Conservative mortgage rules helped save Texas from the recession

The United States is still recovering from the longest and most severe economic recession since the Great Depression. Real GDP fell 4%, employment 6%, and the headline unemployment rate crossed the 10% mark for only the second time in postwar US history.

As we know now, housing and finance were at the center of the crisis. Home values nationally fell 25%, the first time since the Great Depression that home values decreased nationally. Close to 3 million households lost their homes to foreclosure or a foreclosure alternative like a ‘short sale’. As a result the national homeownership rate has gone from just over 69% nationally to just under 64%, a low we have not seen since 1967.

These numbers illustrate the impact of this recession on our national economy. However realize it affected each state differently. 55% of all residential foreclosures were in 32 counties during the height of the Great Recession, primarily in California, Nevada, Arizona, and Florida (the “sand states”). Some states suffered disproportionately, while others (Texas, Oklahoma, Arkansas, and Louisiana – states tied to energy) avoided the worst of the downturn.

Specific industry employment played a large part in the severity of the downturn for many states. Michigan (automotive industry) and Nevada (gaming and leisure) were largely single industry economies. In the case of the “sand states”, there was over the top speculation in real estate that caused these states to experience unrealistic double digit appreciation, setting them up for a precipitous fall.

Each state has its own laws governing housing finance. These laws have an influence on whether a state’s housing sector is resilient or fragile in the face of an economic downturn. Where residential speculation from 2001 through 2006 was rampant, those states that allowed 100% home equity loans helped fuel consumers desire to spend their equity and use their home as an ATM. Consumers that borrowed 100% spent any cushion of equity that would protect them should values change.

Before 1997, Texas law did not allow home equity loans (HELs), and home equity lines of credit (HELOCs) weren’t allowed until 2003. When Texas real estate law was finally amended to permit home equity loans, it included some of the strongest consumer protections in the nation. Some of the most significant provisions are:

  • The total of all mortgage debt (not just the home equity loan) cannot exceed 80% of the fair market value of the home.
  • Only one home equity loan may be made against a home at a time. While additional financing arrangements might be possible, a homeowner cannot obtain a second home equity loan until the first has been paid in full.
  • A borrower is only permitted one home equity loan per year, regardless of how quickly the loan is repaid, and a home equity loan may not be converted to another type of loan.
  • Land that is taxed as “agricultural” or “open space” may not be used to secure a home equity loan.

Analysts (Dr. Anil Kumar) at the Dallas Federal Reserve as well as myself believe this played a big factor in the lack of speculation on one’s individual home. This conservative financial stance on home equity helped protect Texas consumers from themselves.

As we move forward in the slowly recovering economy, Texas should continue to improve economically and consumers who own homes have an equity cushion should the market slow or become depressed. Those that have concerns about overvalue and bubbles should keep this in mind.

The Texas metros continue to not only outperform the rest of the country, but most of the world economically. The strength of the local metro market will continue with its strong employment growth and quality real estate economy.

So where are we headed in 2016?

Lack of inventory – The tightness of the market is obvious with rents continuing to increase across the market through 2016. Inventory shortage will continue, both new and resale residential inventories are below equilibrium creating a seller’s market.

Economy – Nationally, regionally, and locally economic trends are still positive, but less than robust. Realize that the local economy is one of the best in the country, and that strength should continue through 2016. Locally and nationally we continue to see expanding payrolls, solid consumption growth and regionally strong housing market and a nationally improving housing market.

Values continue to improve in most channels – All channels will have small value increases this year due to great demand and development lending still tight.

Rental demand continues to be strong – Rents in all channels continue to improve. Office, apartments and retail will continue to be strong through 2017. The product you look at today if priced correctly will not be there tomorrow.

Weak wage growth – American and regional wages are not growing the way they should, especially when inflation and other price increases are factored in. Nationally wages inched up a measly 3 cents in October or at an annual rate of 2%, or just ahead of inflation. The economy cannot fully recover with anemic wage growth.

Fewer cash buyers – The strength of the Texas market has not generated near the amount of cash buyers as other more depressed markets, due to the lack of discounted values in residential or commercial. Nationally cash buyers purchased by individual investors slowed down to 12% of the total national market.

Foreclosures will continue to be a non-event in most Texas markets due to demand of the market. Yes there will be some, but they will be less than 1% of the total market.

Lending will continue to be tight in comparison. Mortgages and development loans will continue to maintain strong underwriting standards. Although there is a lot of talk about sub-prime, there is little in the market. This in turn causes tightness in all markets and escalating values.

Interest rates – expect rates to rise in 2016. Rate adjustments will be incremental (less than 50 basis points) and tied to economic performance. The Fed will continue to monitor US economic trends and global volatility to guide its decisions. Steady job growth (led nationally by our region and Austin specifically) and continued strength of consumer spending support an increase in the benchmark rate charged by the Fed.

The opportunity to build wealth through real estate is leading many to invest in Texas. If you are planning on investing in this market, I would not wait. We will not see values or lending rates again like this again in our lifetime.