How Texas Avoided the Great Recession

Wendell Cox
Wendell Cox is principal of Demographia, an international public policy firm. He is a founding senior fellow at the Urban Reform Institute, Houston and a member of the Advisory Board of the Center for Demographics and Policy at Chapman University in Orange, California. Mayor Tom Bradley appointed him to three terms on the Los Angeles County Transportation Commission

Cross posted on NewGeography.com

Lately, Texas has been noted frequently for its superior economic
performance. The most recent example is the CNBC ratings, which
designated the Lone Star state as the top state for business

in the nation. Moreover, Texas performed far better than its principal
competitor states during the Great Recession as is indicated in our How Texas Averted the Great Recession report, authored for Houstonians for Responsible Growth.

Introduction: How Texas averted the Great Recession:

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. 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 polies (California,
Florida and other places, saw prices rise to unprecedented heights,
making it impossible for builders to supply sufficient new housing at
affordable prices (overall, median house prices have been 3.0 times or
less median household incomes where there are liberal land use
policies).

The Great Recession: The world-wide Great Recession
was the deepest economic decline since the Great Depression: This
downturn hit average households very hard. According to Federal Reserve
Board "flow of funds" data, gross housing values declined 9 quarters in
a row through the first quarter of 2009. The previous modern record is
a single quarter. From the peak to the trough, household net worth was
reduced a quarter, which is more than 1.5 times the previous record
decline.

Texas Largely Avoided the Great Recession. Texas
has largely escaped the economic distress experienced around the
nation, and especially that of its principal competitors, California
and Florida. By virtually all measures, Texas has performed better in
growth of gross domestic product, employment, unemployment, personal
income, state tax collections, and consumer spending This is in part
due to much less mortgage distress in Texas. At the bottom of the
economic trough, the Brookings Institution Metropolitan Monitor ranked the performance of the 6 largest Texas metropolitan areas among the top 10 in the nation. The latest Metropolitan Monitor ranked each of the 6 metropolitan areas in the highest performance category.

Throughout the past decade, Texas has experienced far smaller house
price increases than in California, Florida and many other states.
During the bubble, California house prices increased at a rate 16 times
those of Texas, while Florida house prices increased 7 times those of
Texas. As a result, after the bubble burst, subsequent house price
declines were far less
severe or even non-existent in Texas. Texas had experienced its own
housing bubble in the 1980s, however even then overall prices did not
exceed the Median Multiple of 3.0 (The Median Multiple is the median
house price divided by the median household income).

Unlike Texas, all of the markets with steep house price escalation had more restrictive land use regulations. This association between more restrictive use regulation and higher house prices
has been noted by a wide range economists, from left-leaning Nobel
Laureate Paul Krugman to the conservative Hoover Institution’s Thomas
Sowell. It is even conceded in The Costs of Sprawl —2000,
the leading academic advocacy piece on more restrictive land use
controls, which indicates the potential for higher house or land prices
in 7 of its 10 recommended strategies.

Comparing Texas and California: Unlike California,
housing remained affordable in Texas. California’s housing
affordability – in relation to income – largely tracked that of Texas
(and the nation) until the early 1970s (Figure). After more restrictive
land use regulations were adopted prices started to escalate. This
relationship has been well demonstrated by William Fischel of Dartmouth University.
Other factors have had little impact. Construction cost increases have
been near the national average in California. Other factors, like
underlying demand as measured by domestic migration, have been lower in
California than in Texas..

Comparing Texas and Florida: The contrast with
Florida is similar. Housing affordability in Florida was comparable to
that of Texas as late as the 1990s. However, with strict planning
control of land for development in Florida, land prices rose
substantially when profligate lending increased demand.

Comparing Texas and Portland: Further, the Texas
housing market avoided the huge price increases that have occurred in
Portland (Oregon), which relies on extensive restrictive land use
regulation. In 1990, Portland house prices relative to incomes were
similar to those of the large Texas metropolitan areas. At the recent
peak, the median Portland house price soared to approximately 80% above
Texas prices. Portland did not experience the price collapses of
California, but due to the greater price volatility associated with smart growth price declines in relation to incomes that were five times those of Texas.

How the Speculators Missed Texas: 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.

But it did not happen this time, despite solid population growth.
During the housing bubble, Dallas-Fort Worth and Houston ranked second
and third to Atlanta in population increases among metropolitan areas
with more than 5 million population. Austin is the nation’s second
fastest growing metropolitan area with more than 1 million population.
Each of these metropolitan areas had strong underlying demand, as
indicated by domestic migration data.

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.

The Threat: Yet, despite the success of the less
restrictive land use policies in Texas, there are strong efforts there
to impose more smart growth policies. The impact could be devastating,
especially from strategies that ration land that would raise land and
house prices, as has occurred in California and Florida. In 2009, Governor Perry vetoed
a bill that would have required the state to promote smart growth.
Federal initiatives, under proposed climate change and transportation
acts could do much to destroy not only the affordability of Texas
metropolitan markets, but could also make Texas less competitive in the
decades ahead.


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