Did Emperor Agustín I Prevent Texas Real Estate Bust?


Quality you can count on: If Audie Murphy is in it, it is worth watching.

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.

The relative lack of zoning [pdf] in Texas prevented supply from getting too scarce.

We may never know.

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:

You can all go to hell, I'm going to Texas.

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.

See to it that no messing with shall be initiated by you with regard to Texas.

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.

NEXT: This Lady's Not For Ignoring

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  1. The relative lack of zoning [pdf] in Texas prevented supply from getting too scarce.

    We may never know.

    Tim, you are a fucking idiot.

  2. “Texans’ horse sense”

    That, from the state that was home to LBJ and GWB?

    1. Texas isn’t just two people, ya know. What state has produced a “good” president. California produced Reagan, who wasn’t absolutely terrible in every way, but I would hardly argue that California is a great state to be emulated.

  3. Doesn’t the property tax act as a sort of consumption tax since the state has no income tax.

    1. Property taxes are evil.

      1. Evil as fuck. I have no idea why property owners have to pay a tax simply because they own land. It’s as if I’m actually leasing it from the state rather than actually owning it.

        1. You don’t think renters pay the higher taxes through higher rents?

        2. Tell you what, let’s get rid of the state and see how well you do at keeping people off your property on your own.

          1. Typical statist. For one reason or another leftists seem to think that the belief in less government = anarchy.

            Go suck a cop’s dick.

            1. But I’ll bite anyways.

              If the penalty for not paying property taxes were the police not responding your argument would make the slightest bit of sense. But that isn’t the penalty. It’s fucking confiscation of said property to be auctioned off just so the state can get “its share.”. Sounds more like a “protection” racket than anything else to me. And I’d I had the choice of paying the authorities by a “per use” basis rather than a fucking prohibitive property tax, I would.

        3. It’s as if I’m actually leasing it from the state rather than actually owning it.

          No “as if” about it. It must be remembered that originally, property title in common law was derived from medieval land tenure theory. Allodial title was title without possibility of alienation. Fee simple was a title to land in which someone else held allodial title, the allodial holder allowed to impose fees for occupation and to take back the land. Thus the allodial holder was said to have “eminent domain”, as opposed to those who had subsidiary domain. The allodial holder in each of the the United States was the state itself, while in DC (and in territories acting as the territorial government) it was the Federal Government.

          (The Supreme Court in 1875 turned “eminent domain” from a description of land tenure into a special governmental power in order to give the Federal Government the ability to seize land in states. After all, the Feds and states could not simultaneously hold allodial title to the same land, and such title was clearly lodged in the states by the practice and precedent of the previous eighty-five years. So a new theory was invented, then given the old name to pretend it wasn’t a new theory.)

  4. What is funny (BeforeIReadThisArticle), I was reading about how Texas and Florida were a models for states (during 2009) during the current recession. I will continue to read Reason (and believe that the free market is the way to lead us out); but, they seem to do a do a little back peddling every once in a while.
    Now…on to the article.

    1. I knew Bernanke read Reason.

      1. Just realized how drunk I was when I wrote that.
        *Man, the program that is suppose to catch grammatical errors is really sucking the phat hog!*

  5. Doesn’t the property tax act as a sort of consumption tax since the state has no income tax.

    Washington state has no income tax. It had a bubble.

  6. I certainly would not put it past him thats for sure.


    1. hey look a keylogger.

      If you want a virus be sure to click on Lou’s link

      1. Free minds and freeloaders.

  7. Another couple random variables.
    A) Texas in general has a lot of immigration.
    B) Dallas and Houston absorbed a lot of Katrina refugees.

    1. Plus one more: No one wants to live in Texas. That keeps “demand pricing” tempered.

      1. No one goes there anymore, it’s too crowded.

      2. Texas has had a huge influx of people moving in. They are projected to pick up perhaps 3 House seats in the census redistricting.

        What tempers robust demand is that Texas is BIG — lots and lots of undeveloped land to build on, without a bunch of zoning restrictions to artificially prop up land prices.

        1. Exactly, I’m from Texas, and piddly little Fort Worth added 150,000 people, too. And the richest race in Texas is THE ASIANS. NOT WHITES!

          1. That was 150,000 people in 2007 I believe.

  8. The tax and insurance costs of owning Texas real estate keep the market permanently depressed, in contrast with Texas’ analogue state California.

    Yet Texas had robust growth and sales. This explanation does not work. In order for a market to be depressed you actually have to show depressed growth and sales.

  9. Many of these other reasons may be important, but I have one to add. I work in the energy industry and this has been a great decade to work in the energy industry. Houston is the heart of the industry industry. The industry did get hit quickly with the Enron bankruptcy and the big overbuild in power plants around 2001…but there has been nice job and salary growth in the energy industry and Houston and this has been a stabilizing force in the biggest city in Texas, no doubt.

    1. Thanks Gabe!

      The energy business and a pro-business climate means that Texas didn’t shit its pants like the rest of the company.

      Better off citizens = more qualified borrowers.

  10. you will need all the factors cited at the beginning of this post, and probably a few others

    Nonsense! There has to be One Single Simple Explanation.

    1. 42

  11. Texas has plenty of empty real estate, so increased demand was met with increased supply. Existing homes don’t inflate too much when you can just go farther out and get a bigger, newer house for just as cheap. Those McMansions out in the exurbs were selling like hotcakes (which is funny, cause the hotcakes weren’t moving), meaning the homes in the far-suburbs had downward price pressure, which meant the near suburbs had downward price pressure, and so forth.

    It also certainly helps that there’s very little to recommend Texas other than employment, shopping, and maybe some lake sports. Otherwise it’s got no scenery or nice weather to draw in newcomers (although it’s not as cold in the winter, it’s just frickin’ miserable in the summer, in a way even Phoenix isn’t).

    But that employment thing is a big factor. Despite being horribly unattractive by almost any objective standard, Texas cities have seen tremendous growth. Collin, Denton, Williamson, Travis, Bexar, and whatever county The Woodlands is in (Eric the .5b can prolly help with that) have all been on the top of nationwide growth lists for a decade and a half at least. But building has been so fast that new houses tend to run in the $150-250k range. It takes a big house or a particularly nice neighborhood to break $500k. Dallas and Houston have had consistently low cost-of-living, nationwide, for as long as I’ve been aware of such things.

    I remember ogling at home prices and rental rates that people quoted from elsewhere throughout the late 90s through mid aughts. Just didn’t seem sustainable. And it wasn’t.

    1. The other thing that strikes me about Texas locally is that they seem accustomed to boom/bust cycles. It’s happened many times there over the past few decades…

      There was the oil boom in the ’70s that busted, there was the tech boom around Compaq and TI, there was bust after that, and then there were the Energy busts around Enron, et. al.

      All of those booms and busts must have made big shock waves in the local economy generally, and maybe the banks there were more cautious because of that too? Texas has probably been through more booms and busts than anywhere else in the Country since the 1970s.

      1. Why does everybody assume real estate price stability is something a nation of immigrants, arrivistes and drifters would want in the first place? Not to mention the outcome the government wants: price stability cobined with massive, constant inflation of house prices.

      2. It also helps that oil is still 4 times the price it was in 2001. We have other industries to fall back on, but if oil crashes, the bust would become evident yet again.

    2. whatever county The Woodlands is in


    3. Texas has it’s share of ugly places[*], but it is big enough to have a few nice ones too. Not many stunning or gorgeous spots, IMO. But both the area around Austin and Kerrville (hell, just throw in the whole of the hill country) and some bits of the desert are quite nice (I like deserts, mind. Not everyone’s cup of tea.).

      Side note: there was a map of economic growth/shrinkage posted here last year. There we two identifiable areas of growth: Washington, DC and the I-35 corridor between San Antonio and Dallas. Take that for what you will.

      [*] You can keep the Houston and Dallas areas and everything near Ft. Collins and the whole of the staked plains for all I care. And I’d be just peachy if W were exiled to his ranch near Wacko.

  12. http://www.bloomberg.com/apps/…..&pos=8

    “U.S. President Barack Obama told Chinese President Hu Jintao today that it’s “important” for China to move toward a “more market-oriented exchange rate,” a White House aide said.”

    just wanted to throw that out there. it made me warm in the cockles of the heart. its not just americans that obama thinks are morons, its everyone!

  13. You know, it’s curious. I’m writing from China (The Yellow Man will Rise Again!, etc). China real estate is regularly proclaimed to be “the world’s biggest bubble” yet has many of these same laws and de facto regulations in place.

    If you think Texas avoided the bubble and crash for any the reasons outlined in the article, you should also be skeptical of anyone who claims China will pop. If you think China is a bubble, then Texas must have survived the bubble due to pure dumb luck.

    1. The asians are richer than the whites in Texas.

      I really don’t think that the real estate upswing in China is a bubble. As long as people are putting down payments on houses and aren’t taking out home equity loans as if their house were an ATM, I really don’t see what could possibly cause it to collapse.

      1. Well. If those crackers really wanted to work…

        1. I completely agree. The asians earned it.

  14. Another angle …

    If you slap any kind of stifling economic controls on the economy, you are pretty certain to reduce the number of bubbles.

    1. If you slap any kind of stifling economic controls on the economy, you are pretty certain to reduce the number of bubbles.

      No, quite the opposite. Ed Glaeser’s research has demonstrated that land-use controls lead to more bubbles.

      Land-use controls decrease the elasticity of supply of housing, which increases price swings. More bubbles (and busts).

    2. You have it backwards. Land use controls lead to more bubbles. Actually I credit the widely available land, ease of development, tiny amount of land under government control (relative to other states), and very good highway system to make farther away land easier to develop.

  15. Off topic, but this thread is worth looking at. A good opportunity for trolls.


    I’ve posted there a couple of times, but there’s a lot of stupid for one web page.

  16. Am I dreaming, or is a libertarian praising the results of government regulation that holds down excessive leverage?

    1. Your not exactly dreaming, yes we are praising the government for not zoning as much as they do in most places.

      Your also ignoring all the stupid things some parts of government does to encourage leverage(interest deductions being one), artificially low interest rates being another.

      Speaking for myself, I do believe that different taxes have different affects on real estate prices…states that use high property taxes, instead of sales or income should be slightly less susceptible to real estate bubbles, although it is certainly open for debate.

    2. Am I dreaming, or is a libertarian praising the results of government regulation that holds down excessive leverage?

      You are dreaming

      Slate is not a libertarian publication and Tim may or may not be a libertarian. he is confused though.

  17. WASHINGTON, April 12 (Reuters) – Despite fraud rates of over 58 percent and 83 percent at two of Washington Mutual Bank’s top-producing loan production offices in 2005, the bank did nothing to address the problem, according to findings released Monday by a congressional panel.

    The loans were made after the the bank, a subsidiary of now bankrupt Washington Mutual Inc (WAMUQ.PK), decided in 2003 to focus on high-risk mortgages because they were more profitable, the subcommittee found.

    The strategy, endorsed by Washington Mutual Chief Executive Kerry Killinger, led the bank and an affiliate, Long Beach Mortgage Corp, to securitize more than $77 billion in subprime home loans and billions more in other high-risk mortgages.


    The hearing on Tuesday will focus on Washington Mutual itself, a once traditional lending institution that had been around for more than a century and focused on fixed-rate and government-backed loans before shifting to higher-risk home loans in 2003.

    Among those scheduled to testify are Killinger, whom the subcommittee said was paid $103.2 million between 2003 and 2008; Stephen Rotella, the bank’s former president and chief operating officer; David Schneider, the former president of Washington Mutual’s home loan division; and two of the thrift’s former chief risk officers.

    The subcommittee found that Washington Mutual’s pay policies rewarded loan officers and processors for originating high volumes of high interest-rate loans, paid extra to loan officers who overcharged or imposed stiff prepayment penalties on borrowers, and granted top executives millions of dollars in compensation even when Washington Mutual’s lending strategy put the bank at financial risk.


    Maybe Killinger would like to be Treasury Secretary.

  18. I blogged this a few days ago myself. It is a very compelling article. My big take-away is that this is the closest thing you’ll see to a happy result from regulation of financial markets and there is no effort to duplicate it nationally because it doesn’t involved enough people’s hands getting greased. My post is here: http://tinyurl.com/y5raa5l.

  19. Donchoo be taking my name in vain! (that, and the space for Names here on the comments section is way too short!)


    Agust?n Cosme Dami?n de Iturbide y Aramburu

  20. Cash out mortgages allow you to get untaxed money for consumption and deduct the interest on that loan from your income tax. It takes big advantage of the tax laws and pushes up the prices of homes in a positive feedback process (until the bubble pops).

    With a broad consumption tax the cash out loan you get would be taxable if you consumed it, as would the interest that you pay on that loan.

  21. It is a very compelling article

  22. Having lived in both Texas and California, the answer seems obvious to me.

    Drive any direction from the center of Dallas, and you’ll find huge new housing developments, from multiple builders at multiple price points, seemingly without end.

    Then try finding a new housing development anywhere from the center of LA. You’ll be looking quite a while.

  23. Property taxes are ok but a law must be passed that it cannot exceed more than 1% of 1%.

  24. Earning money has online never been this easy and transparent. You would find great tips on how to make that dream amount every month. So go ahead and click here for more details and open floodgates to your online income. All the best.

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