December 10, 2024 by John Krukowski
'Where Are We Going To Be At In 4 Or 5 Years?': Efforts To Address Housing Affordability In Texas Focus On Local Regulations
Homeownership is out of reach for many Texans.
Texas Comptroller Glenn Hegar didn't mince words when he addressed a state Senate panel that convened in November to discuss the state’s growing housing crisis.
“The trend of decreasing affordability has been a concern for me,” Hegar said. “I see it as one of the greatest threats to Texas economic success in the years to come.”
Hegar is responsible for managing the finances of one of the fastest-growing states in the country, and earlier in 2024, his office issued “The Housing Affordability Challenge,” a report that became a must-read document for people involved in real estate and public policy in the state.
It warned that median home prices rose a staggering 40% between 2019 and 2023, while the supply of affordable housing — which has long been a catalyst to growth and a point of pride for a state known for its relative affordability — has been in nearly constant decline since the Great Recession.
Multiple factors, including extraterritorial jurisdictions that give local governments wide latitude to stop construction projects, are blamed for the problem. But most agree on when and why the crisis began.
“Today’s high housing prices and low supply levels stem from a dearth of housing investment following the housing bust and financial crisis of 2007-08,” the report says.
This echoes the experience of other states whose housing issues became even more acute at the start of the pandemic, when price hikes were driven by factors including the sudden popularity of work-from-home and inflationary building material costs.
Key housing metrics are headed in the wrong direction.
But the trend feels different in Texas, long the beneficiary of a robust economy and vigorous in-migration. Approximately 350,000 people moved to Texas between 2021 and 2022, the comptroller’s report says.
Those people need housing, but new housing starts haven't kept pace with population growth. Texas had an estimated housing shortage of 306,000 homes in 2023 — equivalent to the entire population of a midsized city like Lubbock or Plano.
“Texas is becoming more unaffordable to both lower- and middle-income families,” Hegar told the senators. “Housing affordability is critical to the health and well-being of our state economy and that of our citizens. That is why I see it as one of the more important issues that our state is facing.”
Many factors that contribute to the problem, such as inflation and insurance rates, are beyond direct control.
But the comptroller’s report found that some barriers to housing affordability are location-specific. These include local zoning and land use regulations that prohibit the construction of new housing in certain areas.
The report says these regulations can drive up home prices and rents by limiting new residential development, including in some of the state’s most desirable locations. As a result, zoning reform has become a higher priority for the state’s business community.
One form of zoning regulation has come under particular scrutiny: the powers granted to local governments in the form of extraterritorial jurisdictions.
‘From The Routine To The Ridiculous’
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ETJs allow a municipality to regulate land use and zoning in areas outside of its boundaries. Many cities argue they need this tool to control development and create a buffer against what they consider unwanted land uses on their borders. Municipalities have used ETJs to stop projects ranging from small businesses to a master-planned community offering housing to hundreds of families of varying incomes.
Others view ETJs very differently.
“A few years ago, people started saying, ‘Hey, wait, we're in an ETJ and they regulate us and charge us fees, but we have no ability to vote for the city council and they don’t provide any services to us,’” said Trey Lary, a partner in the Austin office of law firm Allen Boone Humphries Robinson. “How could this be fair? Wasn't there a tea party in Boston?”
Lary said the state granted local governments the power to enforce ETJs decades ago to help them control their boundaries and manage growth. The policy also allowed them to annex neighboring properties without the owners’ consent.
But many came to view it as an unfair impediment to development and a contributor to the state’s housing shortage. Critics say it is an example of regulations that are out of step with market forces.
“The types of homes a city may want in its borders don't necessarily correlate to what the market is demanding and what people can afford,” said Kristen Hogan, a governmental affairs professional with ABHR.
Examples of out-of-touch zoning requirements have ranged “from the routine to the ridiculous,” according to Lary.
ETJs allow municipalities to regulate zoning for properties outside of their borders.
“One city would enter into an agreement with the developer only if the garage doors were built a certain way,” he said. “The builder said they've always offered that as an option, but no one wants that particular garage door. So, they're requiring the builder to offer something that the customer doesn't want.”
In the past decade, the legislature took steps to end annexation without consent. But ETJs live on, much to the consternation of the developer and builder communities, who complain that some towns will provide water or other vital services only if property owners agree to pay high fees or consent to being incorporated into the city.
“Why should property owners be forced to continue to have their land subjected to regulation by governmental entities of which they have no vote,” Scott Norman, CEO of the Texas Association of Builders, told state legislators earlier this year. “That’s why Senate Bill 2038 came to pass.”
SB 2038, which became law in 2023, allows landowners to opt out of an ETJ by two methods. One is by a petition signed by more than 50% of the applicable area’s registered voters, or “a majority in value” of the landowners. The other method is via a special election requested by a resident of an ETJ-impacted area.
The legislation shifted the balance of power between landowners and local governments and, as ABHR’s Lary put it, “released the hostages.”
When it works, SB 2038 works well, members of the development community say.
“This bill has leveled the playing field to where now the parties are having to act like grown-ups in an arm's-length transaction and negotiate,” Norman said.
But not all parties are on board with it. Although the law requires towns to “immediately release the area from the ETJ” if the petition or election succeeds, some cities are declining to honor the outcome or are fighting the law in court.
“A resolution passed by the city of College Station effectively says that ‘we think SB 2038 is unconstitutional, and therefore we're not going to follow the law,’” James Quintero, policy director for the Texas Public Policy Foundation’s Taxpayer Protection Project, testified before state lawmakers. “I think that is deeply troubling and something that needs to be accounted for in a future legislative session.”
Warning that College Station isn't an outlier among Texas cities that “won’t let go of their ETJs,” Quintero said the state legislature should consider taking further action in 2025.
“The body might consider a complete abolishment of the ETJ concept,” he said. “Now that involuntary annexation is no longer a thing, it really doesn't make sense to have the ETJ.”
Quintero called on legislators to more strongly enforce the provisions of SB 2038 against cities and counties “seeking to go their own way” in violation of state law.
Lary said the actions of some cities to ignore SB 2038 and continue to use ETJs to halt development are nothing short of “unlawful and exasperating.” He, too, said the state might need to be more explicit in what is and isn’t allowed at the local level.
“There's been an active discussion about expanding the role of state preemption to some of these things that relates to the land zoning and subdivision regulation,” Lary said. “There has been talk of better judicial remedies for people who are hurt by illegal city action. Also, the legislature gives cities certain protections from lawsuits, but they could also take those away.”
ETJs might get further scrutiny in Austin in 2025.
Lary and others say this isn't merely a debate among policymakers over redefining the powers of state and local government. Its outcome could also impact the future of the “Texas Miracle” of economic growth driven by low costs and business-friendly regulations.
“The future of Texas' housing market will depend on the ability of policymakers, developers and communities to collaborate effectively,” Residential Strategies Inc., a market research firm serving Texas homebuilders, said in a recent white paper. “With strategic intervention, Texas can maintain its status as an attractive place to live and work while ensuring housing remains affordable.”
That was similar to the message Hegar left state senators with in November.
“We're still more affordable [than other states], but not as much as we used to be,” the comptroller said. “That is a trend that worries me, because where are we going to be at in four or five years?”
This is the third and final article in a series exploring the housing market in Texas. You can read the other articles here.
In-depth coverage of the issue of Texas housing affordability is brought to you by ABHR and Studio B. Bisnow news staff was not involved in the production of this content.
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