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Experts see signs pointing to strong Austin housing market for years to come

Shonda Novak, Austin American-StatesmanExperts see signs pointing to strong Austin housing market for years to come

April 19, 2014

If you’ve bought or sold a house — or even tried to buy a house — in the past 2 1/2 years in Central Texas, you know the local housing market roared back to life after the recession. Homes in many parts of the Austin area are selling fast, and there’s no shortage of would-be buyers battered by a bidding war.

All indications — job and population growth, housing starts, home sales, price appreciation, and a low supply of homes relative to high demand — “point to a very strong and robust housing market” with no signs of slowing in the near future, said Eldon Rude, a local housing market analyst who is principal of 360 Real Estate Analytics, an Austin-based market research and consulting firm.

“Austin, Texas, has probably the best economy on the planet,” said Mike Castleman Sr., who has been observing housing markets nationally for 40 years as a founder and former CEO of Houston-based Metrostudy, a housing market research and consulting firm that he and co-founder Mike Inselmann sold last year. “Look around. There just aren’t any economies any better.”

But as Castleman and other housing experts know, real estate is cyclical. So those who have ridden the merry-go-round over the decades say the current ride won’t last forever.

So how long can we expect this run last? Depending on which expert you ask, the answer could be another two to four years, or as many as eight years.

Castleman, who lives in Dripping Springs, said every market has its local set of variables that dictate how it behaves. External forces also come into play.

“On the local horizon, there do not seem to be any obvious pitfalls to the economy,” says Castleman, who with Metrostudy co-founder Mike Inselmann sold the firm last year. “So chances are if we are to encounter an interruption to this groundswell of prosperity over the next four or five years, it is most likely to be inflicted from the outside,” that is, originating outside of Austin, and Texas.

Castleman and others say the any number of triggers could precipitate a slowdown. It could come in the form of another financial collapse like in 2008. Or high inflation. Or soaring interest rates. Or what Castleman says is the next shoe to drop: the student-loan crisis, a $1 trillion debt bubble he says will ultimately pop.

Mark Sprague, another housing market analyst based in Austin, said economists can always tell when a market hit bottom and turned. “Unfortunately,”said Sprague, with Independence Title, “they can’t tell you when it’s going to turn.”

But Sprague, a predictably conservative forecaster — he says people tell him they listen to him because “‘if the baby’s ugly, you’ll tell the truth’” — surprised me when he recently said he thinks the Austin metro is 2 1/2 years into a postive run that will last more than 10 — that’s right, 10-plus — years.

“I just don’t see many hiccups, barring a catastrophic event,” that would cause the local housing market to lose its luster, Sprague said.

But Sprague himself pointed out in a recent newsletter that “most positive economic runs, particularly in Texas, last no longer than 6 years.” So where does his optimism come from?

Sprague backs up his forecast with a litany of pluses that Austin, and Texas as a whole, have going for them. Like California in 1950, Texas is a “land of opportunity” where families and corporations are flocking. Job creation. Low tax burden. Business-friendly climate. Housing affordability. And on and on.

“With wages staying stagnant, many consumers are looking to Texas because their paycheck stretches farther,” including their housing dollar, Sprague said.

The throngs moving to the Austin area are being drawn by job growth in a region that added an enviable 32,600 net new jobs in the 12 months through February, and continues to see “very low unemployment,” Rude said.

“The most reliable predictor of the real estate market is population growth, and the most reliable predictor of population growth is job growth, and we have full steam ahead for job growth,” said Steve Crossland, an Austin real estate broker.

Although the Austin area saw prices of existing homes rise 8.5 percent last year, which many locals might consider high, people moving from some other areas, including the West Coast and Northeast, “continue to look at Austin as very affordable,” Rude said.

Brian Kelsey, principal at Civic Analytics, an Austin-based economic research and consulting firm, said he thinks home prices will continue to increase provided that “job growth continues to outpace other regions and home prices are relatively cheaper compared to markets where we are drawing the most number of new residents from.” (He cautioned that “we should keep an eye on other high-performing job markets, such as Nashville, that offer many of the amenities that people report to love about Austin — at about half the cost in terms of housing.”)

Castleman said the local variables are so positive — Austin’s technology sector, the planned new medical school and teaching hospital, the stimulative effect of the oil and gas boom on the overall Texas economy, that “it’s very difficult to see anything locally that would all of a sudden just shut this thing down, or even gradually shut this down.”

Crossland concurs. Because the local housing market is being driven by “honest-to-God, true-blue supply and demand” — that is, loan-qualified buyers who need a place to live vs. speculators betting on some unsustainable bubble — “I think we have three to five years of running room ahead of us,” Crossland says.

“I just don’t see any of the leading indicators doing other than showing green lights,” Crossland said.

Occupancy Limits

The Austin City Council voted last month to lower occupancy limits, the maximum number of unrelated people who can share a home, from six people to four people. The new four-person limit is temporary (two years) and will be applied only to newly permitted single-family and duplex properties in greater central Austin, which is roughly bounded by Highway 183, MoPac, and William Cannon (i.e. McMansion Overlay), while the city works on updating the land development code. The ordinance change was largely a response to central neighborhoods unhappy about the proliferation of stealth dorms, which refer to high-occupancy, single-family zoned properties designed for housing, presumably, more than four unrelated people.

Austin is struggling to come to grips with declining affordability as population growth, increasing wealth, and demand for central-city living put upward pressure on home prices. Austin’s priciest neighborhoods are centrally located, and still a bargain for people of means relocating from places like San Francisco, Los Angeles, and New York–or from Dallas or Houston or other places in Texas, where the majority of transplants to Austin originate. Given no apparent signs of a slowdown yet, the proposed change in occupancy limits sparked a healthy debate about housing affordability–i.e. to what extent would lower occupancy limits aimed at stealth dorms result in the proverbial unintended consequences that could make Austin even less affordable, especially for students and low-income workers.

Council Member Bill Spelman lamented the lack of data that could be consulted on the relationship between occupancy limits and housing affordability during the public hearing. A few central neighborhoods in proximity to UT-Austin contributed inventories of perceived stealth dorms, but that work was limited to only a couple of zip codes, with no independent verification of accuracy. Moreover, no such work was done for other neighborhoods located within the McMansion Overlay that would be impacted by this change. Far be it from me to suggest that central neighborhoods ever drive citywide policy in Austin, Texas, but that was among the concerns from critics of the change. On the other hand, no serious person could drive around the most impacted neighborhoods, such as parts of Hyde Park and the North Loop area, and not recognize that some high-occupancy properties were creating problems that needed to be addressed.

The question, therefore, was how to do it–a targeted policy limited to central neighborhoods reporting the greatest impact, or something more far-reaching that, according to supporters of the change, would “protect” neighborhoods across Austin from ever having to deal with the problem of stealth dorms in the first place.

The Austin Board of REALTORS convened a small group of us to see what we could do in terms of bringing a more data-driven perspective to the debate. We got about four weeks to complete a “study” of the relationship between occupancy limits and housing affordability in Austin. Since four weeks is nowhere close to enough time to finish anything that could remotely qualify as a “study” of such a complex issue, we collected and analyzed whatever data we could before City Council was scheduled to vote on the new occupancy limits on March 20. We waited until Friday, March 14, for the last of the data to come in and then had approximately 72 hours to complete a report in time to be reviewed by City Council in preparation for the March 20 meeting. You can download a copy here:

Affordability Impacts of Proposed Changes to Occupancy Limits in Austin

The report fell short in several areas, for lack of sufficient time, no peer review, and no housing economist to guide the work, for that matter. But I hope the report can serve as a starting point for continuing the effort under CodeNEXT. And in the interest of teeing up that future work, here are a few points that we didn’t have time to fully articulate in the report. They all warrant much more public discussion than they received on March 20.

1. The stealth dorm apocalypse appears to be a ways off, even in the most severely impacted neighborhoods. We identified 1,796 possible single-family zoned high-occupancy properties with five or more unrelated occupants in Austin. These properties represent approximately 0.5% of all households in the city. The most severely impacted area is 78751 (Hyde Park/North Loop), where high-occupancy properties make up 1.6% of total housing units. In other words, a significant change, albeit on a temporary basis (for now), to Austin’s housing policy was just passed based largely on the stated preferences of a few central neighborhoods where high-occupancy properties make up less than one out of every fifty homes. One out of fifty. We’re not exactly entering Walking Dead territory here.

2. Many of the neighborhoods with the greatest number of high-occupancy properties don’t seem to be at the table for this conversation. We identified 100 or more possible single-family zoned high-occupancy properties in 78702, 78751, 78745, and 78723 (78748 is not far behind with 99, but outside the McMansion Overlay).

High-Occ Map Zoomed_Revised2

More time for a real study would have provided useful perspective on how high-occupancy properties are impacting communities in 78723, 78702, and 78745, where, presumably, UT students are not the primary drivers of demand for stealth dorms. At the very least, more time would have allowed for targeted outreach to invite new stakeholders to participate, now that we know where high-occupancy properties are most prevalent.

3. And what about those well-heeled UT students who can afford the reported $1,000 per bedroom rents charged in the stealth dorms taking over neighborhoods near campus? Well it turns out that, with the exception of 78705, very few stealth dorms are inhabited by UT students. According to student address records provided by UT for the study, nearly every high-occupancy property we identified in 78705 is occupied by UT students. In fact, our estimate in the report of 64 possible high-occupancy properties in 78705 appears to be low, after reviewing the student address file that arrived too late to make it into the report.

By contrast, only three high-occupancy properties in 78751 were found in the student addresses, which means that non-UT students occupy 98% of high-occupancy properties, or stealth dorms if you prefer, in the portions of Hyde Park, Northfield, and other neighborhoods in 78751. Further, no high-occupancy properties with five or more UT students living there could be found in the three other 100+ zip codes, 78702, 78745, and 78723.

Now, a major qualifier here is that approximately 50% of students don’t have a local address on file with UT, according to the data we received. In addition, future researchers should request student address records from St. Edward’s, Huston-Tillotson, and other colleges in Austin to complete this picture. However, our preliminary analysis indicates that, outside of 78705, the “stealth dorm issue” is more a question of housing availability for workers and other non-student residents than it is about student housing.

4. Finally, while the grandfathering clause was indeed a necessary provision–the new four-person limit will apply only to new construction–it does nothing to settle many unanswered questions that need to be addressed. We are no closer to understanding the root cause of why the market is responding with high-occupancy properties in the first place. Stealth dorm opponents argue that profit-driven developers are tearing down “affordable” homes that would otherwise be available to families with children. With most central neighborhoods now well north of $200 per sq ft and therefore well out of reach for most families, this argument seems a bit disingenuous when made by serious people. On the other side of the debate, the report doesn’t offer much ammunition for people advocating greater population density in the form of higher occupancy limits in central neighborhoods, either.

As the report indicates, all we can say with a reasonable degree of certainty is that high-occupancy properties appear to be more prevalent in lower-income areas of Austin experiencing rising average rental rates, and that relationship holds even when excluding neighborhoods with the greatest number of students.

And what of the new construction that will fall under the temporary, four-person limit during the next two years? In 2013, 2,573 new single-family homes and 101 new duplexes were permitted in Austin, according to data submitted to the Census Bureau. A large portion of those new housing units are likely to be in the McMansion Overlay and subject to the four-person occupancy limit–that’s more than 5,000 housing units that may not be available to students and low-income workers who need more than three roommates to afford rent, especially in central neighborhoods with convenient access to public transportation.

Seems like that would have generated more discussion, or at least six weeks for something more resembling a proper study, in a city that professes to be so concerned with declining affordability.

San Antonio suburb of Von Ormy goes ‘zero tax, zero fee’ to recruit business, provide services

Laylan Copelin, Austin American-StatesmanSan Antonio suburb of Von Ormy goes ‘zero tax, zero fee’ to recruit business, provide services

March 22, 2014

VON ORMY — As motorists speed past this tiny community along Interstate 35, they might not realize they have just passed the “Freest Little City in Texas,” as Mayor Art Martinez de Vara sometimes calls it.

The mayor shies away from political labels. But there is a libertarian tinge to a “zero tax, zero fee” goal as the best way to bring economic development to this poor but proud city that incorporated on the southwest side of San Antonio just six years ago. “I don’t consider myself a politician,” he said. “I just don’t like taxes and regulations.” It’s an attitude that prompted community leaders to cut the town’s property tax rate in half while almost tripling its sales tax revenue with the help of fast-food restaurants and truck stops lured to Von Ormy’s I-35 frontage. City officials hope to recruit larger enterprises once they have installed a sewer system and to eliminate the property tax altogether. But the “Von Ormy Way,” as it is called, is also about offering basic municipal services efficiently — and sometimes in innovative ways — to a community not accustomed to being served. “Here, you have a government experiment,” said Joe Phillips, a longtime Von Ormy property owner. It’s gotten the attention of the Texas Public Policy Foundation, the Austin-based conservative think tank, which invited Martinez de Vara to speak at its annual conference last month. “The primary lesson they’ve figured out is how to run their city more efficiently while creating a better business environment,” said Jess Fields, senior policy analyst at the foundation. “They encourage development by getting out of the way.” The “Von Ormy Way” isn’t for everyone. Von Ormy, population 1,300, relies on a city marshal and two dozen volunteer police officers as well as volunteer firefighters. Its police station is a mobile command trailer the size of an 18-wheeler. It cost $4,500. One of its two police cars was donated. Martinez de Vara said that residents — “after being ignored by San Antonio and Bexar County for years” — are patiently waiting for services as the city pursues a largely pay-as-you-go approach to creating a city from scratch. As the city has prospered, it has installed streetlights and paved streets, and it is building a fire station. It has trash pickup, curbside recycling and negotiated free ambulance service. The city’s only debt is a $120,000, seven-year note that, along with grants, helped buy land where the fire station, a school, a city hall and a park are planned. The key to the city’s future is its pursuit of a public-private partnership to develop a $4 million sewer line that would serve new businesses at the intersection of I-35 and Loop 1604. The revenue from that line, the mayor said, would finance extending sewers to the entire city. No frills This is a no-frills town. “Necessity helps enforce the philosophy,” Martinez de Vara said. The City Council, which meets in a church, has cut the property tax rate by 10 percent each year since its incorporation. The mayor said he expects that will continue until the tax is gone. Brian Kelsey, principal at Civic Analytics and a lecturer on economic development, said property taxes — which are less volatile than sales taxes — make up a larger share of general revenue for most cities. “It’s not uncommon for small communities to see 15 to 20 (percentage) point swings in year-to-year taxable sales during recessions,” he said. “It’s difficult to guarantee residents a minimum level of service they can expect from a city without a stable foundation of revenue.” Martinez de Vara agrees there is a greater risk in relying on one major tax, particularly a sales tax that fluctuates with the economy. For that reason, he said, the city had a reserve fund last year that was one-third of its annual budget and its surplus was almost 50 percent of its budget. “We can take a substantial hit without cutting into city operations,” he said. “We just have to hedge our taxes differently than other cities.” To Martinez de Vara, property taxes pose a risk to landowners: “The property tax is the greatest threat to keeping the land.” That philosophy is rooted in Von Ormy’s history. The mayor, who spent his summers as a child visiting his grandmother in Von Ormy, counts himself as a sixth-generation resident. He estimated 60 percent of the locals are descendants of five families with original Spanish land grants in the area. Their houses and land are handed down through generations. Although the city is almost 90 percent Hispanic, it is named for Count Norbert von Ormay Auffenberg, an Austrian nobleman, who arrived in 1886 with twenty servants. The count gave up his dream of becoming a cattle baron and left after 18 months. But a postmaster, apparently impressed by nobility, renamed the community, misspelling the count’s name in the process. Despite Von Ormy’s long history, it had withered in San Antonio’s shadow — and its extraterritorial jurisdiction. Growing area Von Ormy had tried and failed to incorporate in the past, but a group of community leaders led by Martinez de Vara, a lawyer with Capitol experience, tried again in 2007. The Legislature didn’t pass the bill that the wannabe municipality sought, but there was enough political pressure that San Antonio allowed Von Ormy to go its own way in 2008. “This was a no man’s land,” said Phillips, a landowner at Von Ormy’s intersection of I-35 and Loop 1604. “San Antonio made it very clear it didn’t care about this area before Eagle Ford Shale.” The recent shale oil boom south of San Antonio is increasing traffic and commerce through the area. San Antonio is growing towards Von Ormy. “We knew we couldn’t compete with San Antonio on incentives,” Martinez de Vara said of Von Ormy’s approach to economic development. Moe Lemos said he located his business, Manufactured Housing Consultants, a mobile home dealership, in Von Ormy because of its business climate. “Absolutely,” he said. “We enjoy the benefits of the big city without being burdened with overregulation.” He said the property tax cuts were a “pleasant surprise” that allowed him to expand the business and improve the facilities. Another property owner, Charlie Brown, said he wanted to be sure all of his 100 acres for the Alamo River RV Resort was part of Von Ormy. “Coming from California, I thought I had landed in paradise,” said Brown, a retired airline pilot. “I know how to run my life better than a bureaucrat knows.” Von Ormy typically doesn’t impose fees on companies locating here. When the Pilot Travel Center, a large truck stop, opened a year ago, it had a sign that was taller than normally allowed. Von Ormy granted a sign variance. “We didn’t realize we had a $50 fee for a sign variance,” the mayor said. “We repealed it.” Martinez de Vara estimated the city could have collected $30,000 in “impact fees” if it had the typical fees most cities charge. Instead, city leaders expected to make that up in a matter of months from the city’s share of the truck stop’s sales taxes. Von Ormy has one whopper of a fee, $1 million for would-be junkyards, to discourage those establishments. The city is also adopting “defensive zoning” to encourage commercial — as opposed to industrial — development that would continue its skyrocketing sales tax receipts, the mayor said. “We’re not anarchists,” he said. “We don’t believe in ‘no government.’ But we’re going to keep it simple.” He said city leaders are in the process of cutting 85 pages of a proposed zoning ordinance to about four pages. It’s that approach, Phillips said, that bigger businesses will appreciate. “You not only have no fees and a lowering of taxes,” he said. “You have a community saying, ‘We want you.’”

Research Tips

We’re covering research methods, databases, and tools in my economic development class this week–try to contain your excitement–and I thought I’d post a few tips here that we’ll be covering in class for the future practitioners.

1. Whenever you are dealing with change in monetary units over time, such as wages, income, or GDP, always adjust for inflation. The BLS Inflation Calculator is a handy resource.

2. Practice your elevator speech about why most economic and workforce data is available only for counties and larger geographies. People naturally see the world starting with their neighborhood, zip code, or perhaps city first and then think about larger areas, such as counties or metropolitan areas. So not having data for anything smaller than a county can be frustrating to people. The easiest way I’ve found to explain the lack of reliable data for cities in publicly available sources is that city limits change relatively often through annexations and therefore comparing “apples to apples” over time is very difficult. If you don’t get anywhere with that line, then fall back to blaming Congress for cutting the Census Bureau’s budget and being generally antagonistic toward data. Blaming Congress seems to be a widely acceptable defense for most things these days and should get you off the hook.

3.  I’ve been fortunate to work lately with Maher & Maher on a workforce gap analysis for the City of Atlanta, and it’s reminded me of something I’ve been wanting to post here about so-called “real-time” labor market information. Analysts are increasingly turning to job postings as a source of data for estimating labor demand. Job postings, like what you would find on Monster.com or Indeed, are a valuable complement to government databases traditionally used for labor market research, which can suffer from considerable time lags and gaps in the data resulting from sample size and measures taken to protect the confidentiality of employers. But job postings are neither “real-time” nor always reliable. For example, many posted job openings stay open–some employers post openings with no real intention of filling them, which can result in an analyst overestimating demand. Moreover, job postings can be written poorly and in a way that doesn’t accurately capture the credentials, skills, and experience really needed in candidates, especially in large companies with centralized HR functions responsible for hiring–and far removed from direct supervisors who are in the best position to know what really matters and what to look for in potential hires. More on this and why it’s relevant for workforce development in Peter Cappelli’s wonderful book, Why Good People Can’t Get Jobs: The Skills Gap and What Companies Can Do About It.

Bottom line: understand the strengths and weaknesses of your data.

4. Which brings me to my next tip: understand and be able to explain margin of error in Census products, especially the American Community Survey. Nothing kills a community meeting full of lofty vision statements and goal-setting like a discussion of survey methodology, and most of us writing for a general audience and not academic journals are guilty of glossing over statistical nuance in favor of readability on occasion. But know what you can’t know, and make peace with the fact that some people are going to be irritated with you when you’re forced to respond with the unpardonable offense of saying, “We don’t know.” Navigating the divide between sound data analysis and satisfying your boss’s or community leader’s desire to make a point using data is an acquired skill that all good planners learn to cultivate. This reader-friendly guide on how to correctly use American Community Survey data from different years is worth bookmarking.

5. Economic impact analysis is a valuable and mostly defensible tool for evaluating economic development projects, but be forthright and transparent about your assumptions. Arguing with people about assumptions is a much more fruitful process for debating the validity and implications of your results, rather than trying to respond to mostly unhelpful criticisms of your study relying on a “black box.” Jonathan Morgan at UNC-Chapel Hill a few years ago published a good primer on the various tools available on the market for economic impact analysis.

6. The number of people moving to your community is interesting–and can be downright amazing in places like Austin–but if you’re trying to make a point about growth, you need to focus on net migration. Counting only the people moving to your community and ignoring the people moving away is just bad math, or for the cynics among you, a convenient way to overemphasize growth as a political tactic.

7. The poverty rate is an increasingly useless statistic, that is if your goal is to accurately capture people in poverty, especially in communities with escalating cost of living. Somebody should donate money to the Center for Public Policy Priorities to make their Better Texas Family Budgets tool available nationwide. At the very least, we could have a much more informed conversation about the minimum wage versus a living wage.

Data wonks: feel free to share your tips in the comments.

Austin’s Growth

My latest talking points about growth in Austin in preparation for a Leadership Austin panel tomorrow:

“List-topping” economic performance

The Austin metro area (MSA) economy grew by 47% between 2001 and 2012, second only to Houston among large metro areas (GDP > $50 billion).

The Austin MSA ranked #1 in job growth (23%) among large metros of 500,000+ population between 2001 and 2012.

People move to strong economies

The Austin MSA is adding about 60,000 residents per year, fueled by people moving here because of the strong economy. Travis County gained (net move in move out) about 5,900 people per year from other states between 2000 and 2010, including 1,600 per year from California. While California gets the most attention, most people moving to Austin come from other parts of Texas. Harris County (Houston) was the largest “donor” county to Travis County at 588 people per year, far outpacing places like Los Angeles.

Austin is getting much wealthier

In 2000, 14% of households in Austin (city) had incomes of at least $100,000. In 2012, it was up to 24%. In 2000, households with incomes of less than $15,000 outnumbered households with incomes of $100,000 or more. In 2012, $100,000+ households outnumbered < $15,000 households by almost two to one. This is a remarkable shift in the city’s demographics in a very short amount of time and can go a long way toward explaining why housing is so expensive, especially in centrally located neighborhoods.

But not everybody is sharing in Austin’s growing prosperity

Per capita income in Travis County relative to the US was 105.88 in 2012 (i.e. US=100), down from 2011 and roughly back to where we were relative to the US in 1997.

A family of one adult and one child (there are approximately 55,000 single-parent households in Austin) needs at least $3,390 in pre-tax monthly income to meet basic needs in Austin, according to MIT’s Living Wage Calculator. Average monthly earnings for African American workers in Austin are $3,371 and for Hispanic/Latino workers are $3,272. By contrast: Asians $5,850, Whites $5,387.

48% of annual job growth recently in the Austin MSA has been in occupations that pay, on average, at least $19 per hour, but 72% of those jobs require completed postsecondary education. 23% of African Americans and 23% of Hispanics/Latinos in Austin have a completed associate’s degree or better. By contrast: Asians 75%, Whites 65%.

Building more housing units in the city of Austin and expanding the public transportation network in order to lower the commuting costs for households between the urban core and the rest of the metro area will certainly help. But I’m skeptical that we can “build our way” to greater affordability in Austin, especially without an equally ambitious strategy for human capital development–i.e. investing in people so they can afford to live and raise families here. That means investing in new models of education (and especially CTE), workforce training, and, perhaps, a new, more informed conversation about the minimum wage.

The city’s (and region’s) economic development professionals have made enormous progress diversifying the local economy and getting Austin up to the top of all the “best of” lists. And we clearly understand the link between human capital development and economic development. Indeed, look around at other regions in the US and you won’t find many chambers of commerce investing $1.5 million in education initiatives.

But it’s time for Austin to start asking what’s next. Change usually happens when (a) things get bad enough to force the issue (think Detroit or Northeast Ohio) or (b) things are good enough to lower the price of failure and get people more comfortable with risk. Austin has never been in a better position to take some risks. You can see it in recent conversations about urban rail, the excitement around F1, and development of downtown. Austin may not always be at the top of all those “best of” lists so the time for big ideas is now. The window is open.

Here are two suggestions:

1. Make Austin the first city in the US to eliminate working poverty

2. End veteran homelessness (like Salt Lake City)

In addition, now that we are all investors in the Dell Medical School, offer ideas for how to leverage that once-in-a-generation project to showcase how economic development can be made more inclusive. Think creatively about how innovation and cluster-based economic development can address issues of equity.

State Senator Kirk Watson has described Austin as the home of big ideas. Time to ante up.

Texas Economy: Miracle or Myth?

Economist Tyler Cowen offers 10 reasons why Texas is our future in the latest edition of Time. Governor Perry calls it the Texas Miracle. The DNC calls it the miracle that never was. Who’s right? And, more important, does it matter?

As with most things in life and politics, the truth is somewhere in the middle. Nonetheless, the debate matters very much, especially for economic development, but not for the reasons you may think.

As I argued yesterday at the Texas Economic Development Council conference in San Antonio, an objective view of the evidence provides fodder for both sides of the debate. Texas is very much at the forefront of the economic recovery. Using traditional measures of growth in GDP, employment, and population, Texas performs very well compared to other states and the US as a whole.

Yet, many communities around the state are still waiting for the “miracle” to appear. Forty counties in Texas have higher unemployment rates than the US, and 15 of those counties have unemployment rates of 10 percent or higher. Texas also gets mixed marks on wealth creation. The state ranks 28th in per capita income adjusted for purchasing power parity.

You can access the rest of my presentation here:

Miracle or Myth: The Real Story of Job Creation & Economic Recovery in Texas

The miracle or myth debate is a red herring–a media-friendly smokescreen that obfuscates the true threat to the state’s future economic competitiveness: the growing contingent of people who appear to believe that economic development is possible without public investment.

Take education, for example. Nearly one-third of total US population growth in the ≤ 25 age cohort occurred in Texas between 2001 and 2013. That’s a demographic advantage in terms of workforce availability that many states would kill for. The question is, of course, are we serious about investing in people at the level that’s required to ensure that most residents of the state will be able to participate in the “miracle” (slide 24)?

Are we serious about experimenting and investing in new models of career and technical education that get away from the false dichotomy that’s plagued debates about higher education in Texas recently? Economic developers are critical for making these connections clear to politicians and the people who elect them.

As the Texas boosters like to say, people vote with their feet. Hopefully they’ll find opportunities to make enough money to buy boots when they get here.

CityLab

A few thoughts from Day 1 of CityLab in NYC, where mayors, researchers, planners, and talking heads have gathered to discuss sustainability, economic development, open data, and, generally, the future of cities:

“In God we trust. All others must bring data.” – W. Edwards Deming

Tremendous enthusiasm here, of course, about the power of data to transform the policy making process, program development, evaluation, and service delivery. Chris Osgood at the Office of New Urban Mechanics in Boston made some excellent points about the practical side of creating and running a city office of innovation. For example, locating the innovation team in the mayor’s office communicates to city staff and to the public that it’s a high priority, but it helps to have non-public sources of funding (e.g., foundations) to carry out initiatives in order to avoid expectations of immediate ROI and provide cover for experimentation. Like most research projects or startup companies, some failure is inevitable and, in many cases, a necessary part of the learning process. Failing on the taxpayer’s dime, outside the friendly confines of basic research in universities, can quickly erode support for innovation before you learn enough about what doesn’t work to get to a final product that does work.

Austin is reportedly launching an office of innovation, and I’m encouraged to read that they’ve been talking to Boston. For all of our focus on facilitating and celebrating entrepreneurship in Austin, I think we could do much better in the area of public-private partnerships to support innovation inside local government, and give city officials the latitude (and resources) required for a serious innovation effort.

CityLab2

NYC Mayor Michael Bloomberg

Sam Nguyen from the Behavioural Insights Team at the UK Cabinet Office was also fantastic. Sam and his colleagues are conducting randomized control trials on everything from tax collections to re-employment programs in the spirit of Dan Ariely’s work here in the US. Texas would do well to create a similar shop, but given our somewhat tenuous grip on truthiness in the Lone Star State, I’m not too optimistic. Still, much of Sam’s work, particularly in workforce development, is directly applicable to programs here in the US.

CityLab1

Richard Florida, Carol Coletta, Mayor Karl Dean (Nashville), Bruce Katz, and Robert Steel

Of course, you put this many talking heads in the room together and you will invariably get some side-stepping of thorny issues that don’t fit nicely into think tank research agendas. That moment arrived with the opening plenary, and we need to have more of them. Carol Coletta and a couple of audience members raised the question of equity–i.e. to what extent has the metropolitan revolution moved the needle on poverty, inequality, or other aspects of social equity? Nobody on the panel could muster a satisfactory answer, offering only vague references to improving the quality of service jobs or promoting trade between global cities. I can sympathize. We struggled mightily with this question when we designed the Jobs and Innovation Accelerator Challenge in 2011. In that case, the question was about clusters and other place-based growth strategies–how can innovation-based economic development be more inclusive?

US competitiveness may be inextricably tied, as Brookings likes to point out, to our major metro areas, but the promise of a revolution will ring hollow for many people until the link to social equity is better demonstrated. More on this soon at our Reimagining Cities conference in Austin later this month.

Lies, damned lies, and economic development

Richard Florida has a piece making the rounds today called The Great Growth Disconnect: Population Growth Does Not Equal Economic Growth. Few people have done more than Florida to inspire people to think differently about economic development, in ways that take into account a broader picture than simply the jobs and private investment metrics of yesteryear. But this time I think Florida may be guilty of oversimplification.

Florida’s article is about economic growth, not economic development, so this isn’t a criticism of his argument or his methodology. His points are well made about the fallacies of reading too much into population growth as evidence of success. But given our tendency in economic development to chase whatever silver bullet or magic formula the talking heads are serving up, we need to be careful about how we define and measure success.

Florida presents this table to illustrate the point that population growth doesn’t always mean economic growth, as measured here by productivity. The number in parentheses indicates the metro’s rank among all US metros:

2013-09-30 Richard Florida Table

Source: The Great Growth Disconnect: Population Growth Does Not Equal Economic Growth

Perhaps the table would have been more revealing with additional columns:

2013-09-30 Regional Growth Metrics

Source: Florida (GDP & Pop columns), author’s analysis of BEA data (PCI & AWS columns)

This table shows the same top 10 metros but with new columns for inflation-adjusted per capita income (PCI) growth and average wage and salary (AWS) growth. Both tables are for 2001-2011. Corvallis may rank first in productivity, but it ranks near the bottom in per capita income and average wage. San Jose ranks highly in productivity and in average wage, but performs very poorly in per capita income.

Given Florida’s influence in regional economics and the work his firm, Creative Class Group, does consulting with policy makers and practitioners, I would have expected more on takeaways for economic developers beyond the point about population growth–i.e. how much can Corvallis teach us if there isn’t a strong connection between productivity and other relevant metrics? How should that inform our thinking about regional strategies?

My point here is simply that we need to be careful about the conclusions we draw from incomplete data. Again, Florida’s article isn’t focused on the link between economic growth, as observed, and economic development, which by its very nature is a policy intervention. Economic developers should not immediately charge over to the Corvallis or Portland economic development websites looking for guidance on strategies just because they rank highly in productivity. But a caveat along these lines in Florida’s article would have been a useful addition.

The goal of economic development is wealth creation for residents. GDP or productivity growth, while one factor that contributes to economic development as the economist Amartya Sen puts it, is not sufficient evidence of successful economic development. Neither is per capita income or average wage for that matter because they say very little about the income distribution or inequality. It’s the proper combination of all of these data points, coupled with an understanding of data limitations, that should guide the work of economic developers.

There is no secret sauce, no matter what the policy wonks would have you believe.