Texans Pay Less of Our Income on Shelter

By David S. Jones

A new study from the Real Estate Center at Texas A&M University explains why Texas’ housing market fared far better than other states during the current downturn. It also suggests why the state’s economy is expected to continue to do better than the rest of the nation in the coming months. “Texas’ lower-than-national-average housing cost is one reason for the state’s higher-than-national-average growth rate,” says Ali Anari, Ph.D., a Center research economist and one of the study’s authors. “When Texans are able to spend more on non-housing goods and services, the state’s economy is strengthened and more people attracted.”

“These results illustrate one of the key reasons the Texas economy outperforms the United States in terms of job growth almost every year,” says Center Chief Economist Mark Dotzour, Ph.D. “The fact that Texans pay less of their income for housing means they have more to spend on other things that add to the overall quality of life. Texas offers a lower cost of living than many places in the United States. “This allows Texas employers to be able to attract workers at a reasonable wage rate that allows them to compete successfully in the global economy,” says Dotzour.

Since 1987, the average annual expenditure for shelter per consumer increased in every major American metropolitan market. Texas data for the study came from the Dallas-Fort Worth and Houston-Galveston-Brazoria metro areas because they are among the major metropolitan areas for which consumer expenditure data are available. These two metros accounted for 60.3% of Texas’ labor force last year and 64% of Texas’ gross domestic product (GDP) the previous year.
“Houston and Dallas consumers spent the smallest shares of their incomes on shelter in 2008 (18.6%),” says Anari.

The two Texas metros in the study had negligible increases in their shelter expenditure shares from 1987 to 2008. Houston’s share rose 1% while Dallas’ share increased 2.2%. According to the National Association of REALTORS®, Houston was the only metro in the study to post a home price appreciation, albeit a small one. Dallas had the nation’s smallest home price decline (-3.8%).

It is not surprising that the two Texas regions are experiencing normal home price fluctuations, Anari says, because the risk of a home price decline in Texas is low. “The study found that the larger the share of housing expenditures in the consumer’s budget, the more home prices in their region have fallen since 2007,” says Anari, who conducted the study along with Dotzour.
“Consumers allocate their income among various goods and services,” Anari says. “By doing so, they determine the quantities produced and prices of consumer goods and services. “Regardless of income level, the most important items in a consumer's budget are food, shelter, and clothing. However, no matter how important an item, its share of a consumer’s total expenditures cannot continually increase for a long time.”

When expenditures in a particular category in the consumer’s budget take larger and larger shares of total expenses, consumers look for less expensive substitutes, which can lower demand for more expensive goods and services, leading to lower prices for those goods and services. “For
example,” says Anari, “if the price of beef gets too high, people eat more chicken.”

Consumers have two basic shelter choices: buy or rent. Shelter expenses run the gamut from rent to mortgage interest, to property taxes, to insurance, to repairs, to security and other expenses. “Even when on vacation, consumers have shelter expenses,” points out Anari, “from costs on vacation homes to hotels and motels. Family members in college must be housed, and that’s another shelter expense.”

Anari points out that home price changes affect expenditures and wealth. Lower housing costs allow consumers to spend more on other goods and services, leading to higher regional economic growth, increased growth rates, a larger labor force, and more demand for goods and services. “At the same time,” he says, “lower costs and prices of real estate properties can significantly increase economic productivity, lead to more investments, and increase economic growth rates.”

Where were shelter shares of income the highest in 2008? You guessed it. California. San Diego led the nation with 30.8% of residents’ income going to shelter. Compare that to Houston and Dallas-Fort Worth, where residents spent just 18.6% of their income toward shelter. No wonder Texas is still where folks want to be.