Outlook for the Texas Economy

January 2018 Summary1

A strong U.S. economy and rising energy prices supported growth in the Texas economy. Texas crude oil production reached a cycle-high as global trade factors tipped in the state’s favor. The bomb-cyclone storm jolted the demand for utilities but stifled activity in the service sector. Texas created 16,000 jobs amid solid growth in the goods-producing sector. The labor market tightened further, driving the economy towards full employment. Potential headwinds to the Texas economy include decreased housing affordability, energy price volatility, and trade uncertainty.

The Texas economy advanced as the Dallas Fed’s Business-Cycle Index (a measure of current economic activity in the state) posted 4.8 percent quarterly annualized growth. The metropolitan business cycle indices were positive across the Texas Urban Triangle, led by Austin at 8.0 percent. Dallas and San Antonio maintained solid growth at 4.2 and 3.7 percent, respectively, while rebuilding efforts supported 5.7 percent growth in Houston. Meanwhile, weaker job creation in Fort Worth slowed the index to 1.8 percent.

The Texas Leading Economic Index (a measure of future directional changes in the business cycle) reached a two-year high amid higher oil prices, gains in the U.S. leading index, and declines in the Texas value of the dollar (a weight on Texas export competitiveness). Despite lagging wages, the Texas Consumer Confidence Index jumped 13.3 points as the business-cycle expansion continued.

Robust U.S. and global economic growth heightened inflation expectations and elevated interest rates. In their January meeting, the Federal Reserve Board hinted at three federal funds rate hikes this year as the national economy hovered around full employment. The ten-year U.S. Treasury bond yield rose 18 basis points to 2.58 percent, its largest monthly gain in over a year. The Federal Home Loan Mortgage Corporation 30-year fixed-rate jumped above 4 percent, maintaining upward momentum. While rates remained low by historical standards, even slight increases could hinder mortgage financing, particularly for first-time homebuyers.

Shortages of homes priced less than $300,000 restrained Texas housing sales to 1 percent growth and heightened affordability challenges. Current residential construction activity, measured by the Residential Construction Cycle (Coincident) Index, inched forward as industry employment expanded. Growth in weighted building permits and housing starts accelerated the Texas Residential Construction Leading Index (RCLI) to its highest level since 2007, signaling improvements in residential construction activity to start the year. On the demand side, economic growth decreased the statewide foreclosure rate to 0.6 percent, down from its 2010 peak of 2.1 percent. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)

The average West Texas intermediate crude oil spot price increased to $63.702, the highest since 2014, driven by robust global demand and diminishing U.S. stockpiles. The number of active rigs in Texas rose to 4562, up 35.7 percent year over year, as activity accelerated in both the Permian and Eagle Ford Basin. Higher crude oil prices pushed Texas production above 3.9 million barrels per day2, accounting for 41 percent of national output. The opening of the Midland-to-Sealy Pipeline in November 2017 improved the regional supply chain and is scheduled to expand operations this year. The Henry Hub natural gas spot price jumped 14.4 percent to $3.69 per million BTU2 (British thermal units) after the bomb-cyclone storm lingered in the southern and northeastern United States but normalized later in the month.

Texas monthly nonfarm employment added 16,000 jobs led by growth in the goods-producing sector. Theunemployment rate held at 4 percent, slightly below the national level, while metropolitan unemployment balanced even lower. Houston was the exception with unemployment above 4 percent but remained below its 5.8 percent long-run average. Reduced initial unemployment insurance claims corroborated the general labor force tightening and could drop the unemployment rate even lower. Data revisions indicated an improved labor force participation rate at 63.4 percent, rather than slipping below 63 percent as previously reported.  An aging workforce, however, continues to pressure labor force participation downward throughout the nation.

At the Texas metropolitan level, Houston added the most jobs at 5,300, primarily from gains in education, health services, and the energy sector. Austin had the largest proportional increase at 0.5 percent, as retail jobs stabilized after a six-month decline. Manufacturing rebounded in San Antonio after a fourth-quarter slide last year, balancing total monthly growth at 1,600 new jobs. North Texas employment stagnated for the second straight month as professional-business services and wholesale trade hindered Dallas and Fort Worth, respectively. The sluggish stint, however, should be transitory as the region’s economic expansion generated the most job creation across the state in 2017.

Statewide, the goods-producing sector added 7,200 jobs as higher oil prices boosted energy sector activity. The manufacturing sector improved, adding 2,400 jobs, but could stagger amid potential U.S. tariffs on foreign steel and aluminum. Manufacturing job growth hovered around 3 percent (quarterly annualized) in Austin, Dallas, and Fort Worth, followed by Houston at 1.5 percent.

The Dallas Fed’s Texas Manufacturing Outlook Survey noted positive, yet slowing employment trends in the industry. The production index extended a 19-month upward trend with 25 percent of companies increasing capital expenditures. Companies revealed reinvestment plans following the recent tax cuts and favored the weakened value of the dollar. Skilled labor shortages remain the primary complaint across the manufacturing sector.

Rebuilding efforts along the Gulf Coast propelled construction employment growth above 11 percent (quarterly annualized). The total value of Texas construction rose 2.4 percent on a three-month moving average after sliding through most of 2017. Multifamily residential construction accounted for most of the monthly uptick, followed by school and hospital construction. Additionally, hotel and motel investment poured into all the major metros except Austin.

Texas’ service-providing sector inched forward, creating 8,800 new jobs, nearly 30,000 less than a year ago. Steady contractions in retail trade and the information sector hindered this month’s expansion. The Texas Service Sector Outlook Survey corroborated lackluster employment growth as all the labor indices decelerated. The revenue index fell sharply after the cold front stormed through the state early in the month. Respondents expressed concerns regarding NAFTA renegotiations and the lack of the H-2B visa “returning worker” exemption.

The cold weather disproportionately affected the retail industry, resulting in 2,400 lost jobs. The Texas Retail Outlook Survey reflected the seasonal impact as the sales index crashed 28.8 points into negative territory, while the future business conditions indices held firm. Labor market tightness forced retailers to compete for the limited supply of skilled workers through wage and benefit increases.

Despite low unemployment levels, employee compensation remained stagnant as real Texas private hourly earnings fell 0.8 percent, pulling YOY growth into negative territory. Houston and San Antonio wages suffered disproportionately, contracting more than 3 percent YOY. Hourly earnings fell 0.3 and 0.4 percent YOY, respectively, in Austin and Fort Worth. Dallas remained the exception with 2.1 percent YOY wage growth but showed signs of slowing.

While Texas wages lagged the national level by $0.44, Texas manufacturing jobs paid a 10 percent premium in hourly earnings relative to U.S. average. Fort Worth had the highest manufacturing wages, paying 47.1 percent more than the statewide average but dipped 3.6 percent YOY. Manufacturing earnings were relatively unchanged in Houston and Dallas compared to January 2017. San Antonio remained the outlier for manufacturing wage growth, rising 14.4 percent YOY but remained 15.4 percent below the Texas average.

The U.S. Consumer Price Index (CPI) surpassed 2 percent growth YOY for the fifth consecutive month as cold weather elevated energy costs. The core inflation rate, which excludes the often-volatile energy and food sectors, approached the 2 percent YOY benchmark amid rising medical care and transportation prices. The Dallas CPI was higher at 2.7 percent YOY after balancing above 3 percent in 4Q17. Affordable housing constraints pushed Dallas residents into the rental market, where prices inflated 5 percent YOY.

Increased trade in transportation equipment and primary metal manufacturing held Texas total commodity and manufacturing exports near record levels, despite a pause in the petroleum industry. Bolstered by higher oil prices,Texas crude oil exports increased 167 percent YOY and accounted for 87 percent of the national total. The Texas trade-weighted value of the dollar3 extended its downward trend, falling 8.8 percent YOY and boosting the attractiveness of Texas goods and services to foreign consumers.

Strong global economic growth and the falling value of the dollar should support export growth early this year. Mexican and Canada received nearly half of January exports, remaining Texas’ primary trade partners. This trilateral relationship highlights the importance of a successful NAFTA renegotiation. The potential of increased tariffs and global trade conflicts present an additional headwind to Texas trade activity.

____________________

1 All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
2 Nonseasonally adjusted.

3 The Texas trade-weighted value of the dollar is generated by the Federal Reserve Bank of Dallas. Its release typically lags the Outlook for the Texas Economy by one month.

WalletHub: Texas has sixth-highest property tax rate

​​WASHINGTON, D.C. (WalletHub) –

Texas has the sixth-highest property tax rate in the nation, according to online financial website WalletHub.

The Lone Star State’s tax rate is 1.86 percent, WalletHub says, putting it behind New Jersey (2.4 percent), Illinois (2.32 percent), New Hampshire (2.19 percent), Connecticut (2.02 percent), and Wisconsin (1.95 percent).​

To rank the states, WalletHub compared U.S. Census Bureau data for the 50 states and the District of Columbia. Analysts divided the median real estate tax payment by the median home price in each state. They used the resulting rates to obtain the dollar amount paid as real estate tax on a house worth $184,700, the median value for a home in the U.S.​

Texas Housing Insight-REC TAMU


James P. Gaines, Luis B. Torres, Wesley Miller, and Bailey Cuadra (Feb 6, 2018)

2017 Annual Summary
The Texas housing market held steady as sales rose 4 percent, maintaining the current four-year average. Demand remained robust, particularly in the resale market as buyers searched for affordable housing. Rapid home price increase and stagnant wages pared Texas’ affordability advantage, presenting a growing problem throughout the state. Supply conditions showed signs of improvement but failed to relieve pronounced market imbalances, particularly for homes priced below $300,000. Marked shortages will likely continue unless builders shift construction toward this price cohort, a difficult task amid rising land cost and skilled-labor shortages.

In 2018, single-family housing sales are projected to reach 6.6 percent growth before moderating in 2019. Economic acceleration and employment growth in Texas bodes well for housing demand. Price pressures are projected to ease slightly as homebuilders stretch to increase production in the entry- and first move-up markets, where houses generally range between $150,000 and $250,000.

Supply*
The Texas Residential Construction Cycle (Coincident) Index, which measures current construction activity, accelerated 3.8 percent annually as residential construction values and industry employment advanced. Growth in weighted building permits and housing starts pushed the Texas Residential Construction Leading Index (RCLI) up 3.6 percent, signaling increased residential construction activity in early 2018.

In response to market imbalances, developers accelerated building activity at the earliest stage of the construction cycle. The number of vacant developed lots (VDLs) in the Texas Urban Triangle reached its highest level since 2011, continuing a four-year climb after bottoming out in 2014. In Dallas-Fort Worth (DFW) and Austin, the number of VDLs increased 6.1 and 6.6 percent, respectively, as builders scrambled to satisfy housing demand. San Antonio VDLs reached 2010 levels during steady 3.3 percent growth. Houston also posted 3 percent growth amid a fourth quarter recovery following Hurricane Harvey. Despite recent increases, VDLs were nowhere near pre-recessionary levels in actual or per capita terms.

Similarly, Texas single-family housing construction permits (unweighted) grew 8.2 percent annually but lagged well below their 2006 peak. Permits in Dallas and Fort Worth increased 12.1 and 26.3 percent, respectively, after marginal gains in 2016. Austin recorded similar permit growth at 12 percent. San Antonio permits slid in the fourth quarter but maintained 16.3 percent annual growth. Houston remained the national leader in single-family permits issued, despite more moderate 3.4 percent growth.

Upward trending supply factors supported 4.6 percent growth statewide in single-family private construction values. The boost in VDLs and single-family permits materialized into 11.4 and 7.6 percent growth in Austin and DFW construction values. A sluggish fourth quarter weighed on San Antonio, but early gains led to 6.4 percent growth annually. Houston single-family construction values stabilized, ticking up 1.2 percent after two straight annual contractions. Residual building stimulus from the hurricane recovery should support further growth into 2018.

After dipping in 2016, total Texas housing starts finished the year up 3 percent—slightly above the 2.4 percent national rate. Market forces pulled construction activity from the saturated multifamily sector to the undersupplied single-family industry. At the national level, housing starts fell 9.3 percent for multifamily homes, while rising 8.4 percent in single-family construction. In DFW, the building boom continued as single-family starts rose 10.8 percent, the sixth-straight year of double digit growth. Single-family starts in San Antonio and Houston posted their strongest gains since 2014 at 10 and 8.2 percent, respectively. After spiking 29.5 percent last year, Austin maintained elevated single-family start levels, leading the state in per capita terms. Despite these supply-side shifts, builders struggled to fully satisfy single-family demand amid rising costs and skilled-labor shortages.

Growth in supply factors did not keep pace with housing demand, thereby magnifying market imbalances. The Texas months of inventory (MOI) settled at 3.7 months after a 9 percent slide in the second half of the year; a MOI around six months is considered a balanced housing market. Fewer active listings combined with constant demand pressure prevented inventory levels from expanding. The MOI remained particularly constrained for homes priced under $300,000, where the supply of active listings bottomed out around three months, marking the closest resemblance to stabilization this decade. Consequently, rampant demand spilled over to the higher-end markets, where inventory levels were more sustainable.

Inventories stabilized in both the new and existing home market. The Texas MOI for existing homes ticked up to 3.4 months, its first annual increase since the data series began in 2011. In the new home market, the MOI held steady around its three-year trend of five months. However, the current balancing could be transitory as inventories in trended downward in both markets during the second half of the year.

Statewide, North Texas observed the tightest housing supply. Fort Worth maintained the lowest inventories at 1.9 and four months for existing and new homes, respectively, followed by Dallas at 2.1 and 4.4 months. Austin inventories showed signs of improving, surpassing 8 percent growth for both resale (2.1 months) and new home MOI (4.7 months), respectively. In contrast, inventory levels continued to decline in San Antonio to 3.1 and 4.5 months in the existing and new home markets, respectively. The supply of resale homes was similarly constrained in Houston at 3.4 months, while the new home MOI remained at more balanced levels above five months.

Demand
Total Texas housing sales managed 4 percent annual growth, outpacing the national rate for the second straight year. Sales increased uniformly across the state, rising between 3 and 4 percent in all the major metros except Houston. Sales in Houston slowed abruptly during the summer months and after the hurricane but recovered enough to match last year’s growth rate at 2.6 percent.

In the new home market, disappointing fourth quarter sales volume drove Houston’s annual growth rate below zero for the third straight year. On the other hand, positive year-end performance in DFW and San Antonio pushed annual new home sales up 12.7 and 6.1 percent, respectively. In Austin, new home sales activity decelerated but maintained 6.1 percent annual growth.

Rapid price increase and supply constraints shifted the sales distribution away from the lowest price cohort (homes priced under $200,000), where sales accounted for 41 percent of homes sold through a Multiple Listing Service (MLS)—down from 68 percent in 2011. Every other price cohort posted double-digit annual growth, led by homes priced $300,000–$400,000 at 16.3 percent.

After sinking to a record low last year, the homeownership rate in Texas and the nation ticked up to 63.8 and 61.7 percent, respectively. The recent rise in home purchases by Millennials relieved some of the downward pressure associated with an aging population. Of the Texas major metros, San Antonio maintained the highest homeownership rate at 62.3 percent, followed by Dallas at 61.8 percent. Homeownership in Austin and Houston dwindled to record lows of 55.6 and 58.9 percent, respectively.

Texas housing demand remained robust as the average days on market (DOM) hovered at 58 days for the third consecutive year. Homes priced $200,000–$300,000 sold the fastest, averaging 52 days on the market, while homes under $200,000 averaged just over 60 days. Demand was softer in the top price cohort (homes priced above $500,000), where homes sold on average after 88 days, down from 118 days in 2011.

Resale demand reached an all-time high as homebuyers searched for lower-priced alternatives. The existing home days on market remained historically low at just 52 days. Rising prices pulled many prospective buyers into the resale market. In Dallas and Fort Worth, the resale DOM settled at 32 and 34 days, respectively, amid soaring home values. In San Antonio, the average existing home sold after 50 days, nearly half the average in 2011. In contrast, the resale DOM in Austin and Houston expanded for the second straight year to 43 and 48 days respectively, indicating a slight softening of demand.

New home demand balanced on a three-year trend in Texas, averaging 90 days on the market. The lack of new home inventory and rising prices challenged the Austin market, holding the DOM at 99 days. Despite higher inventory levels in Houston, new home demand was also soft with an annual DOM of 95 days. New home demand eased in San Antonio, particularly late in the year, pushing the DOM up to 86 days. New homes sold fastest in Dallas and Fort Worth, averaging 82 and 76 days on the market, respectively.

Interest rates closed the year on a high note after U.S. legislators passed tax legislation, and the Federal Reserve raised the federal funds rate for a third time in 2017. Investors sold off bonds in expectation of rising inflation and further interest rate increases. The ten-year U.S. Treasury bond yield increased nearly half a percent annually, settling at 2.33 percent. As expected, the Federal Home Loan Mortgage Corporation 30-year fixed-rate ticked up similarly to 3.99 percent, mirroring changes in the ten-year bond yield. Rates remained low by historical standards but showed signs of trending upward.

Prices
The health of the Texas economy combined with housing supply constraints elevated home prices to record levels. The median sale price increased by more than $13,000 to an annual average of $222,106, with home values appreciating across the state. Most of the price pressure occurred in the resale market, where the statewide median jumped 6.8 percent to $211,844. The resale median price was highest in Austin at $291,904, but North Texas posted the largest percentage growth. In Dallas ($266,775) and Fort Worth ($210,100), the median resale price rose 9.3 and 11.9 percent, respectively, as single-family demand boomed. Price increase was more modest in Houston and San Antonio, but they also recorded annual records with a median resale price of $216,467 and $199,583, respectively.

Softer demand and more sustainable inventory levels held new home prices to moderate growth. The median price for new homes sold through an MLS ticked up only 1.4 percent to $290,662. Similarly, new home prices in the major metros increased modestly compared to the resale market. Dallas maintained the highest median price at $351,559, up 2.2 percent over the year, while the Fort Worth median approached $300,000. The median price for new homes in Austin rose to $316,088, just $15,000 higher than the resale median. In Houston and San Antonio, new home prices actually depreciated, falling to $305,422 and $257,635, respectively.

In terms of price per square foot (ppsf), the new home median rose 3.2 percent as homebuilders reduced square footage amid rising land costs and burdensome regulations. The median lot size for new homes fell for the third consecutive year to 2,373. In contrast, the statewide median ppsf for existing homes accelerated 6.3 percent, surpassing $106 for the first time in series history.

At the metro level, Austin led the state in median ppsf for both new and existing homes at $140.94 and $145.04 ppsf, respectively, and was the only major metro to pay a premium for existing-home square footage. However, the median ppsf for existing homes in Dallas jumped 9.3 percent to $123.87, a little less than six dollars below the new home ppsf. The spread between new and existing ppsf was wider in the remaining metros but continued to converge. The median new home ppsf settled at $121.15 and $119.23 in Fort Worth and San Antonio, respectively, while the resale ppsf rose to $108.04 and $104.79. The median ppsf was lowest in Houston at $116.03 and $100.21 for new and resale homes, respectively.

The Texas sale-to-list price ratio hovered around 0.96 in both the new and resale home market. New home ratios inched down in all major metros except Houston, indicating slightly weaker demand. For existing homes, Dallas and Fort Worth recorded sale-to-list price ratios around 0.98 as homes continued to fly off the market. Austin and Houston posted slight dips to 0.97 and 0.95, respectively, but remained historically high. In general, elevated sale-to-list price ratios across the state indicated a continuing sellers’ market across the housing spectrum.

Texas housing affordability remained favorable compared to other stats but continued the steady decline that began in 2013. Rapid price increase, fueled by shortages of homes priced under $300,000, challenged Texas buyers. Stagnant wages failed to keep pace with home values, driving the Real Estate Center Affordability Index to 1.5, its lowest level since the housing crisis. The index indicated that a family earning the median income could afford a home 50 percent more than the median sale price. For much of the past decade, Texans enjoyed the capability of affording homes priced twice that of the median. Fort Worth and Houston boasted the highest affordability conditions at 1.8 and 1.7, respectively, but had substantial declines over the past year. In Austin and Dallas, affordability fell below 1.5 amid rampant home price increases. San Antonio fared similarly with a significant drop in the affordability index from 2.4 to 1.6.

Furthermore, the Explosive Behavior Map indicated a misalignment in North Texas home prices relative to their fundamental-based normative values. This behavior stretched south into Waco and College Station-Bryan. Recent price movements in the remaining major metros, as well as in Midland, also warrant careful attention

2017 record year for San Antonio housing market

An aerial view of a lot of houses.

 

SAN ANTONIO – The area’s growing economy propelled the local housing market to another record sales year in 2017, but the supply of homes on the market remains extremely tight.

Home sales in the San Antonio-New Braunfels metro area increased by 3.8 percent in 2017 to a record 30,715, up from 29,596 in 2016, according to data released from the San Antonio Board of Realtors.

The median sales price climbed 4.9 percent to a record high of $214,300, up from $204,300 the year before.

High demand, a labor shortage and rising construction costs are driving up prices, experts say.

The local area’s inventory of available homes dropped to 3.1 months in December, which matches the record low set in December 2016.

“San Antonio is still doing pretty strong,” said Dr. Jim Gaines, chief economist at the Real Estate Center at Texas A&M. “It’s doing well economically, it’s still gaining jobs.”

 

Read more at mysanantonio.com

IKEA pieces fit for Bexar County store

IKEA closed on its plot in Live Oak on Dec. 5, according to deeds records, and construction of its future 300,000-square-foot store is scheduled to begin in March.

LIVE OAK, BEXAR COUNTY – IKEA completed its acquisition of 30 acres in Live Oak, and construction of its future 300,000-sf store is scheduled to begin March 2018.

The estimated $30 million project is expected to be completed in March 2019.

Following IKEA’s acquisition, real estate firm Weitzman announced it will start construction immediately on the Live Oak Town Center, of which IKEA will be the anchor tenant.

In addition to IKEA, the shopping center will have about 530,000 sf of retail, restaurant, entertainment and hospitality space.

The first phase will deliver in late 2019.

 

Read more at the San Antonio Business Journal

See also: San Antonio-New Braunfels Retail Market Research.

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Outlook for the Texas Economy

October 2017 Summary1

The Texas economy advanced as Houston’s recovery continued, and the price of oil reached an eight-month high. Rebounds in leisure-hospitality and accommodation-food services pushed monthly employment growth above 71,000 new jobs. The statewide unemployment rate fell to a record low 3.9 percent but failed to significantly boost wages. Gulf Coast rebuilding efforts supported the construction industry, generating rapid job creation and increased construction values. A combination of higher oil prices and declines in the Texas trade-weighted value of the dollar boosted crude oil exports to record levels. Potential headwinds to the Texas economy include energy price volatility and trade uncertainty, especially with Mexico.

Recently released 2Q17 gross state product data for Texas indicated 6.2 percent quarterly annualized growth amid accelerated activity in mining, manufacturing, and real estate. The economic expansion continued through the third quarter as the Texas Business Cycle Index (a measure of current economic activity in the state) posted over 5 percent quarterly annualized growth in each of the past three months. The Austin and San Antonio indices surpassed the state level at 7.2 and 5.7 percent quarterly annualized, respectively, after solid job gains and falling unemployment. Similarly, the Dallas index accelerated above 5 percent for the first time this year, while Fort Worth slowed slightly to 3.6 percent growth. Hurricane recovery efforts stabilized the Houston index after contracting 5.5 percent in the previous month.

The Texas Leading Economic Index (a measure of future directional changes in the business cycle) inched forward as growth in the U.S. leading index and higher oil prices outweighed a slowdown in monthly well permits issued. The Texas Consumer Confidence Index flattened after taking a double digit hit from Hurricane Harvey in the previous month but should trend upward as the economic expansion advances.

Interest rates elevated after the U.S. Senate approved a budget resolution, opening the door for tax reform. The potential deficit increase resulting from tax breaks would expand the number of bonds issued, weighing on the price of existing debt. If tax cuts sufficiently stimulate economic activity, it could attract investors away from bonds in favor of riskier assets. Yields received an extra boost after the release of the Federal Reserve Board minutes, indicating a high likelihood of raising the federal funds rate in December. As a result, the ten-year U.S. Treasury bond yield rebounded from a year-to-date (YTD) low last month, reaching 2.36 percent. The Federal Home Loan Mortgage Corporation 30-year fixed-ratealso reversed its downward trend, reaching 3.9 percent after slipping in the third quarter.

Texas housing sales expanded across the state despite shortages of homes priced under $300,000. Current residential construction activity, measured by the Residential Construction Cycle (Coincident) Index, flattened as industry employment gains offset falling construction values. However, rebounds in weighted building permits and housing starts accelerated the Texas Residential Construction Leading Index for the first time since March, signaling increased activity in upcoming months. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)

The average West Texas intermediate crude oil spot price increased to $51.582, the highest since February, driven by geopolitical tension in the Middle East and hopes of extended OPEC production cuts. Despite the number of active rigsin Texas falling to 4422crude oil production rebounded 6.0 percent amid rising well completions. Increased shale activity could counter OPEC supply cuts, thereby hindering upward oil price momentum. The Henry Hub natural gas spot price fell to $2.88 per million BTU2 (British thermal unit) despite decreased global supply, a trend that could continue amid predictions of a colder-than-average winter in the northern United States.

Texas monthly nonfarm employment added 71,500 jobs as Houston landed back on its feet after two months of hurricane-related payroll declines. The Texas unemployment rate dipped to a record low 3.9 percent as labor markets tightened across the state. In Austin, the unemployment rate fell to 2.7 percent, the lowest since 1999. Unemployment fell to 3.2 percent in both Dallas and Fort Worth, while settling at 3.0 percent in San Antonio. Houston unemployment persisted above the state level at 4.4 percent, still well below its historical average. Revised data revealed a surge in initial unemployment insurance claims in Texas through September, rather than the large drop reported last month. However, the series shifted to more typical levels, falling 29.6 percent this month and should decline even further as the Houston economy recovers. Despite the tightening labor market, the Texas labor force participation rate remained at a historically low 63.0 percent.

This month’s payroll expansion occurred primarily in Houston, where recoveries in the leisure and hospitality industry as well as retail trade led to 27,300 total new jobs. Dallas added jobs in both goods-producing and service-providing sectors, elevating its 2017 job creation total to 41,500. San Antonio maintained the largest YTD job growth rate at 2.3 percent, adding over 2,300 jobs in each of the past five months. Austin and Fort Worth added 3,000 and 2,500 jobs, respectively, as growth in leisure and hospitality offset goods-producing employment contractions.

Statewide, the service-providing sector more than recovered the 15,800 jobs lost in August and September. The leisure and hospitality subsector led the charge with 34,700 jobs created, followed by accommodation and food services with 30,000. The Texas Service Sector Outlook Survey corroborated these trends as the wages and benefits, hours worked, and employment indices elevated. Increases in the revenue and service sector outlook indices reflected improved conditions after the hurricane.

The retail industry fared similarly well, recovering nearly a third of the 25,100 jobs lost between February and September. The Texas Retail Outlook Survey employment indices indicated job growth but slightly lower wage pressures. Despite approaching the holiday season, retailer optimism and future outlook decelerated.

The goods-producing sector maintained its steady expansion, adding 6,800 jobs and pushing the YTD total above 84,000. Supported by higher oil prices, Texas ranked second nationally in year-over year (YOY) employment growth in mining and logging at 16.9 percent, adding 3,200 in October. The construction industry created 4,500 jobs amid rebuilding efforts around the Gulf Coast, pushing annualized growth to 3.1 percent, nearly twice the national rate. The total value of Texas construction increased for the first time on a three-month moving average since May, led by investment in stores, restaurants, offices, and bank buildings. Residential construction values remained negative, but single-family home building ticked upward.

Texas manufacturing employment growth slowed from 5.4 to 4.1 percent annualized quarterly, shedding 900 jobs this month. Dallas posted the highest manufacturing growth rate at 8.0 percent, reaching a 20-year high after lackluster performance over the past two years. Fort Worth maintained 7.7 percent growth, thereby contributing to the robustness of the manufacturing industry in North Texas. Austin’s manufacturing growth rate accelerated to 4.8 percent after stagnating late this summer, while growth in San Antonio decelerated to 2.6 percent. The Houston annualized employment growth rate fell to -2.3 percent, a drastic slide from double-digit positive readings between April and July. Houston has lost over 4,000 durable-goods manufacturing jobs since August, all of which should recover as economic conditions normalize.

The Texas Manufacturing Outlook Survey confirmed the overall industry expansion, indicating increased activity and demand. The production index extended its positive trend to 16 months, and over 30 percent of respondents reported improved business activity. The hours worked and wage indices slowed, supporting recent labor market adjustments in manufacturing, particularly along the Gulf Coast. Respondents mentioned prolonged supply chain disruptions from the hurricane and subsequent flooding but remained optimistic for the fourth quarter.

Despite low unemployment levels, employee compensation remained relatively mute throughout the state. Real Texas private hourly earnings hovered around 1.9 percent YTD after sliding in August and September. Wages fell 1.1 and 2.2 percent YOY in Fort Worth and Houston, respectively. Hourly earnings rose 0.8 percent in Austin—barely above last year’s level. Wage growth was more favorable in Dallas and San Antonio, rising 2.4 and 2.1 YOY, respectively.

While Texas wages lagged the national level by $0.40, Texas manufacturing jobs paid an 11.3 percent premium in hourly earnings relative to U.S. average. Fort Worth had the highest manufacturing wages, paying 48.2 percent more than the statewide average but were flat on the year. Manufacturing earnings fell 1.2 percent in Houston amid production process disruptions. San Antonio remained the outlier for wage growth, rising 14.7 percent YTD while remaining 19.5 percent below the Texas average.

The U.S. Consumer Price Index (CPI) fell to 2.0 percent YOY after hurricane-related energy price spikes calmed. The core inflation rate, which excludes the often-volatile energy and food sectors, increased 1.8 percent YOY, indicating upward price pressure. Prices remained elevated in Houston as the local CPI rose 2.3 percent YOY, the highest since 2014. Gasoline and medical care expenses rose over 4.5 YOY, accounting for most of the Houston inflation.

The U.S. real goods trade deficit increased by $3.1 billion to $65.3 billion as commodity imports rose and exports flattened. Total Texas commodity and manufacturing exports surged 11.2 percent and 10.7 percent, respectively, as petroleum exports returned to pre-Harvey levels. Texas crude oil exports continued to hit record highs, rising 15.8 percent amid higher oil prices. Furthermore, the Texas trade-weighted value of the dollar3 fell 10.3 percent YTD, thereby increasing the attractiveness of Texas goods and services to foreign consumers.

Strong global economic growth and the falling value of the dollar will likely support upward trending export growth throughout the next two quarters. Mexico, Texas’ largest trade partner, received more than a third of September exports but slowed economically in recent months. NAFTA renegotiations and the potential of a Mexican recession remained potential headwinds to Texas-Mexico trade activity.

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1 All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.

2 Nonseasonally adjusted.

3 The Texas trade-weighted value of the dollar is generated by the Federal Reserve Bank of Dallas. Its release typically lags the Outlook for the Texas Economy by one month.

“Well, well, well”—All’s well that ends well

“Well, well, well”—All’s well that ends well

An image of a oil well with a dramatic blue sky background.SAN ANTONIO – Despite challenges facing the oil and gas industry, advances in technology and improvements in efficiency continue to drive well costs down and keep the industry competitive.

That is according to executives who spoke at the Society of Petroleum Engineers’ Annual Technical Conference and Exhibition in San Antonio.

Drilling and completion costs are down about 40 percent from the peak of the oil boom, which came in mid-2014 at $107 per barrel before crashing to $26 by early 2016.

New wells in the first 90 days produce 4½ times the amount of oil—in the same area—as wells drilled five years ago.

Also, real-time monitoring of wells means that companies know exactly what’s going right or wrong at a particular well site.

National oil production in 2018 is expected to reach around 9.9 million barrels per day, and the Energy Information Administration expects the U.S. to become a net exporter of natural gas in 2017.

 

Read more at the San Antonio Express-News

More Regulations, More Days to Close

Dr. Anari and Gerald Klassen (Aug 8, 2017)
The Takeaway
Center research reveals that Dodd-Frank regulations extend the time from acceptance to closing by one week.

Given the importance of mortgage loans for Texas real estate markets and the state’s banking industry, the Real Estate Center embarked on a research program to investigate the impact of the Dodd-Frank Act on the time it takes to sell a home. The Center leveraged its long-term time series data to investigate the length of time to complete home sale transactions in Texas after an offer is accepted.

Center researchers studied the impact of the Wall Street Reform and Consumer Protection Act on the length of time to sell homes and close transactions in Texas’ two largest metropolitan housing markets, Houston-The Woodlands-Sugar Land (Houston) and Dallas-Fort Worth-Arlington (Dallas). The research found that:

  • The length of time to sell homes in the two metro areas has trended downward in the aftermath of the recovery from the Great Recession (GR).
  • The length of time to process home sale transactions after an offer is accepted has trended upward.
  • Consequently, the percentage of time devoted to closing transactions has been trending upward to the extent that processing the transaction accounts for more than 40 percent of the time needed to sell a home.

Dodd-Frank Act Effects

Every U.S. economic recession has ended in a blame game between proponents and opponents of more or less government intervention and regulation. Among a long list of culprits blamed for nearly eight million foreclosed homes and the GR of 2007–09, subprime mortgage lending was the most prominent. Advocates for less government intervention blamed government policies that overexpanded homeownership, Federal Reserve policies that engineered artificially low interest rates, government-sponsored entities (Fannie Mae and Freddie Mac) that subsidized risky loans, and so on.

Proponents of more government intervention blamed greedy bankers seeking quick profits, rating agencies (Moody’s, Standard and Poor’s, Fitch) colluding with bankers to defraud investors by giving misleading ratings to risky mortgage-related securities, borrowers who didn’t understand what they were being offered by predatory lenders, and so on.

As Hubert Humphrey said, “To err is human, to blame is politics.” In the immediate aftermath, advocates for more government intervention emerged victorious in the GR blame game. In response to widespread calls to learn from past mistakes, the administration passed the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) in 2010.

The 3,500-plus pages of rules targeted changes to all parts of the U.S. financial system to “promote the financial stability of the United States.” An important part of the act was devoted to regulating mortgage loans on the presumption that loose mortgage loans were the real culprit behind the GR. The Mortgage Reform and Anti-Predatory Lending Act section of the Dodd-Frank Act has more than 200 pages of regulations to “assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive.”

To fulfill these objectives, the act sets minimum standards for mortgage originators, appraisals, escrow accounts, title agents, and other players in the mortgage field. It prohibits “mortgage originators from steering any consumer to a residential mortgage loan that the consumer lacks a reasonable ability to repay.”

To manage new loan regulations, the act created the Consumer Financial Protection Bureau (CFPB) to “promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.” Since its creation, the CFPB has been busy issuing rules making the Dodd-Frank Act an ongoing work-in-progress. Lenders and borrowers now need to spend more time being aware of the latest rulings of CFPB to update their knowledge of mortgage lending regulations.

The key words in the act are “the ability to repay.” The burden of verifying the ability of the borrower to repay the mortgage loan is on the lenders who are now required to check and document the borrowers’ current employment, current assets and income, credit history, monthly mortgage payments and related payments (taxes, insurance expenses), other debts, and borrowers’ debt-to-income ratios. Lenders should also determine how much income borrowers have left to pay for their living expenses after all housing costs are deducted from their incomes.

Since the passage of Dodd-Frank, there has been an ongoing debate between its advocates and opponents. Advocates argue that new mortgage regulations have prevented another nationwide mortgage default. Critics argue that the act and regulations have limited access to mortgage loans, particularly to first-time homebuyers and new retirees, resulting in fewer home sales. Banks spend millions of dollars to comply with the regulations. Compliance costs are especially important for small community banks. The increased costs have forced many of them to merge with larger banks or exit the mortgage lending business.

The debate regarding the impact of Dodd-Frank on finance and real estate markets has spurred research programs to quantify the impact of the act and empirically test the validity of various claims and counterclaims.

In a typical transaction, the time from offer acceptance to closing represents the time needed to prepare required documents, process the buyer’s mortgage application, and comply with regulations. Obviously, the more regulations and the more documentation, the more time needed to complete a homebuying transaction, but how long?

Regulations and Days-to-Close

The Center compiled monthly computations of days-on-market (DOM), days-to-close (DTC), and days-to-sell (DTS) for the two largest Texas metropolitan areas, Houston and Dallas, to test whether increased regulation has lengthened homebuying transactions in Texas. The two metros normally account for more than 55 percent of homes sold in Texas. DOM represents the number of days a house has been on the market from when it was listed for sale until an offer is accepted by the seller through a signed purchase agreement. DTC reflects the number of days from the offer acceptance date until the transaction closed. DTS is the sum of DOM and DTC. The monthly data run from January 2003 to December 2016.

The blue line in Figure 1 shows the number of DOM for single-family homes in Houston and includes short-term fluctuations and seasonality. The red line represents the long-term trend in DOM extracted using the Hodrick-Prescott filter. The trend shows decreasing DOM before the GR of 2007–09 from 83 days in January 2003 to 80 days in November 2006. This was followed by an increase to 84 days during the GR and finally trending downward during the local economic recovery after the GR to 55 days in December 2016.

The number of DTC following the offer acceptance on single-family homes in Houston trended downward before the GR, decreasing to 31 days in February 2006, then trended upward, reaching 37 days in May 2012 and 38 days in December 2016 (Figure 2). Compared with the pre-GR era, Houston’s homebuyers now need to wait one additional week to get the key for their purchased home.

The time series of DTS trended downward before the GR, decreasing to 111 days in September 2006, then trended upward to 119 days in March 2011 followed by a steep downward trend, falling to 89 days in September 2015 and ending at 91 days in December 2016 (Figure 3).

The percentage of time spent closing (mortgage application, appraisal, inspections, completing paperwork in compliance with Dodd-Frank regulations) after the offer is accepted can be calculated by dividing DTC by total DTS. The percentage of time spent closing the transaction in Houston was less than 28 percent before 2009. Since then it has risen, reaching 42 percent in December 2016 (Figure 4).

DOM for Dallas rose from 70 days in January 2003 to 82 days in September 2010. It fell during the local economic recovery after the GR to 34 days in December 2016 (Figure 5).

The DTC for Dallas trended downward before the GR, decreasing to 30 days in October 2007. Then it turned upward, reaching 36 days in December 2016, a 20 percent increase in time (Figure 6). Compared with the pre-GR era, Dallas homebuyers now also wait one more week to get the keys for their purchased home.

Dallas’ DTS was trending upward before the GR, reaching 115 days in December 2010. Since then it has decreased, reaching 71 days in December 2016 (Figure 7).

The percentage of time spent closing the transaction in Dallas was less than 30 percent before 2011. In December 2016, it reached more than 50 percent—so, shorter absolute days but longer percentage of time in closing. Favorable market conditions shortened the DOM, but regulations lengthened the DTC (Figure 8).

Mortgage Borrowers Be Prepared

Maybe waiting one more week to close a homebuying transaction is not important for some buyers, but if it is important, gathering documents showing incomes, expenses, credit history, and so on can help homebuyers minimize the days needed to close.

So what does this all mean? First, it is clear that the regulations introduced with Dodd-Frank have had a measurable impact on time taken to close a home purchase. The extra safety checks created to protect buyers and prevent another financial crisis have extended the time for transactions in Dallas and Houston to close by one week.

Second, the significant decline in DOM in Dallas and Houston reflects the urgent shortage of housing supply in Texas. While the national economy struggled to recover after the GR, the Texas economy expanded strongly, creating new jobs and attracting millions of new residents to the state.

The Dodd-Frank regulations also tightened lending conditions for builders and construction loans, leading to lower supplies of new homes. The net result is a historically low housing inventory and rapidly rising prices, threatening the affordability of housing in Texas.

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

Outlook for the Texas Economy

Outlook for the Texas Economy

 May 2017 Summary1

The Texas economy advanced amid increased energy activity and a strong labor market. Oil production and the number of active rigs in Texas increased, stimulating 6,600 new mining and logging jobs despite the price of oil falling to its lowest point this year. Single-family housing and nonresidential construction across the state supported higher construction values and created 3,400 construction jobs. These gains dragged down the statewide unemployment rate and sparked hourly wage increases. Overall the Texas economy remained robust, but trade uncertainty (especially with Mexico), volatile energy prices, and tax policy uncertainty present potential headwinds.

The Texas Business Cycle Index (a measure of current economic activity in the state) increased 3.7 percent year-over-year, indicating continued economic expansion. The major metro Business Cycle Indices indicated similar year-over-year growth throughout the Texas Urban Triangle. Economic activity accelerated for the fifth straight month in Houston, solidifying its recent economic recovery. The Dallas and Fort Worth indices posted the strongest growth, increasing at a quarterly annualized rate of 3.7 percent and 3.3 percent, respectively.

The Texas Leading Economic Index (a measure of future directional changes in the business cycle) flattened but maintained positive year-over-year growth. The overall health of the Texas economy balanced the index against falling oil prices. The Texas Consumer Confidence Index declined by over 8.0 percent for the second consecutive month, eliminating all of its post-election gains. Stagnant wages weighed on Texans’ confidence, but have hardly impacted consumption spending.

Multiple components generated interest rate fluctuations in May. In the beginning of the month, European political anxiety waned, elevating the ten-year U.S. Treasury bond yield to a peak of 2.42 percent. However, tensions in Washington offset this increase and dragged the yield to a monthly average of 2.3 percent. The Federal Home Loan Mortgage Corporation 30-year fixed-rate fell to 4.0 percent, despite the Fed’s 25-basis-point increase in the federal funds rate. Lower interest rates could ignite stronger demand and simultaneously stimulate residential construction.

Texas housing sales increased 8.7 percent (seasonally adjusted) after dipping last month. Current construction activity, measured by the Residential Business Cycle (Coincident) Index, was steady as construction worker wages and employment increased. The Residential Construction Leading Index (RCLI) flattened after large increases earlier this year, indicating a stabilization at the current level of activity. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu)

The average West Texas Intermediate crude oil spot price fell to a nonseasonally adjusted six-month low of $48.48 despite OPEC’s extended production cuts. Booming U.S. production continued to offset OPEC’s market rebalancing measures. The number of active rigs in Texas increased 153.1 percent year-over-year to 4532 and crude oil productionrose above 3.3 million bpd23. The Henry Hub spot price of natural gas rose to $3.2 per million BTU2 (British Thermal Unit) despite saturated inventories. Increased oil drilling, which produces natural gas as a byproduct, contributed to a global natural gas glut. The Energy Information Administration predicts that the U.S. will be a net exporter of natural gas by 2018—the first time in nearly 60 years. Texas remained the largest gas-producing state, accounting for 23.7 percent of national production.

Texas monthly nonfarm employment added 14,800 jobs and kept pace to reach the Dallas Fed’s 2017 forecast of 289,300 new jobs. The statewide unemployment rate fell from 5.0 percent to 4.8 percent, but at the expense of a labor force contraction. The statewide labor force participation rate fell for the first time this year, dropping to 63.9 percent, but maintained positive year-over-year growth. Despite this blip, the number of initial unemployment insurance claimsremained at pre-recessionary levels, reinforcing the labor market’s strength.

The unemployment rate fell in every major Texas MSA for the second straight month. Austin boasted the lowest rate at 3.4 percent, followed by San Antonio at 3.9 percent. Dallas and Fort Worth both settled at 4.0 percent, while Houston experienced a 3 point drop to 5.4 percent. This downward trend, concurrent with recent employment growth, indicates labor force expansions throughout the major metros.

Dallas and Fort Worth led employment growth, adding 13,700 and 5,200 jobs, respectively. The number of jobs was unchanged in Austin and fell by 100 in San Antonio. Houston employment growth rose for the ninth consecutive month, supported primarily by an upswing in manufacturing and leisure/hospitality industries. Houston added over 37,000 jobs year-to-date, more than doubling the 2016 annual increase.

The goods-producing sector accounted for 80 percent of Texas nonfarm employment growth. The mining and logging subsector led the charge with 6,600 new jobs, while manufacturing posted a 1,800 job increase. The manufacturing employment percentage surged in Houston and Austin, reaching double-digit annualized growth quarter-over-quarter. The Texas Manufacturing Outlook Survey’s corroborated the industry expansion, as the production index hit a 3-year high. The hours worked and wage indices jumped 9.8 percent and 5.5 percent, respectively, and expectations soared even higher.

Construction activity accelerated, generating nearly a quarter of May’s nonfarm employment growth. Statewide construction values rose 11.5 percent on a three-month moving average (3MMA) as single-family and non-residential construction advanced. Population growth stimulated construction activity as new hospitals in Austin, Dallas, and San Antonio drove up construction values. Dallas benefitted from major investments in two-family housing and steady growth in single-family residential construction. In Houston, major increases in retail, warehouses and office buildings elevated construction values.

In Texas, the services-providing sector returned to flat growth, ticking up less than a tenth of a percent. The financial sector added 3,000 jobs, led by gains in Houston and Austin, but statewide declines in education and health care negated most of the growth. In contrast, the Texas Service Sector Outlook Survey was increasingly optimistic. Increased sales activity elevated the employment and wage indices, but respondents noted frustrations regarding burdensome taxes and regulations impeding potential growth.

Retailers expressed less optimism in Texas Retail Outlook as the retail sales and business activity indices decelerated. The employment and hours worked indices dipped below 0 and part-time employment increased, suggesting business could be slowing. The hard data confirm retail labor market struggles, where over 18,000 jobs were lost statewide since February. However, decreased optimism contradicts the steady upward trend in actual retail sales4.

Despite low levels of unemployment, Texas real personal income per capita contracted 0.4 percent year-over-year, falling further behind the national level. However, recent increases in wages and salaries, particularly in energy related industries, suggest a possible convergence. Total private employee hourly earnings in Texas rose 2.9 percent year-to-date and showed no signs of slowing. Wage growth was apparent in San Antonio, where hourly earnings increased 2.0 percent from last year, while Austin posted 1.0 percent year-over-year growth. Only recently have earnings picked up in Dallas, where the hourly rate increased 2.8 percent since February. Despite strong employment growth, falling wages continued to plague the Houston and Fort Worth economies, where hourly earnings declined 1.8 percent and 2.2 percent year-over-year, respectively.

Texas manufacturing jobs paid an 11.2 percent premium in hourly earnings relative to the national average. Fort Worth had the highest manufacturing wages, paying 65.6 percent and 49.0 percent more than the national and statewide averages, respectively. Manufacturing earnings surged in San Antonio, where the hourly wage increased 18.0 percent from last year, but remained 8.4 percent below the Texas average.

The U.S. Consumer Price Index (CPI) fell below the Fed’s 2.0 percent benchmark amid a 6.4 percent drop in gasoline prices. The core inflation rate, which excludes the often-volatile energy and food sectors, rose marginally at 0.1 percent. The CPI for Dallas fell to 2.1 percent as food, beverage, and apparel prices offset transportation and housing price inflation. The Federal Reserve considered falling prices to be transitory and remained on track to further raise the federal funds rate.

The real goods trade deficit decreased 1.6 percent as U.S. commodity export growth outpaced import growth by $1.0 billion. Total Texas commodity and manufacturing exports increased 2.5 percent and 4.0 percent, respectively, led by computer and electronic product sales. The Texas trade-weighted value of the dollar5 fell 5.1 percent year-to-date, providing favorable export conditions. Mexico remained Texas’ main trading partner, accounting for 36.4 percent of Texas exports year-to-date.

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1All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.

2Non-seasonally adjusted.

3Crude oil production data lag this report by one month.

4The Federal Reserve Bank of Dallas seasonally adjusts Texas nominal retail sales data and the data release typically lags the Outlook for the Texas Economy by one month. The series is converted into real terms using the Consumer Price Index.

5The Texas trade-weighted value of the dollar is generated by the Federal Reserve Bank of Dallas. Its release typically lags the Outlook for the Texas Economy by one month.