At Slate's Big Money column, Alyssa Katz suggests a new answer to a longstanding question: Why was the state of Texas spared the worst excesses of both the real estate bubble and the subsequent bust? Katz argues that Texans were constrained by an ancient state law that makes it very hard to take equity out of your home.
Before getting into the details of Katz' compelling (and from a deregulatory perspective, unwelcome) case, here are some other explanations that have been advanced to explain the Lone Star State's unusual performance during the cycle:
Texans are chastened by historical memory of what is still the worst housing bust in history.
The tax and insurance costs of owning Texas real estate keep the market permanently depressed, in contrast with Texas' analogue state California.
The state's robust consumer protection laws prevented some of the dumbest types of loans from being made.
There are missing pieces in all these arguments. It's also worth noting that while Texas metro areas did not experience inflation or deflation on the scale seen in other parts of the country, they did not escape the cycle entirely. But if you're looking for a way to avoid another cycle exactly like the last decade's, Texas is the right place to start looking.
Katz says Austin's antipathy toward sucking money out of mortgaged houses is what kept Texas real estate prices solid:
If there's one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it's to follow the Lone Star State's lead and put the brakes on "cash-out" refinancing and home-equity lending.
A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans can't total more than 80 percent of a home's appraised value. There's a 12-day cooling-off period after an application, during which the borrower can pull out. And when a borrower refinances a mortgage, it's illegal to get even $1 back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date back to the first days of statehood in 1845, when the constitution banned home loans entirely.
"Delinquency and foreclosure rates are significantly lower in Texas," boasts Scott Norman, the president of the Texas Mortgage Bankers Association. "The 80 percent loan-to-value limit—that's the catalyst for a lot of this."
Research from the Federal Reserve Bank of Dallas backs Norman up. Texas' low-ish unemployment rate, 8.6 percent, is a help. But so is the fact that fewer Texans took cash out of their home equity than did borrowers in any other state—and took out less when they did. The more prevalent cash-out refinances are in a state, the more likely it is that mortgage borrowers there will run into trouble. For every 1 percentage point increase in its share of subprime mortgages that are cash-out refinances, the likelihood of foreclosure in that state goes up by one-third of a percent.
Some history of the law, which has intellectual roots going back to the period before the Lone Star Republic:
Until 1998, Texans couldn't take out home-equity loans at all. The roots of this fierce resistance to debt's temptations go deep in Texas history. Seven years before the republic joined the union in 1845, a bank panic and resulting foreclosures lost many homesteaders their property. Drawing from Mexican codes protecting landholders—much beloved by flocks of U.S. debtors who had taken refuge from creditors by relocating to Texas homesteads—the new constitution of the state of Texas forbade lenders from peddling mortgages to homesteaders.
There are reasonable exceptions to the constitution's restrictions on home-mortgage borrowing. Starting in the 1870s, homeowners could take out mortgages to buy a home, or pay for improvements or property taxes. And once a homeowner has paid down debts below 80 percent of a home's value, they can borrow against that.
Not everyone loves the state's rules. Financial services companies have periodically lobbied to scale back the restrictions on home-equity borrowing, noting that the costs of compliance increase borrowers' interest rates. But another reason the loans are more costly is that the Texas rules are unique in the nation, giving borrowers less opportunity to shop around.
There's a lot more, but Katz' solution is more useful in explaining the bust than the bubble. The kind of law outlined here will tend to prevent people who were already in homes from getting too far underwater. But it doesn't prevent inflation of house prices. It is still not clear why Texas experienced relative price stability while the rest of the country went mad. I suggest a Murder On the Orient Express theory, in which you will need all the factors cited at the beginning of this post, and probably a few others (I'll even throw "Texans' horse sense" on the table), to solve this mystery.