(Real Estate Center at Texas A&M University’s Tierra Grande by Ali Anari and Mark G. Dotzour) While making presentations across Texas, Real Estate Center researchers frequently are aware of high-networth investors in the audience. These people may live in New York City, Miami or San Diego, but they invest in Texas real estate.
Why do investors find Texas so attractive? Let us count the reasons: (1) Texas is leading the United States in the current economic recovery, (2) Texas’ economy is big and growing, (3) Texas’ economy is profitable, (4) Texas has a growing population, (5) Texas’ economy is an international economy, (6) the tax burden is less in Texas, (7) Texas has an affordable housing sector, (8) Texans have entrepreneurial spirit, and (9) Texans are mobile.
1. Texas Leading Nation in Economic Recovery
The Great Recession ended in June 2009, according to the Business Cycle Dating Committee of the National Bureau of Economic Research. The committee noted that “a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion.”
The Texas economy suffered less in terms of lost jobs and outputs in the Great Recession than the nation as a whole. The duration of the recession, measured by the number of months of job losses, was shorter for Texas while the intensity, measured by the highest job loss rate in the trough month, was smaller for Texas than for the nation.
While the U.S. economy experienced its first month of job losses in May 2008, Texas continued to create jobs for eight more months, until January 2009. The state’s economy posted job losses for 16 months, from January 2009 to April 2010, compared with 28 months for the nation, from May 2008 to August 2010. The largest year-on-year annual job loss rate for the United States was 5.1 percent in August 2009; it was 4 percent for Texas that month.
The state’s private sector suffered 17 months of job losses with a trough of 5 percent job loss in August 2009 compared with 28 months of job losses and a trough of 5.9 percent in June 2009 for the nation.
Academics and policy makers will be debating the causes of the Great Recession for many years. Increases in the Federal funds rate from 1 percent in 2003 to 5.2 percent in 2007, the increase in international crude oil prices from $20 per barrel in 2001 to more than $130 per barrel in 2008, the housing price bubble, misguided macroeconomic policies, and the collapse of the U.S. financial system have all been suggested.
Whatever the causes, consumers and producers responded to the recession by postponing their investment and consumption plans and waiting for signs of economic improvements. After all, past economic recessions and depressions have ended in periods of economic recovery, and the recent recession, no matter how deep, is not an exception.
The postponement of investment and consumption has created pent-up demand for goods, services and quality investments, not just for distressed properties. In the short run, meeting this demand for goods and services can lead to a consumption boom, resulting in more investments in various parts of the U.S. economy. If this leads to more employment, that is, if employers increase output by employing more people, then the short-run gains in the economy can lead to economic growth in the long term.
Several indicators suggest that Texas is a promising region for more investment, economic growth, and higher profitability thanks to a combination of favorable human resources, natural resources and its legal and policy environment. The state’s economy proved resilient in the Great Recession, and now is leading the U.S. economic recovery. From August 2010 to August 2011, the U.S. economy added 1,282,000 jobs, 271,400 of which, or 21.1 percent, were generated in Texas.
2. Texas’ Economy is Big and Getting Bigger
With a gross domestic product (GDP) of more than $1.2 trillion, Texas’ economy was the 14th largest in the world in 2010. It was the second largest economy in the nation in 2010, larger than New York’s. The state’s GDP accounted for 8.3 percent of U.S. GDP compared with 13.1 percent for California and 8 percent for New York.
A growing economy offers more job opportunities and attracts more population, leading to further growth in the regional economy. By offering more investment opportunities, a growing economy can further promote growth and development. Revenues generated by a growing economy enable local and state government to impose lower taxes.
Texas’ share of U.S. GDP increased from 7.3 percent in 1997 to 8.3 percent in 2010. The state’s share of total personal income (wages, salaries, interest and dividend incomes) generated in the U.S. increased from 6.7 percent to 7.9 percent during that period.
Higher output growth rates mean more jobs. Texas’ share of the nation’s nonfarm employment increased from 7 percent in August 1997 to 8.1 percent in August 2009.
3. Texas’ Economy is Profitable
An economy’s pro!tability on a macro level can be measured in terms of a macro pro!t margin. Private sector GDP consists of compensation of employees, taxes and subsidies, and gross operating surplus (pro!ts). The percentage of private sector GDP accounted for by gross operating surplus is an important indicator of pro!tability of an economy.
In 2009, gross operating surplus in Texas accounted for 40 percent of the state’s private sector GDP compared with a national average of 37.5 percent. This means Texas businesses are more pro!table.
4. Texas’ Population is Growing
A growing population, particularly if well educated and sporting an entrepreneurial spirit, is an important part of the economic infrastructure. On the demand side, a growing population boosts the need for goods and services, especially housing units, which in turn leads to more economic growth and higher pro!tability.
On the supply side, population is the source of labor inputs for an economy. A growing population means the availability of more labor inputs and fewer constraints on economic activities.
The share of U.S. population living in Texas has increased from 7.4 percent in 2000 to 8.1 percent in 2009. Population studies at the Real Estate Center have shown that the annual growth rate of the state’s population is expected to exceed the national average in the foreseeable future. State demographers have estimated that the Texas population could grow by 12 million from 2010 to 2030.
5. Texas’ Economy is International
Texas is an important player in the nation’s international trade. Total exports via Texas in 2009 were nearly $163 billion, accounting for 15.4 percent of U.S. exports.
The state alone exported more than $1 billion to 25 countries in 2009. Mexico received 34.4 percent of Texas exports in 2009 followed by Canada (8.5 percent) and China (5.5 percent).
6. Tax Burden is Less in Texas
In 2009, state and local taxes paid by Texans accounted for 7.9 percent of the state’s per capita income, compared with 9.8 percent for the nation.
7. Texas Has Affordable Housing
The average price of an owner-occupied housing unit in Texas in 2009 was $125,800, about 68 percent of the national average. Affordable housing is an important factor in attracting population to the state and expanding the state’s economy. The lower cost of living allows wages to be lower, which helps Texas businesses remain globally competitive.
8. Texans Have Entrepreneurial Spirit
New business creation and expansion of existing businesses through innovation and creativity drive economic growth. The percentage of adult, nonbusiness owners who start a business each month is a signi!cant measure of entrepreneurial activity. Another key measure is the number of entrepreneurs per 1,000 adults.
According to the Kauffman Index of Entrepreneurial Activity, Texas ranked tenth in entrepreneurial activity (400 per 100,000 adults) in 2010 compared with 340 for the nation.
9. Texans are Mobile
Free movement of labor and capital not constrained by language and cultural barriers in various regions of the U.S. economy promotes balanced economic growth and development. One measure of labor mobility is the percentage of people one year or older who lived in a different house in the United States one year ago. In 2009, about 17.4 percent of Texans one year and older lived in a different house one year ago compared with 14.9 percent for the nation.
High mobility makes it easier for people to move away from places with fewer economic opportunities to places where opportunities are greater.
Texas is Built for Business
Texas is an attractive place for real estate investors. It works hard to stay “business friendly,” and the state’s economic environment supports businesses as they compete in the global economy.
To view the Tierra Grande story with its figures and tables, click here.