Below is a long comment I recently made on a post about, “How Texas Avoided the Great Recession.”
Important Question – Why no Texas real estate boom & bust?
A great question because if we can figure out what Texas did right, other states may be able take the same actions to avoid real estate booms and busts in the future. States would be able to control of their own destiny without hoping Washington will solve their problem.
I don’t know the solution, but here are some thoughts.
1) Texas land use policies. Restrictive land use policies were a factor but not as important to my mind as in the author’s. For example, in Arizona where I’m from, land use restrictions weren’t a huge constraint to new housing development.
However, skyrocketing home builder prices in Arizona, although rational, created a price umbrella under which every homeowner on the periphery could raise their prices with impunity. In addition, Arizona home builders continued overbuilding long after the music stopped which greatly exacerbated the housing bust.
2) Texas banking regs. A Washington Post writer mentioned as a key factor that Texas has an 80% maximum loan-to-value limit for home mortgage refinancing and home equity lines of credit. So the 80% loan-to-value limit, to a degree, protects responsible homeowners from the effects of those less responsible homeowners who would have ended up in foreclosure if they had done a larger cash out refi.
A large part of the current crisis was caused by people who had tons of equity, doing cash out refis near the top and then eventually when prices fell losing their homes and driving down their neighbors’ home prices.
Further, since cash out refis were such a common way for Joe Investor to get the down payment for his investment property, the 80% rule would have thwarted many of those novice investment purchases that helped stoke home prices. Working a couple of different ways, the 80% rule would have prevented many home owners from losing their homes.
I assume there are other Texas banking regulations that had an impact and I would love to hear about them.
3) Texas property taxes. I wouldn’t want Arizona to copy this mechanism but property taxes are so incredibly high in Texas that it makes it harder to make money speculating on real estate. If you don’t flip that home quickly, the property taxes can eat you up. The high property taxes discourage speculators. (California property taxes are a significant factor in restricting housing supply in my opinion but that’s another story.)
4) Texas is far from California. The boom from the Arizona point of view, started in California, spread to Las Vegas and then to Arizona. The boom was in the process of spreading to Texas and Utah when it petered out.
The boom was caused by people, not just economics. As a Realtor in Arizona, the vast majority of investors I spoke with were Californians and some Nevadans. They had made a ton of money earlier in California and Nevada booms so they had the money and the motivation to do it again in nearby markets that hadn’t taken off yet. As Phoenix boomed they started looking to Texas and Utah for new cheaper markets to conquer.
5) The internet. In the olden days, it would take a California real estate investor a ton of work to learn about the Arizona real estate market. They might spend a few days in Phoenix on a few different trips before they bought an investment home.
The internet changed everything. California investors would study the real estate market online and even select the homes they wanted to see before they ever came to Arizona. Then they would drive to Arizona and make an offer on a home within a couple of days.
Anyway, this is a fascinating subject. I would love to hear why you think Texas dodged the bullet this time.
Here’s an earlier post of mine about Texas avoiding the real estate boom and bust.