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March 2009

This article is the second item in a series of reports on the Texas economic climate. View the series.

the Storm

A Series of Reports on the Texas Economic Climate


It remains to be seen how deep and long-lasting the nation’s recession will be.

But Texas is weathering the financial meltdown rather well so far, though with some indications of choppy seas ahead. In this issue of Fiscal Notes, we consider the outlook for some Texas industries at the heart of the current downturn.

Real Estate:
“We’ve Held Up Very Well”

“Home prices were going up
20 or 30 percent a year in
some of the high-growth states. That was unsustainable, and artificially induced by easy credit. If you could walk in and fog a mirror, you got a loan.”

– Jim Gaines economist,
Real Estate Center at Texas A&M University

Can you put a price on Texas? How does $1.5 trillion sound?

That’s the total value of Texas real estate in 2007, according to the Real Estate Center at Texas A&M University. More than half of that sum, $847.2 billion, represents single-family homes. Fortunately, those homes are holding their value pretty well – and that’s good news for the industry that depends on them.

Real estate is an important piece of the Texas economy, contributing nearly 8 percent of Texas’ gross state product in 2006. About 552,000 Texans, many of them self-employed, worked in the industry in 2007, accounting for nearly 4 percent of all Texas jobs.

The Tab for Texas

According to Texas A&M’s Real Estate Center, Texas real estate had a total value of more than $1.5 trillion in 2007. Single-family residences accounted for more than half of that value.

Taxable Values of Texas Real Estate Properties, 2007
Type of PropertyValue of Properties
(in billions)
Percentage of Properties
Single-family residences$847.256.1%
Multifamily residences$77.05.1%
Commercial real$251.816.7%
Industrial real$85.95.7%
Oil, gas, minerals$95.16.3%
Vacant lots$37.82.5%
Rural real$70.44.7%

*Components may not add due to rounding

Source: Texas Comptroller of Public Accounts and Real Estate Center at Texas A&M University

“In terms of home prices, we’ve held up very well,” says Jim Gaines, an economist with the Real Estate Center. “Some states are down by double digits. Texas prices are more or less flat.” And as a recent business catchphrase has it, in this economic climate, flat is the new up.

Texas didn’t bust because it didn’t boom, Gaines says. “Home prices were going up 20 or 30 percent a year in some of the high-growth states. That was unsustainable, and artificially induced by easy credit. If you could walk in and fog a mirror, you got a loan.”

While values have held steady, sales are slowing. “Texas home sales, as reported by real estate agents, are down by about 15 percent statewide,” says Gaines. “But frankly, it’s amazing to me that demand isn’t down by more than that.

“Easy credit, the subprime loans and so forth, at one time probably accounted for as much as 10 to 20 percent of all sales in Texas,” he says. “And we had a lot of homes bought as second homes or as investments.”

“Texas is in a Good Position”

Banking, of course, lies at the heart of the financial crisis, and Texas is particularly fortunate to have a relatively healthy financial industry. Texas commercial banks employ nearly 68,000 Texans, according to the Federal Deposit Insurance Corporation (FDIC), and other FDIC statistics illustrate Texas’ current position.

About 19.2 percent of U.S. commercial banks were unprofitable at the end of the third quarter of 2008 (Sept. 30) – more than twice the 9.5 percent share registered at the end of third-quarter 2007. In Texas, by contrast, just 14.4 percent of the state’s 598 commercial banks had an unprofitable third quarter, up from 8.5 percent in third-quarter 2007.

“By and large, Texas banks are doing extremely well,” says Rick Smith, president and CEO of the Texas Bankers Association. “Texas has not suffered like some other states have, such as California, Arizona, Florida and Nevada, in large part because we didn’t experience a strong jump in residential real estate prices.”

But Smith also credits Texas legislation with helping our banks continue to prosper. “We passed home equity laws in 1997 that are very conservative compared to those in some other states,” Smith says. “That’s extremely important. Texas allows only one home equity loan at a time, and the loan-to-value ratio for all liens on a home is capped at 80 percent.

“In some states, they advertised that they’d loan 125 percent of value on a home, and it didn’t matter if this was your fourth home equity loan,” Smith says. “Texas banks have been much more prudent in their underwriting standards and much more conservative in their overall business approach.”

At present, “the anecdotal evidence we’re hearing is that Texas banks are having extremely good years, with positive expectations for 2009,” says Smith. “Their profitability is not as strong as it was a year ago, but their capital is strong, and their reserve for loan losses is adequate.

“Texas is in a good position at this time.”


With more than a quarter-trillion dollars in assets and nearly 68,000 employees, most Texas banks are coping well with the recession. Only 14 percent of Texas banks were unprofitable in the third quarter of 2008, compared with 19 percent of banks nationally.

Percent Share of Unprofitable Institutions

Source: Federal Deposit Insurance Corporation

Oil and Gas:
“We’ll see a contraction”

Energy production, a traditional mainstay of the Texas economy, was buoyed to new prominence in recent years by unprecedented increases in the price of oil. In 2007, nearly 308,000 Texans worked in the mining sector, virtually all of them in oil and natural gas production.

“Since the third quarter of 2002, the industry’s share of the total Texas economy has about tripled, from about 5 percent to 15 percent,” says Karr Ingham, consulting economist to the Texas Alliance of Energy Producers. “We’ve added tens of thousands of high-paying jobs. It’s been good for Texas, no question. But now this oil and gas economy has peaked.”

Gasoline Prices:
Driving off the cliff

Since December 2007, the average retail price of gasoline has fallen by 45 percent.

Average Retail Gasoline Price,
December 2007-December 2008

Source: U.S. Energy Information Administration
and Texas Comptroller of Public Accounts

If you’ve been to the pump lately, you know that the oil price run-up has reversed itself with startling speed.

“I think there are two factors at work here,” Ingham says. “That run-up in prices that seemed never-ending, when prices approached $150 in midsummer – that, to me, was not a price level that could be supported by market conditions. I expected that bubble to burst, and sure enough it did. Demand was primarily brought down by the high prices themselves, which of course is the function of high prices in a free market. Think of that as round one of the price decline.

“Round two, though, came as a result of the worsening economic situation,” Ingham says. “A situation like this typically leads to slower demand for energy products. But the pendulum is swinging kind of wildly right now.”

Wild indeed, crude oil prices plunged below $40 in a barrel in December 2008 for the first time since 2004.

Ingham thinks the recent Texas oil boom reached its peak in September 2008. “The rig count topped out at about 950 in the fall. In December, we were in the 885 or 890 range – historically high, but a fairly rapid drop in a short period of time.”

And with dramatically lower prices, energy companies will be forced to curtail their operations.

“There won’t be nearly as much money to devote to capital budgets and new exploration and drilling in 2009 as in recent years,” Ingham says. “I think rig counts are going to continue to come down, and ultimately, so will industry employment. That’s the last domino. I think we’ll probably begin to see those effects early in 2009.”

Market fundamentals suggest a return to higher prices is inevitable – but not just yet.

“I think this is a temporary situation,” Ingham says. “The prevailing long-term market situation will be driven by growing population worldwide, growing economies and some high-growth areas like India and China bidding up the cost of the world’s finite energy sources. We’ll return to that, but it will take a recovery in the U.S. and on the global level.

“This is a cyclical downturn, and in the longer term we will once again grow in terms of prices and activity. In the meantime, though, we’ll see a contraction.” FN

Slowdown in the Oil Patch

High energy prices breathed new life into Texas oil and gas production over the last few years. Sharp price drops since the downturn have reversed the trend, bringing the January 2009 Texas rig count to its lowest level since March 2006.

Number of oil rigs per year, see alternative

Source: Baker Hughes

Read the entire “Weathering the Storm” series:

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