, rural states than it does to

someone in New York City or San Francisco. Much remains unresolved on this issue. Any tax legislation will have to address this fundamental disagreement.

reappear in 2022? The odds look slim, but “never” is not a word that should be used when predicting legislative activity and politics. First, the proposed estate and gift tax changes would generate What About Complicated Tax Provisions? tax revenue, and they could be resurrected to plug a revhis is a big, global world, and a number of tax issues— enue hole in a 2022 bill. Second, the Treasury or the Internal such as corporate book income minimum tax proviRevenue Service (IRS) could use administrative methods to sions or global intangible low-taxed income (GILTI) accomplish some of the Democrats’ goals, such as changing the modifications—are important from an international perspecgrantor trust rules by regulation or administrative rule. The tive. However, they can be perplexing. use of valuation discounts could be dealt with in regulations, Some ardently believe corporations should pay a minibut the last time a regulatory attempt was made to stop valuamum tax, but implementing a corporate minimum tax is not tion discount, more than 10,000 opposing comments were filed easy. Some want the minimum tax for corporations based on with the IRS, and the proposals were dropped. accounting income Some major changes as opposed to taxable will most likely occur income, believing such without any legislaWhat Did Manchin Say Exactly? a provision would be tion. For example, Manchin’s statement was carefully written. He said he was opposed to more difficult to avoid the bonus estate and “this” piece of legislation, being the BBBA. His statement suggests he or would be more congift tax exemption would consider a small version of the BBBA. Manchin has been less vocal ceptually sound. amounts are set to about the tax provisions in the BBBA. He and Schumer agreed in writing To negotiate a expire Jan. 1, 2026. on July 28, 2021, to tax rate increases for corporate, individual, and capiworldwide corporate This change is already tal gains rates as follows: minimum tax, counin the law books. tries that support the The 2022 exemption • corporate tax rate, 25 percent; idea would need to amounts for estate, • corporate minimum tax, 15 percent; adjust their individual gift, and generation• top tax rate on ordinary income, 39.6 percent; and tax rules to conform to skipping purposes was • capital gains tax rate, 28 percent. an international frameincreased to $12.06 In addition, they agreed to end carried interests. work. The proposmillion (from $11.7 Despite Manchin’s indication of support for these tax increases, there’s als in the BBBA (the million in 2021). In little doubt that major changes would have to be made to the BBBA before GILTI modifications) 2026, these exemphe would support it. Will he be willing to support a smaller-scale version seek to align U.S. tax tion amounts will be of the BBBA? Obviously, those curious about the direction of tax legislarules with the internareduced to $5 million, tion in 2022 will want to keep a sharp eye and ear on Manchin. tional framework. adjusted for cost of Whether any of living to somewhere these tax provisions around $6 million end up on a tax bill remains uncertain. Some are proposing a with the result that in 2026 estate and gift taxes are already corporate tax increase as an alternative. scheduled for an increase.

The Issue with Tax Extenders

Advice to Consider in Light of Volatile Tax Law

A number of tax provisions expired in 2021, and others will expire in 2022 or even 2023. These include temporary provisions that were set to expire by virtue of earlier tax legislation. For example, the 100 percent bonus depreciation is set to phase down in 2023. It’s possible that Congress could enact a tax extenders bill. A tax extenders legislative package could include certain items from the BBBA, such as changes to the child-care tax credit.

As 2022 begins, the tax law is politically unstable. Tax law is and has been unstable because of prevailing political uncertainties. The pandemic further complicates the environment. There could be a political shift to the left, in which case some of the Democratic proposals could reappear, or not. COVID-19 and its variants and inflation are major uncertainties, driving up asset values. These influences have the notso-subtle effect of increasing the contingent liability for estate taxes on death. Although the proposed dramatic changes in the tax law were scuttled, any of them could reappear. The political forces that want tax law changes are still present—perhaps stronger, perhaps weaker. Predicting what will happen in future elections is unsound. In light of these things, the ultimate message is simple: plan now.

Estate and Gift Tax Changes Democrats proposed significant and ambitious changes to estate and gift tax rules in early 2021, but the Senate version of the BBBA did not include the proposals. Each Democratic proposal would have been transformative in one way or another. The main proposals were realization at death, curtailing valuation discounts, transforming the tax treatment of grantor trusts, accelerating the expiration of the doubled estate and gift tax exemption, and the short-lived billionaire’s tax. Any of these would have materially changed estate planning. Is there a risk that any of these proposals will

Elliott (bill@wdelliottlaw.com) is a Dallas tax attorney, Board Certified, Tax Law; Board Certified, Estate Planning & Probate; Texas Board of Legal Specialization; and Fellow American College of Tax Counsel. TG

Residential

Materials escalation clauses in building contracts allow for price adjustments or cancellations in the event of extreme increases in material prices. While they are rarely invoked, they are not new, and they serve a purpose in the market. These clauses appear to be enforceable, and parties should read and understand them before signing. By Rusty Adams SPRING 2022

A popular meme these days shows an online want-ad that purports to offer a 4-ft x 8-ft sheet of plywood in trade for an expensive truck or sports car. “No low-ballers,” it says. “I know what I have.” Another features a well-dressed couple eating a white tablecloth meal in the aisle of an indoor lumberyard. The tagline: “Take me somewhere expensive.” Indeed, prices for construction materials have gone through the roof like never before, creating problems for property owners as well as those in the construction industry. As a result, materials escalation clauses have become a topic of conversation in the news and one that deserves a fair examination. The news stories tend to go like this. A sweet couple entered into a contract with a greedy builder to build a home. Then the builder raised the price and/or canceled the contract. The home was sold to someone else, leaving the couple heartbroken. The contractual clauses are characterized as “obscure,” “surprise,” or “fine print,” or as providing for a “surcharge.” It’s easy to empathize with the buyers, especially when so many people live in homes, but relatively few build them. But perhaps there is more to the story than meets the eye.

‘A Proﬁt Deal’ An escalation clause is a provision in a contract that allows for a price adjustment if certain conditions change. For instance, leases may increase the rent to keep up with expenses or inflation. Another type of escalation clause

increases a buyer’s offer in order to compete with other offers on the same property. A materials escalation clause is a provision in a contract between a buyer and a builder providing that the price may increase if the price of building materials increases. aterials escalation clauses in construction contracts are nothing new. Many builders—commercial and residential—have included them in their contracts for decades. Actually invoking the clauses, however, has never been common. Many builders chose—and still choose—to eat losses if they are small enough rather than use the clause to raise the price. But skyrocketing costs of lumber and other building materials, historically high home prices, supply chain issues, inflation, and the recent pandemic have created the perfect storm for things to get out of hand quickly. While it’s still somewhat rare to invoke the clause, some builders are left with no choice. When it comes to the business of building, in the words of fictional businessman Navin R. Johnson, “It’s a proﬁt deal!” Builders who build at a loss don’t stay around long. As with most contractual provisions, these clauses are all about foreseeing and allocating risk among the parties. When a contract contains a materials escalation clause, the buyer and the builder are allocating between themselves the risk that the cost of materials will change between the signing of the agreement and the completion of the project.

What’s in a Materials Escalation Clause? Contracts vary, but materials escalation clauses usually contain some common elements. First, the clause will list certain building materials or categories of materials to which the provision applies. Examples might be lumber, plywood, drywall, concrete,

steel, roofing materials, or appliances. Second, there will be a definition of what triggers the escalation. For example, an increase in the price of those materials over a certain percentage might trigger the provision. The contract might measure the increase by individual products, categories of products, or all products together. The clause should also establish a reference point from which the increase will be measured. The lower the trigger percentage, the more risk is allocated to the buyer, whereas a higher trigger percentage exposes the builder to more risk. Finally, the clause will state how the price increase for the buyer will be calculated. Often, the price change is simply passed directly to the buyer. Parties to the contract should pay particular attention to how the trigger points and additional charges are calculated. These terms should be defined as clearly as possible to avoid confusion.

Other Points to Consider As prices rise and materials escalation clauses are more commonly invoked, other questions and concerns arise. The first is whether such a clause would be enforced by a Texas court. Despite a dearth of case law directly addressing the subject, the answer appears to be yes. Texas courts generally hold parties to the agreements they make, with a few exceptions, none of which appears to be present here. econdly, these clauses are often found in contracts entitled “Fixed Price Contract,” yet when this clause is included, the price is not exactly fixed. Depending on how the materials escalation clause is written, there may not be a lot of certainty as to the price. At some point, the so-called fixed-price contract may essentially become a cost-plus contract. These issues are particularly important because lenders rely on the contracts when making lending decisions. Because of the price uncertainty in a cost-plus contract, lenders may be reluctant to make loans on them. Without the loans, most of these transactions don’t go. Additionally, appraisals are often based on the finished home’s market value, not necessarily its contract price. In an atmosphere of rapidly rising construction costs, it’s possible the lender will not make the necessary loan based on the appraisal. Even if the buyer is able to pay the difference in cash,

SPRING 2022

the buyer’s financial position after doing so may prevent him from qualifying for the loan.

What’s the Alternative?

here are alternatives to materials escalation clauses, but they have drawbacks that may make them less than satisfactory solutions. One alternative is for builders to order the necessary materials immediately or even before the contract is signed. The drawback is that many builders lack the cash flow to do so and would need a higher initial deposit from the buyers, many of whom also lack the cash flow to do so. Another option is a cost-plus contract. As mentioned before, lenders do not favor cost-plus contracts. Additionally, they come with bookkeeping headaches (and costs) for builders. One other alternative is for the buyer to buy a home that is complete or near complete, or for the builder to finish the house at a known cost and then put it on the market. While this would reduce the risk of price swings, it would also essentially do away with the custom and build-to-suit markets. To avoid unpleasant surprises, buyers should always read the contract. In fact, anyone who signs any contract should read it and be aware of its contents before signing. Under Texas law, a person who signs a contract is legally deemed to know what it says. While the materials escalation clause may be a less than ideal solution, it serves an important purpose and appears to be here to stay. Nothing in TG should be considered legal advice. For advice on a specific legal situation, consult an attorney. Adams (r_adams@tamu.edu) is a member of the State Bar of Texas and a research attorney for the Texas Real Estate Research Center at Texas A&M University.

Real Estate Issues

Residential

How Higher Interest Rates Affect Homebuying Mortgage interest rates are expected to rise in 2022, making it harder for households—especially ﬁrst-time homebuyers and low-income households—to purchase a home. By Clare Losey

Home Price $100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000 $300,000 $400,000 $500,000 $750,000

ortgage interest rates play an integral role in one’s ability to buy a home. While home-price appreciation averaged nearly 20 percent nationally in 2021, diminishing many households’ ability to purchase a home, mortgage interest rates reached a record low 2.65 percent. This helped mitigate the impact of high appreciation rates. In response to rising inflation, the Federal Reserve could raise the federal funds rate as many as seven times in 2022. One potential by-product of this is higher mortgage interest rates. At the beginning of the year, economists projected mortgage interest rates would be between 3.5 and 4 percent by the end of 2022 (after hovering around 3 percent at the beginning of 2022). However, forecasts will likely be revised Table 1. Monthly Mortgage Payment for Conventional Loan upward in response by Home Price, Mortgage Interest Rate to the news of seven Mortgage Interest Rate potential rate hikes. Such an increase will 2.5% 2.75% 3% 3.25% 3.5% 3.75% 4% 4.25% diminish purchase $649 $660 $671 $681 $693 $704 $715 $727 affordability, making $812 $825 $838 $852 $866 $880 $894 $909 it even more difficult $974 $990 $1,006 $1,022 $1,039 $1,056 $1,073 $1,090 for lower-income and $1,137 $1,155 $1,174 $1,193 $1,212 $1,232 $1,252 $1,272 first-time buyers to $1,299 $1,320 $1,341 $1,363 $1,385 $1,408 $1,431 $1,454 purchase a home. $1,461 $1,624 $1,948 $2,598 $3,247 $4,871

$1,485 $1,650 $1,980 $2,640 $3,300 $4,949

$1,509 $1,677 $2,012 $2,682 $3,353 $5,030

$1,533 $1,704 $2,044 $2,726 $3,407 $5,111

$1,558 $1,731 $2,078 $2,770 $3,463 $5,194

$1,584 $1,760 $2,111 $2,815 $3,519 $5,279

$1,609 $1,788 $2,146 $2,861 $3,576 $5,364

$1,635 $1,817 $2,181 $2,908 $3,634 $5,452

Note: Assumes a 30-year loan term, 80 percent loan-to-value ratio, and property taxes and insurance collectively amounting to 4 percent of home price. Source: Texas Real Estate Research Center at Texas A&M University

Rising Interest Rates and Repeat Buyers Table 1 shows how much the total monthly mortgage payment for TG

Table 2. Income Required for Conventional Loan by Home Price, Mortgage Interest Rate Mortgage Interest Rate Home Price

2.5%

2.75%

3.25%

3.5%

3.75%

4.25%

$100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000 $300,000 $400,000 $500,000 $750,000

$25,977 $32,472 $38,966 $45,460 $51,954 $58,449 $64,943 $77,932 $103,909 $129,886 $194,829

$26,397 $32,996 $39,596 $46,195 $52,794 $59,393 $65,993 $79,191 $105,588 $131,985 $197,978

$26,825 $33,531 $40,237 $46,943 $53,649 $60,355 $67,062 $80,474 $107,299 $134,123 $201,185

$27,260 $34,075 $40,890 $47,705 $54,520 $61,335 $68,150 $81,780 $109,040 $136,300 $204,450

$27,703 $34,628 $41,554 $48,480 $55,406 $62,331 $69,257 $83,108 $110,811 $138,514 $207,771

$28,153 $35,191 $42,230 $49,268 $56,306 $63,344 $70,383 $84,459 $112,612 $140,765 $211,148

$28,611 $35,763 $42,916 $50,069 $57,221 $64,374 $71,527 $85,832 $114,442 $143,053 $214,580

$29,075 $36,344 $43,613 $50,882 $58,151 $65,420 $72,689 $87,226 $116,302 $145,377 $218,066

Note: Assumes a 30-year loan term, 80 percent loan-to-value ratio, 30 percent debt-to-income ratio, and property taxes and insurance collectively amounting to 4 percent of home price. Source: Texas Real Estate Research Center at Texas A&M University

Table 3. Home Price-to-Income Multiplier a conventional loan increases as the mortgage interest rate by Mortgage Interest Rate (Repeat Buyers) increases. For example, a $200,000 home has a total monthly mortgage payment of $1,299 with a 2.5 percent interest rate. Mortgage Home Price-to-Income A 4 percent interest rate increases that amount by more than Interest Rate Multiplier $100 to $1,431. 2.5% 3.85 Changes in that rate can significantly change the amount of 2.75% 3.79 income required to qualify for a loan. For a conventional loan 3% 3.73 on a $200,000 home with a 2.5 percent interest rate, a house3.25% 3.67 hold would need to earn $51,954 annually with a 30 percent 3.5% 3.61 debt-to-income ratio (Table 2). A 4 percent interest rate would 3.75% 3.55 increase that amount to $57,221. As the income required to 4% 3.50 qualify for a loan increases, the maximum home price afford4.25% 3.44 able to that household decreases. Note: Assumes a 30-year loan term, 80 percent loan-to-value ratio, An increase in the interest rate also causes a household’s 30 percent debt-to-income ratio, and property taxes and insurance collectively amounting to 4 percent of home price. maximum affordable home price to drop. The home price-toSource: Texas Real Estate Research Center at Texas A&M University income multiplier by mortgage interest rate is shown in Table 3. This multiplier Table 4. Percentage of Buyers Who Earned Required Income reflects how much for Conventional Loan by Home Price, Mortgage Interest Rate home a particular household can afford. Mortgage Interest Rate For a conventional Home Price 2.5% 2.75% 3% 3.25% 3.5% 3.75% 4% 4.25% loan, the multiplier is 3.85 for a 2.5 percent $100,000 81.6% 81.3% 80.9% 80.6% 80.2% 79.8% 79.5% 79.1% interest rate. That $125,000 76.3% 75.8% 75.4% 74.9% 74.5% 74.0% 73.5% 73.0% means a household $150,000 70.9% 70.3% 69.8% 69.3% 68.8% 68.3% 67.7% 67.2% can afford a home $175,000 65.8% 65.2% 64.6% 64.0% 63.4% 62.8% 62.2% 61.6% priced at 3.85 times $200,000 60.8% 60.1% 59.5% 58.8% 58.1% 57.4% 56.7% 56.0% the household’s $225,000 55.7% 55.0% 54.3% 53.8% 53.2% 52.6% 52.1% 51.5% income. The multi$250,000 51.7% 51.1% 50.5% 49.9% 49.3% 48.6% 48.0% 47.3% plier drops to 3.5 for $300,000 44.4% 43.6% 42.9% 42.2% 41.4% 40.6% 39.9% 39.1% a 4 percent interest $400,000 30.6% 30.1% 29.5% 29.0% 28.4% 27.9% 27.3% 26.7% rate, a 10 percent $500,000 22.4% 21.8% 21.1% 20.4% 19.7% 19.0% 18.3% 17.6% $750,000 9.4% 8.9% 0% 0% 0% 0% 0% 0% decline in home-buying potential. Note: Assumes a 30-year loan term, 80 percent loan-to-value ratio, 30 percent debt-to-income ratio, and property taxes and insurance collectively amounting to 4 percent of home price. The percentage Source: Texas Real Estate Research Center at Texas A&M University of households that SPRING 2022

Table 5. Monthly Mortgage Payment for Federally Backed Loan by Home Price, Mortgage Interest Rate Mortgage Interest Rate Home Price

2.5%

2.75%

3.25%

3.5%

3.75%

4.25%

$100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000 $300,000 $400,000 $500,000 $750,000

$713 $891 $1,069 $1,247 $1,426 $1,604 $1,782 $2,138 $2,851 $3,564 $5,346

$725 $906 $1,088 $1,269 $1,450 $1,631 $1,813 $2,175 $2,900 $3,625 $5,438

$737 $922 $1,106 $1,291 $1,475 $1,659 $1,844 $2,212 $2,950 $3,687 $5,531

$750 $938 $1,125 $1,313 $1,500 $1,688 $1,875 $2,250 $3,001 $3,751 $5,626

$763 $954 $1,145 $1,335 $1,526 $1,717 $1,908 $2,289 $3,052 $3,815 $5,723

$776 $970 $1,164 $1,358 $1,552 $1,746 $1,940 $2,328 $3,104 $3,880 $5,821

$789 $987 $1,184 $1,381 $1,579 $1,776 $1,973 $2,368 $3,157 $3,947 $5,920

$803 $1,004 $1,204 $1,405 $1,606 $1,806 $2,007 $2,408 $3,211 $4,014 $6,021

Note: Assumes a 90 percent loan-to-value ratio, 0.5 percent mortgage insurance premium, and property taxes and insurance collectively amounting to 4 percent of home price. Source: Texas Real Estate Research Center at Texas A&M University

Table 6. Income Required for Federally Backed Loan by Home Price, Mortgage Interest Rate Mortgage Interest Rate Home Price

2.5%

2.75%

3.25%

3.5%

3.75%

4.25%

$100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000 $300,000 $400,000 $500,000 $750,000

$35,867 $44,833 $53,800 $62,767 $71,733 $80,700 $89,667 $107,600 $143,467 $179,333 $269,000

$36,286 $45,358 $54,430 $63,501 $72,573 $81,644 $90,716 $108,859 $145,145 $181,432 $272,148

$36,713 $45,892 $55,070 $64,248 $73,427 $82,605 $91,783 $110,140 $146,854 $183,567 $275,350

$37,148 $46,434 $55,721 $65,008 $74,295 $83,582 $92,869 $111,443 $148,590 $185,738 $278,607

$37,589 $46,986 $56,383 $65,780 $75,178 $84,575 $93,972 $112,766 $150,355 $187,944 $281,916

$38,037 $47,546 $57,056 $66,565 $76,074 $85,583 $95,093 $114,111 $152,148 $190,185 $285,278

$38,492 $48,115 $57,738 $67,361 $76,984 $86,607 $96,230 $115,476 $153,968 $192,460 $288,690

$38,954 $48,692 $58,431 $68,169 $77,907 $87,646 $97,384 $116,861 $155,815 $194,768 $292,153

Note: Assumes a 90 percent loan-to-value ratio, 0.5 percent mortgage insurance premium, 35 percent debt-to-income ratio, and property taxes and insurance collectively amounting to 4 percent of home price. Source: Texas Real Estate Research Center at Texas A&M University

Table 7. Home Price-to-Income Multiplier by Mortgage Interest Rate (First-Time Buyers) Mortgage Interest Rate

Home Price-to-Income Multiplier

2.5% 2.75% 3% 3.25% 3.5% 3.75% 4% 4.25%

2.79 2.76 2.72 2.69 2.66 2.63 2.60 2.57

earn the required income to qualify for a conventional loan for the same priced home declines as the mortgage interest rate increases. In 2020, over 60 percent of Texas households earned the required income to qualify for a conventional loan for a $200,000 house at a 2.5 percent interest rate, but that dropped to 56.7 percent when the interest rate increased to 4 percent (Table 4).

Rising Interest Rates and First-Time Buyers Mortgage payments for federally backed loans are no different than payments for conventional loans when it comes to rising mortgage interest rates. For example, a $200,000 home has a total monthly mortgage payment of $1,426 with a 2.5 percent mortgage interest rate, but a 4 percent interest rate increases that amount by more than $100 to $1,579 (Table 5). Again, as with conventional loans, the income required to qualify for a federally backed loan changes along with the mortgage interest rate. To qualify for a federally backed loan for a $200,000 home with a 2.5 percent interest rate, a household would need an annual income of $71,733 (Table 6). TG

Table 8. Percentage of Buyers Who Earned Required Income for Federally Backed Loan by Home Price, Mortgage Interest Rate Mortgage Interest Rate Home Price

2.5%

2.75%

3.25%

3.5%

3.75%

4.25%

$100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000 $300,000 $400,000 $500,000 $750,000

82.9% 77.9% 72.8% 67.9% 63.1% 58.4% 53.9% 47.0% 33.1% 24.8% 11.1%

82.6% 77.4% 72.3% 67.3% 62.5% 57.7% 53.3% 46.3% 32.1% 24.2% 10.6%

82.2% 77.0% 71.7% 66.7% 61.8% 56.9% 52.7% 45.5% 31.5% 23.5% 10.1%

81.9% 76.5% 71.2% 66.1% 61.2% 56.2% 52.1% 44.8% 30.9% 22.8% 9.7%

81.5% 76.1% 70.6% 65.5% 60.5% 55.4% 51.5% 44.0% 30.4% 22.1% 9.2%

81.1% 75.6% 70.1% 64.9% 59.8% 54.6% 50.8% 43.3% 29.8% 21.4% 8.7%

80.7% 75.1% 69.5% 64.3% 59.1% 54.0% 50.2% 42.5% 29.2% 20.7% 0%

80.4% 74.6% 69.0% 63.7% 58.4% 53.4% 49.5% 41.7% 28.6% 20.0% 0%

A 4 percent interest rate increases that to $76,984. As with conventional loans, the maximum home price affordable to a household decreases as the income required to qualify for a loan increases. An increase in the interest rate also causes a household’s maximum affordable home price to drop (Table 7). For a federally backed loan, the home price-to-income multiplier is 2.79 for a 2.5 percent interest rate. That means a household can afford a home priced at 2.79 times the household’s income. The multiplier drops to 2.6 for a 4 percent interest rate, a nearly 7 percent decline. The percentage of households that earn the required income to qualify for a federally backed loan for the same priced home declines as the mortgage interest rate increases. In 2020, over 63 percent of Texas households earned the required income to

qualify for a federally backed loan for a $200,000 house at a 2.5 percent interest rate, but that dropped to 59 percent when the interest rate increased to 4 percent (Table 8).

2022 Homebuyer Outlook With mortgage interest rates expected to rise in 2022, homepurchasing affordability will diminish. Repeat buyers could see an estimated 3.3 to 6.6 percent decline in home-purchasing potential. For first-time buyers, it could be a 2.3 to 4.6 percent decline. The bottom line: Homeownership will become harder to attain for households across the income spectrum. Dr. Losey (clare_losey@tamu.edu) is an assistant research economist with the Texas Real Estate Research Center at Texas A&M University.

Fed Funds Rate Explained

s deﬁned by Federal Reserve Economic Data (FRED), the fed funds rate is “the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve banks) with each other overnight.” The Fed bears a dual mandate: maximize employment and adjust the fed funds rate to stabilize prices. When the Fed raises the fed funds rate, the cost of borrowing capital also increases. In other words, interest rates for credit card loans, car loans, student debt loans, and mortgage loans gradually increase. This reduces household demand for big-ticket items typically ﬁnanced by debt, such as cars, homes,

SPRING 2022

and college educations. The Fed often implements rate hikes during inﬂationary periods or when the prices of consumer goods and services consistently rise at a faster-than-average rate. In 2021, the fed funds rate averaged 0.08 percent. In March 2022, the Fed announced seven interest rate hikes over 2022, each forecasted to be one quarter percentage point. In other words, the fed funds rate is poised to increase a total of 1.75 to 2 percentage points this year. An increase in the fed funds rate will not necessarily result in the same increase for other interest rates. For example, a 0.75 percentage point

increase in the fed funds rate does not necessarily equate to a 0.75 percentage point increase in the mortgage interest rate. Throughout its history, the Fed’s only direct impact on interest rates has been through the fed funds rate. However, quantitative easing programs have resulted in almost $2.7 trillion of mortgage-backed securities sitting on the Fed’s balance sheet as of March 2022, when their monthly buying program ended. The absence of purchases—or even potential sales—going forward will have a direct but unknown impact on longer-term interest rates.

Commercial

Q O T T H G I FL Retaining Talent in the

The past 18 months show a flight to quality in office space leases. A corresponding trend suggests higher retention of high-value talent in companies with a strong culture. Understanding and acting on this correlation could transform the Great Resignation into the Great Return for office building owners willing to invest. By Harold D. Hunt 20

One fallout from the pandemic is the mass exodus of many Americans from the workforce, a phenomenon Texas A&M University professor Anthony Klotz first called the “Great Resignation.” What does the Great Resignation mean for office space demand in the coming years? The answer will be the difference between success and failure in an important sector of commercial real estate. A clear-cut solution is needed that can mitigate the impact, for better or for worse. To address this question and others, Texas Real Estate Research Center Research Economist Dr. Harold Hunt interviewed Steve Ramseur, JLL chief innovation officer, Americas, and executive professor for Texas A&M’s Master of Real Estate program; and Bucky Banks, associate director and executive assistant professor for Texas A&M’s Master of Real Estate program in Mays Business School. TG

Y T I L A U Q Great Resignation

attraction is targeted capital investments in office space. We’re seeing companies with Class A cultures invest in the renovation of their Class A space. As a result, they’re attracting and retaining the best workers. At JLL, we’ve been seeing some extremely favorable office concession packages. Some landlords are offering up to nine months free rent and more than $70 per square foot in tenant improvements. Top-tier companies are continuing to lease large blocks of Class A space all across the country, but they’re also spending their tenant improvement money in innovative ways. Google is one example. The company recently took down 679,153 square feet in Atlanta and now has an A+ employee retention score. More than 80 percent of their employees say they’re excited to go to work every day. This places them in the top 5 percent of all companies for retention, work culture, and happiness according to comparably.com, a firm that compares employers, brands, and salaries. Other companies, like Amazon and Goldman Sachs, scored high in these areas as well. So, the best companies are willing to invest in their culture. And part of that investment is putting capital into the right tenant improvements in modern, high quality properties (see sidebar).

Hunt: What’s your take on why so many people have been quitting their jobs? Banks: Around 30 million people wound up quitting their job

Hunt: There’s been increasing concern about employee attrition during the pandemic and its impact on future office space requirements. How are forward-thinking companies addressing this problem as it relates to investment in their physical space? Ramseur: I think one antidote to the Great Resignation we’ve been witnessing may be hiding in company office space. The U.S. office market is experiencing a post-pandemic flight to quality, but it’s a specific type of quality. Our research at JLL shows net absorption of about 40 million square feet in U.S. office buildings renovated since 2015. Meanwhile, we’ve recorded negative net absorption of about 189 million square feet for the rest of the market, the older properties. Since 2015, about one in four Americans quit their job. One possible answer to converting employee attrition back to SPRING 2022

in 2021. That’s despite persistent economic uncertainty and the COVID-19 pandemic. We see this trend across nearly all demographic categories. Surprisingly, the bulk of quits are among workers age 30 to 45, and that age group has registered a year-over-year increase of more than 20 percent. Such high attrition in this age cohort isn’t typical. Popular opinion attributes job quits to a number of factors, including burnout, better-paying opportunities elsewhere, and the desire for greater work flexibility. But a deeper dive into the problem reveals a different root cause. A 2021 report by McKinsey & Company discovered that a lack of purpose and meaning at work, combined with an absence of a sense of belonging, were much stronger motivations for quitting. I believe these factors represent the real core disconnect between what employees and their company value. A November 2021 article in the Harvard Business Review discovered something similar. Research was carried out over 20 years and captured more than 800,000 data points. Workers were asked what they really value at work. Both white-collar and blue-collar workers across all industries identified four major areas. They were purpose, value, belonging, and certainty. The survey also showed these four worker priorities have remained consistent across changing political, social, and economic environments as well as generational cultures. What’s interesting is how consistent these answers are over time. What workers value really hasn’t changed that much, but the global pandemic has finally brought these established values to the surface.

Land Markets

How Proximity to and Direction from Downtown Affect Urban Land Prices

A recent Austin study shows how city land prices change with distance from downtown, in direction from downtown, and over time. By Adam Perdue 24

any things determine the price of land in a city. The most basic urban economics models consider only distance from downtown, which is commonly considered the center of economic activity because of its highwage jobs and consumer amenities. Workers and residents are often willing to pay higher prices for land near downtown districts because living there lowers travel costs. Although this model produces a simple, smooth bid price gradient for land, the real world is more complicated. Jobs and amenities, while centered around downtown, are spread out to some extent. Transportation costs will vary based on infrastructure, and government policy can have different impacts as well. Such real-world influences are why “location, location, location” will always be a real estate truism. TG

Austin I-35, East, West Corridors

INTERSTATE

183

130 190

190 183

Downtown Austin I -35 Corridors East and West Corridors

130 INTERSTATE

Sources: Esri, HERE, Garmin, FAO, NOAA, USGS, © OpenStreetMNap contributors, GIS User Community, and Texas Real Estate Research Center at Texas A&M University

Studies consistently show distance from downtown does have an independent impact on land prices in cities. Estimated land price gradients around a city, or any other valuable location, reveal a relationship between average market price paid for land and the distance of the land from that valuable location. Because of travel costs’ influence on the price gradient, prices for land near a major transportation corridor would be expected to fall at a lower rate than prices for land farther away. Also, in any given direction there may be alternative amenities that support higher land prices in that general direction or within a localized area within a corridor. SPRING 2022

Austin Land Price Gradient by Corridor

his analysis looks at estimated land price gradients of four alternative corridors in the Austin area: I-35 North, I-35 South, and the eastern and western corridors. North versus south and east versus west are defined relative to the center of the Congress Street Bridge over the Colorado River. The I-35 corridors include the area within five miles of I-35. The east and west corridor is a straight-line corridor generally perpendicular to I-35 where it crosses the Colorado River. The map shows all known lots and land sales in these corridors

Figure 1. Nominal Land Prices by Year, Austin East Corridor

80 Dollars Per Square Foot

IN 2020, the per-square-foot cost of land in downtown Austin was around $100 compared with less than $5 per square foot for land 35 miles away in any direction.

60 40 20 0 0

10 15 20 25 Distance from Congress Street Bridge (in miles)

2005

2010

2015

2020

Source: Texas Real Estate Research Center at Texas A&M University

Dollars Per Square Foot

160

Figure 2. Nominal Land Prices by Year, Austin West Corridor

Dollars Per Square Foot

120

over the analysis period. The Austin region was defined as the Austin Metropolitan Statistical Area (MSA) plus contiguous counties. 40 ominal land prices along each corridor increased regularly from 2005 through 2010, 2015, and 2020 (Figures 1-4). Land 0 prices for 2005 and 2010 are relatively close, 0 5 10 15 20 25 30 35 largely because 2005 was the beginning of the Distance from Congress Street Bridge (in miles) run-up in housing and land prices before the Great 2005 2010 2015 2020 Recession, and 2010 was the bottom of the lull Source: Texas Real Estate Research Center at Texas A&M University after the bust. Since 2010, lots and land prices across corridors have consistently increased, with significantly larger absolute increases closer to downtown Austin. Figure 3. Nominal Land Prices by Year, Austin I-35 North Corridor 80 Figures 5 and 6 show the estimated land price gradients for each corridor for 2005 and 2020, respectively. 60 In 2005, the eastern corridor had the consistently lowest land price gradient until 18 miles out. By that point, the gradient had reached a min40 imum and started to increase, possibly because it was approaching some other local attraction, and not just because of its proximity to Austin. 20 The southern corridor had the highest average estimated land price in the 2005 first-mile estimates, but a steep gradient led to the corridor 0 having the second-lowest prices after 12 miles. 0 5 10 15 20 25 30 35 Land prices in the north were the second lowest Distance from Congress Street Bridge (in miles) for the first few miles, but a flat gradient made them 2005 2010 2015 2020 the second highest at miles 12 through 15. After Source: Texas Real Estate Research Center at Texas A&M University that, the north had the highest estimated prices.

Figure 4. Nominal Land Prices by Year, Austin I-35 South Corridor

Dollars Per Square Foot

160 120 80 40

0 0

10 15 20 25 Distance from Congress Street Bridge (in miles)

2005

2010

2015

2020

Source: Texas Real Estate Research Center at Texas A&M University

Figure 5. Austin Nominal Land Price Comparison, 2005

Location, Location, Location Austin land prices are obviously not constant, and “location, location, location” includes distance and direction from many possible points of interest. The relative values of different locations are also not fixed through time. Even by considering only direction and distance to downtown, one can see the potential influence of the great many considerations that people may put into deciding where to live and work within the greater region. Dr. Perdue (aperdue@tamu.edu) is a research economist with the Texas Real Estate Research Center at Texas A&M University. SPRING 2022

0.1 0

10 15 20 25 Distance from Congress Street Bridge (in miles)

East

West

North

South

Source: Texas Real Estate Research Center at Texas A&M University

Figure 6. Austin Nominal Land Price Comparison, 2020

100 Dollars Per Square Foot

The western region consistently showed some of the highest estimated land prices from close in through mile 15. Land prices in 2020 increased from 2005, but there was less relative difference between the corridors (Figure 6). Close to town, the southern and western corridors continued to have the highest estimated land prices, and most of the patterns described for 2005 remained. Over this period, the eastern corridor’s estimated land prices rose the quickest, closing the gap with the southern corridor’s gradient by the 12th mile. The relative differences in the slopes of the northern and western corridors have also shifted so the northern corridor generally shows the highest estimated land values from mile 12 onward.

Dollars Per Square Foot

100

0.1 0

10 15 20 25 Distance from Congress Street Bridge (in miles)

East

West

North

South

Source: Texas Real Estate Research Center at Texas A&M University

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Articles inside

How Higher Interest Rates Affect Homebuying

Legislation Limbo

Sticker Shock