How Texas Avoided the Great Recession and Real Estate Bubble: Market-Oriented Land Use Policies
"One reason that Texas did so well is that it fully escaped the “housing bubble” that did so much damage in California, Florida, Arizona, Nevada and other states (see chart above). One key factor was the state’s liberal, market oriented land use policies. This served to help keep the price of land low while profligate lending increased demand. More importantly, still sufficient new housing was built, and affordably. By contrast, places with highly restrictive land use policies (California, Florida and other places, saw prices rise to unprecedented heights), making it impossible for builders to supply sufficient new housing at affordable prices.
Speculation is often blamed as having contributed to the higher house prices that developed in California and Florida. This is correct. Moreover, with some of the strongest demand in the United States, Texas would seem to have been a candidate for rampant speculation. After all, it happened back in the 1970s when a huge oversupply of housing, industrial, retail and office space collapsed in the face of falling energy prices.
Yet the speculators were not drawn to the metropolitan areas of Texas. This is because speculators or "flippers" are not drawn by plenty, but by perceived scarcity. In housing, a sure road to scarcity is to limit the supply of buildable land by outlawing development on much that might otherwise be available.
However, the speculators did not miss California and Florida. Nor did they miss Las Vegas or Phoenix, where the price of land for new housing rose between five and 10 times as the housing bubble developed. Despite their near limitless expanse of land, much of it was off limits to building, and the exorbitant price increases were thus to be expected."
MP: The graph above shows that Texas never had a real estate bubble like those in California, Florida, Arizona or Nevada. Consequently, Texas never had the real estate crash like in the other states. This article presents an interesting perspective about how restrictive land use policies contributed to the real estate bubbles around the country, and how Texas may have escaped the Great Recession at least partly due to more liberal land use policies.
HT: Romell Nandi
34 Comments:
Do Nevada and Arizona have particularly strong law use policies. I thought the LV and Phoenix areas were known for their sprawl? I wonder too what a study of ALL areas that had smaller than average bubbles would show.
Also, didn't Texas have a huge real estate bubble and burst in the 1980's. Were the land use laws any stricter then?
Here's an article in the WSJ that suggests several reasons (laws against easy refinacing, high property taxes, etc.) for Texas' avoidance of the most recent RE bubble:
http://blogs.wsj.com/developments/2010/04/06/did-consumer-protection-laws-prevent-texas-housing-bubble/
The city with the most restrictive and use policies in California is Newport Beach. You actually have to get public approval by vote for a development of more than 200,000 square feet.
Most wealthy beach towns are highly, highly restrictive on what they allow to be built.
Texas also has relatively high property tax values which keep people from buying more house than they need to keep their tax burden lower
Texas, which has no income taxes, does have higher property tax rates than some states. But I don't think those taxes are much highyer than property taxes in the housing boom states. Here's some examples of property taxes for similarly priced homes I found at Zillow.com:
Beaumont, CA (San Bernardino)
2340 sq ft house for $249,000
2009 property taxes: $5,060
Fort Lauderdale, FL
2120 sq ft house for $250,000
2009 property taxes: $5,511
Gaithersburg, MD
1408 sq ft house for $250,000
2009 property taxes: $3,574
Plano, TX
2262 sq ft house for $247,000
2009 property taxes: $4,917
I don't know if these are typical property taxes for CA, FL, and MD. I didn't choose either the highest tax or the lowest tax property I found, but rather something close to the median.
I'm not sure property tax rates in Texas suburbs would have been a significant factor in deterring speculation.
Not sure about Nevada, but I'm pretty sure that many of the housing speculators who fueled the Arizona boom were residents of California. At least, that's what AZ realtors have been telling me for the past decade. They said that CA housing speculators were taking their CA profits and investing them in AZ. So it may not have been restrictive land use policies of AZ but rather such policies of CA which caused the AZ boom.
Jet's completely right about CA pushing up the NV housing market with their profit taking. We also have high unemployment because the build out is over, and many construction workers just don't understand that. They'll continue to collect unemployment extension money, and sit in homes until foreclosed, because many have nothing in the home. No down payment loans corrupted the system here in NV.
Mayor Goodman still holds the illusion that income from building permits will return. He should instead, work with other local officials and the BLM to propose a building moratorium based on our lack of resources (i.e. water) to fuel future growth.
In Clark County, we just saw a huge DECREASE in our property taxes, due to property reassessments. The $400M shortfall from real estate taxes would reappear, as housing supply is limited, and future relocaters / retirees see their window of opportunity slipping away. Nevada housing would bottom, taxes would return, and NV would stabilize based on logical resource planning.
A Denver home price index shows a similar pattern compared to Texas.
The Denver index was about 50 in 1991 and rose steadily to around 140 in 2006. There wasn't a price bubble in Denver, unlike Phoenix, Los Angeles, San Diego, San Francisco, Washington, Miami, Las Vegas, New York, and some other major cities.
There was a homebuilding boom in Denver, between 1991-06, much of it around the Denver Tech Center, which is about 20 miles south of downtown Denver. Vast empty fields (to the mountains in the west and Castle Rock in the south) became (upper) middle class housing tracts, while new malls were built, and the tech center expanded, etc.
There was little new homebuilding in downtown Denver. Instead lower downtown was renovated, to look like the 1920s when it was new, lofts replaced warehouses, a new major league baseball stadium was built in the middle of lower downtown, and on the southern edge of lower downtown new pro football and basketball/hockey stadiums were built.
There were many other city improvements in downtown Denver (e.g. a new central library, where the G-8 meeting was held one year, a light rail system, new convention center, upgrades of city streets and sidewalks, etc.), along with new businesses, which drove up property values. The Denver tech center area values were based more on new construction, while downtown Denver values were based more on improvements.
Perhaps, Denver and Texas had similar patterns. However, it seems, San Francisco had little new construction and few improvements, and yet had a huge home price bubble, perhaps because of home flipping.
Data links added.
Also, who actually wants to live in Texas. All the beautiful parks they have? Is there a single charming city in Texas?
Is it hot there in summer? Is it the Third World along the border?
Oh, yeah, Texas. I lived there two years, and oddly enough, I have never gone back. The people were nice, through.
The "COSTHPI, House Price Index for Colorado" looks at least as good as Texas:
https://research.stlouisfed.org/fred2/series/COSTHPI
It seems, real housing values in Texas and Colorado didn't deviate much from their nominal values. Also, they may have been undervalued to begin with.
ruddyturnstone: " didn't Texas have a huge real estate bubble and burst in the 1980's. Were the land use laws any stricter then?"
Land use laws are one cause for real estate bubbles, but not the only cause.
The Texas real estate bubble of the early '80s actually started in the '70s, when oil prices skyrocketed. Texas cities - especially Houston - were growing so fast that developers and public infrastructure could not keep pace. Housing prices were bid up. Commuting highways were jammed, and so close-in housing boomed even more.
A second "bubble" occurred in the north Texas condominium market, fueled by pure fraud on the part of developers and financial institutions. A second cause of the condo bubble was the soaring use of tax shelters by real estate investors.
The first bubble did not burst so much as deflate steadily after Reagan deregulated energy prices.
The second bubble did burst, after the fraud was exposed and after passage of the Tax Reform Act of 1986. That act eliminated the deductions for passive activity losses, which reduced the attractiveness of condominium and other real estate investments.
What should be apparent is that these real estate bubbles were not caused by free markets but rather by government interference in free markets. Included in that interference would be: federal control of energy prices; special tax breaks for real estate investors; federal guarantees of real estate loans; and manipulation of interest rates.
Benjamin: " who actually wants to live in Texas."
Job seekers have been flocking to Texas for decades. You may not like Texas, Benjamin, but corporate America loves the state.
Actually, millions of Texans would live nowhere else, and most Texans retire right in the state. I doubt that any group of Americans love their state more than Texans do. If you drive across and visit the towns of Texas, you will see the Texas state flag proudly displayed on cars, pickup trucks, homes, buildings, billboards, water towers, fences, retail windows, pets, and even tattooed on human posteriors. It's a love affair that you could never understand, Benjamin
This is a good analysis, but it can be extended to better understand the roots of California's environmentalism and Texans' indifference to environmental restrictions: the best parts of California simply have a much, much nicer environment that Texas, but those parts are quite limited, and thus greatly fought over.
There is simply vastly more flattish, well-watered land in Eastern Texas for building houses upon than there is California. Indeed, there is a quite limited supply of prime quality California land in the superb Mediterranean climate zone that is level enough for cheap construction and has adequate water supply. Moreover, mountains cause tremendous transportation chokepoints in California.
So, the great differences in topography make it more likely that Texas will be pro-development and California anti-development.
"Land use laws are one cause for real estate bubbles, but not the only cause."
That was more or less my point. But, on an idealogically driven blog, an article which purports to "prove" that restrictive land use laws are the real reason why CA is having a bubble and burst, and Texas is not, is presented as fact. The article I linked to presented several reasons. Which I think is more likely to be closer to the truth than a hackneyed, "Well they got themselves some free enterprize down there, unlike them hippies in Californee" type explanations.
"Job seekers have been flocking to Texas for decades. You may not like Texas, Benjamin, but corporate America loves the state."
True, but job seekers don't bid up prices the way speculators do. And, according to the WSJ article I linked to, Texas actually has a stricter regulatory environment when it comes to refinancing and "flipping" than CA does.
Contrary to popular conception, Las Vegas and Phoenix are not "free" land markets. Both, for example, are rated toward the more restrictive side of the scale by the Brookings Institution. In addition to very tough planning rules, much of the land for residential development is owned by governments in both places, and governments seek to maximize their returns. In Las Vegas, federal residential land auction prices rose 10 times during the bubble --- more than the increase in residential land auctions in Beijing, which is the heart of what many consider the Chinese housing bubble. In Phoenix the state land auctions of residential lands saw a 6 times increase. The difference in housing prices around the country is much more in land and regulatory costs than construction costs. For more details see: http://demographia.com/db-lvland.pdf (Las Vegas analysis) and http://demographia.com/db-phxland.pdf (Phoenix analysis).
As regards the 1980s Texas real estate bust, as we indicated in the article, prices never got out of control, because there were no serious land use regulations to drive them up. There was a bust, as the banks loaned too much money and financed too many houses. But there was no price bubble, as prices remained within historic norms.
Wendell Cox
New Geography & Demographia
didn't Texas have a huge real estate bubble and burst in the 1980's
That was a commercial real estate bubble.
Steve Sailer, much of California's homebuilding took place in the Central Valley, i.e. around Stockton, Modesto, Fresno, etc., where it's cheaper, hotter, "flattish", and "well-watered." A lot of farm land turned into housing tracts.
People pay a huge premium for California's weather and environmental projects. Many in California moved to Colorado, because of the great environment, except the weather is harsh, and the cost of living is much lower.
The inequality gap is much larger in California than in Colorado. Yet, the poor in California receive much greater benefits from the state. Also, much of the middle class in California seems to be struggling. Incomes are high in California. Yet, living standards are low. I think, it'll get even worse, although it's now at the point where many people are living in their cars or in motor homes on the street. At least they're enjoying the great weather.
For those who have never been to Texas please be advised that they have more land (supply) than does California or Florida and that factors into the price of homes.
Alternatively, you could have insanely high property taxes like we have in Pennsylvania. That will shoo the speculators away!
ruddyturnstone: "but job seekers don't bid up prices the way speculators do"
I agree with your literal statement, but I disagree with what you seem to be implying.
First, my comment about job seekers was not an explanation for price increases. It was simply a response to Benjamin's insulting comments about Texas.
Though job seekers may not bid up prices as much as speculators, job growth expectations can provide the motivation for speculators. Were all else equal, speculators should be much more likely to bid up prices in high growth areas such as Houston, Dallas, and San Antonio.
Of course, all else was not equal - the point of the article by Wendell Cox.
> So, the great differences in topography make it more likely that Texas will be pro-development and California anti-development.
No doubt this is true, but I have a strong suspicion that the vast array of liberal eco-twits has far more to do with it than topography.
> on an idealogically driven blog, an article which purports to "prove" that restrictive land use laws are the real reason...
Yes, that's why Mark said this:
This article presents an interesting perspective about how restrictive land use policies contributed to the real estate bubbles around the country.
He was using such a word to define a "proven" point, that "such policies were the ONLY reason for it..."
Reasoning and reading/word comprehension are new concepts to ya, are they??
NV also had significant benefit from CA tax refugees.
CA has a 9.3-10.3% income tax.
NV has none.
cross from CA into NV at tahoe and watch the property values spike (this is more pronounced at the high end)
i maintain a residence on the NV side of tahoe for precisely this reason, and let me tell you, the boom in pricing there has been phenomenal. there is also highly restrictive land use which has only driven prices higher despite some of the most ludicrous building restrictions and regulations i have ever seen.
eg. a $20k "water use study" to convert a full bath into a half bath. yes, i'm serious. satellite images used to be sure you don't move and coastal rocks. (thanks TARPA) and of course, the endless TARPA/fire department fight any time you do anything with the former claiming you cannot cut down trees and the latter requiring that you do so to mitigate fire danger and both needing to sign off on your permit...
it's a bit of a double edged sword - you get the best appreciation in highly restrictive neighborhoods, but they are the most difficult places to do anything to your house.
I live in California and our taxes are too high. That said our problems involve more than high taxes. Our taxes are higher than NV yet their economy is worse than ours. California has not always had a bad economy yet it has always had high taxes. It is accepted as an article of faith that California’s high taxes have driven business and jobs to more business friendly neighboring states. If that was the case then, given the number of jobs we have lost, those states should have booming economies. They do not.
If you go to Yahoo maps and display businesses that support travelers at those points where interstate freeways cross the California border in most cases there is infrastructure to support business on only one side of the border. The California side of I-15 is a dry lake where you would not want to build anything for example. The exception is I-10 between Phoenix and Los Angeles. A that border most of the businesses are on the California side. Most of those businesses found that in total California offered them a better deal than did Arizona. Each of those businesses could move to Arizona by only moving a few miles some a few hundred yards. So far most have not.
My opinion is that California job loss has and continues to be jobs leaving the country for cheap foreign labor not the state to avoid taxes.
Indeed taxes, and more importantly spending, are too high and it would help if lowered but the major problem would still exist.
"If that was the case then, given the number of jobs we have lost, those states should have booming economies. They do not"...
As compared to California? You got something credible to back that up?
I'm not sure that this one page comparison actually adds anything to the conversation but its an interesting (but questionable>) comparison: California – Nevada Business Cost Comparison...
Isn't the lion's share of Nevada business income directly related to how much disposable income?
California ports as Professor Mark has shown has helped California's business quite a bit...
Nevada doesn't...
Oregon's results from passed measuress 66 & 67 aren't in yet but according to the Business Relocation Coach dated July 15 California is still loosing businesses: Calif. Business Exodus 'Explodes' in 1st Half –
Total Doubles Entire Previous Year
There's a lot interesting info about why companies are heading to better places to have a bussiness...
From the OC Register: Going To Greener Pastures
Jet Beagle-
I liked Texans--but boy, w/o air-conditioning, Texas would be nothing.
And Houston smells like a toilet. Dallas is dull and stupid looking. Austin is nice, but has become overgrown. They had topless bathers at Barton Springs in the old days, but no more.
It is interesting-I remember apartment buildings so poorly built they literally wilted in the heat and humidity.
Finding a couple of blades of grass to sit on in Texas is a major accomplishment--ain't no Yellowstone there.
The beautful deserts of the Southwest stop at the Arizona border, and the Colorado Rockies dodge the state too. Most Texans vacation in Colorado and buy second homes there.
The glorious history of Texas is nice if you overlook the seditionists who took part in Confederacy, and then left statues behind extolling their treason in support of slavery.
Scholz' Beer Garden is great, but I heard they went bankrupt.
I do not dount houses are worth much in Texas--you got giant "water beetles" (ie cockraoches the size of small turtles) running around everywhere, inside even the best homes in Houston.
A "fancy" restuarant in Texas is one where you turn the bills of your baseball caps to face forward.
Oh, I loved Texas.
Benjamin,
It appears you use insulting words as a means of drawing attention to your comments. You should know that only cheapens your comments in the eyes of others.
Jet Beagle-
Most Texans are good at giving--and taking--a ribbing.
Besides, crapping on my homestate, California, is all but a national pastime. No waa-waa from me.
You can dish it out, but can you take it?
James: "My opinion is that California job loss has and continues to be jobs leaving the country for cheap foreign labor not the state to avoid taxes. "
Do you think that observations about businesses on the state line are so significant enough to be relevant?
Consider these recent relocations out of California:
Fluor Corporation, a $21 billion engineering firm headquartered in Southern California since 1922, began relocating its headquarters to the Dallas suburbs in 2005.
Northrup Grumman, the fourth largest defense contractor in the world, announced January 5th it will move corporate headquarters from Century City, CA, to the Washington, DC, suburbs.
Vermillion, Inc, a $73 million molecular diagnostics company announced July 23rd the relocation of its headquarters from Fremont, CA, to Austin, TX.
Solera Holdings, a $621million insurance claims processor, announced July 7th the move of its headquarters from San Diego to Dallas.
Globalstar, a $65 million satellite communications company, announced July 13th it will relocate its corporate headquarters from Milpitas, CA, to Covington, LA.
This past March, Precor stopped producing exercise equipment in Valencia after it opened a new plant in Greensboro, NC.
You can find information about these and dozens of other relocations out of California at The Business Relocation Coach As relocation expert Joseph Vranich explains:
”It's no mystery what California’s problems are – high taxes, undue regulation, excessive fines and fees, high workers' comp costs, a legal environment stacked against businesses, and lengthy permitting requirements.”
Benjamin,
I offer economic facts about California, not insults.
Again, if you want to be taken seriously, try using relevant facts that contribute to the discussion here rather than continuing your insults.
Jet Beagle-
I was offering my econmic analysis of why Texas houses are not worth a hill of beans.
Oh, there is another reason: At any time, the local appraiser's office can say your house is on property that could be used for a better and higher purpose, and thus your property taxes can go through the roof. In CA, we have Prop 13, and your taxes are the same for as long as your own the property.
But in Texas there is no zoning, and property taxes can go up every year. Nope, I wouldn't put a lot of money into a house in Texas either. That and the "water bugs" dragging my pet parakeet out the front door. The typical Texan cockroach can beat up a California mouse. I think it was in Texas where two ladies blew their house up using those flea-and-roach bomb things. Evidently they left the pilot lights on in their gas stove, and that ignited the flea-and-roach bomb fumes. I am surpised that never happned to me.
"I was offering my econmic analysis of why Texas houses are not worth a hill of beans"...
"But in Texas there is no zoning, and property taxes can go up every year"...
Let me guess pseudo frijoles you don't feel one iota of shame posting such inane comments about something you know less than zero about, right?
Talk about putting your head in the sand. Texas hasnt avoided the RE bubble and in fact its now hitting Texas worse than the rest of the country. Foreclosures are down in most parts of the country and are up in Texas.
You can have a bubble without massive price appreciation in real estate to claim otherwise is ridiculous. Obviously if you have too much product that people arent willing to buy then this is a bubble also.
Thats exactly where Texas is now. Too much supply not enough demand. The price fluctuations in Texas arent as violent as many parts of the country but the housing price trend is going down and will continue to go down.
If you scour the numbers now they are especially worrying. The prices are all over the place. Meaning that sellers arent being realistic that prices are dropping heavily and that the air is coming out of the Texas real estate market. These price drops are going to drive many, many more people underwater and the negative spiral that Texas had avoided until now is about to begin in earnest.
Also crowing about how other parts of the country got hammered on price is stupid. Texas is now competing with many more temperate and less sprawl ridden areas of the country on price. Guess what that is going to do to real estate in Texas.
If you study the 80's Houston and Austin real estate bubbles you would realize we are in this type of situation but much worse. Hold onto your hats things are going to get ugly and stay ugly.
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