What Texas Got Right

Great Debates
1

Over the next 14 months there is going to be a lot of talk about how Rick Parry created jobs in Texas. To get a head of the game Slate.com put out a pre-emptive strike against him with this piece: Why the Lone Star State Shines So Bright; Can other states replicate Texas’ economic success?

Forget Parry, jobs and oil for a moment and scan down to the second point about financial regulations:
*Second, Texas kept its housing-finance regulations tight. As Alyssa Katz noted last year in The Big Money, Texas has had a longtime commitment to ensuring that **homeowners make significant down payments and do not use their houses like piggy banks. **The rules bar Texans from taking out home-equity lines of credit worth more than 80 percent of their mortgage. They also ban “cash-out refinancings,” which add to homeowners’ debt.

As a result, Texas never had a housing bubble. Real estate prices appreciated much more steadily and slowly than in states like Nevada and Florida and never really turned down. That means relatively few foreclosures, healthier local banks, and a steadier construction sector. Moreover, it means that Texans never got as indebted as citizens in other states.

It is that latter point that explains so much about Texas’ economic vibrancy today. During the bubble, Californians and Nevadans and Floridians bought McMansions they couldn’t afford, took out home-equity loans on those McMansions, and charged billions more to their credit cards. They are still focusing on paying down those debts years later—a process economists call “deleveraging”—suppressing their consumer spending and adding to their states’ economic malaise. Texans built up less debt, and therefore have had a whole lot less deleveraging to do, as this great chart by finance blogger Mike Konczal shows. That means smoother consumer spending. It means a more stable economy. And it means a lower unemployment rate. *

Hopefully that section is short enough to post here because it has the key points I think are worth discussing:
*the financial regulations were directed at the consumer, preventing them from making stupid decisions. Accept that foxes will always be foxes, so stop the chickens from getting to close.
*this meant slower growth in the housing sector, and I remember at the time HGTV had shows where people were moving from shitty little 1 bedroom condos to massive estates in Texas because house prices were way below national average, I think it was called, “I can afford what?”
*lower debt before the crash means a faster recovery after, this graph shows dept per capita by state.

A couple of rules that are so easy to apply, and easy to understand. Which ultimately mean people can’t get more house than they can afforded. A simple lesson to learn: If you start out in a house with equity, and payments below what you can afford, where you to continue to save, you can weather a storm. Your house can lose value but you’ll still have enough equity to avoid foreclosure. You can have one spouse lose a job, or you might not get your bonus or raise, and you’ll be okay. And if both lose their job, you have savings and the ability to survive until you find something else, which includes finding something that might pay less.

All this points to the three culprits in the financial melt down:
*a crocked financial sector
*an incompetent government
*and greedy consumers

In Texas, they addressed one issue and avoided the other two.

2

Do we also get to talk about what Texas has got wrong?

It’s got the highest share of minimum wage jobs in the country, basically tripling in the last five years. About one in four Texas do not have health insurance. Texas ranks at the bottom in a whole host of education statistics.

3

Just so I get this right: I take it the OP is now in favor of government regulations to prevent people from making “stupid” decisions about their personal finances?

4

I don’t think the thread is about Perry. It’s about Texas’s history of very conservative laws regarding home mortgages. This predates Perry or even Bush: up until about 15 years ago, you flat-out couldn’t get a home equity loan on a house the capping it at 80% was a liberalization.

Now, that’s not the only reason house prices have stayed low in Texas, and I think the article overlooks some factors: number one, we have a ridiculous amount of land, and since our cities are relatively new, they are relatively car friendly: a 30-mile commute isn’t nearly as daunting most places in Texas as it is some places. You can really see this in Dallas: whenever the real estate market booms, they build another ring of suburbs. I live in the 60s ring, my sister lives 10 miles north in the 80s ring, my parents used to live another 10 miles north in the 00s ring.

5

I heard somewhere that most of Perry’s job creation was a result of federal stimulus, minimum wage and public sector as well as the thriving oil and gas industry.

Anyway, I think you nailed it. Several years ago I visited Canadian relatives who moved to Dallas several years earlier. They chose Texas because of the low state taxes. I was amazed that their 3 bedroom brick home with a backyard pool was purchased for $200,000. In Vancouver such a home would go for at least $600,000.

I assumed such was possible on the backs of cheap Mexican labour. Now I realize that the more stringent home financing requirements of Texas has probably controlled the housing market from getting out of hand and making speculators rich while instead leaving more money to the average guy to spend in the Texas economy.

6

How much of that 600,000 would be the lot?

7

Actually, average Vancouver detached home prices are now in excess of 1.2 million, so you’re off by a factor of 2 there.

Welcome to bubble territory.

8

What’s a “Vancouver”? Is that a tarp you use to couver your van? You guys are cute, how you spell stuff!

9

If you really feel you need to, although most of that is blazingly obvious since it is after all Texas.

Yet in spite of all those factors, Texas had slower personal debt rates, and fewer foreclosures. You’d think a state with all those problems would have been ripe for failure following the crash. But instead the had fewer foreclosures, and a faster recovery.

The rules they had in place are very similar to what Canada has, where growth was slower before the bubble, and the recovery happened faster.

Canadian house prices continue to rise, but will it cause a bubble? If people have equity in their homes, foreclosure isn’t necessary. If their monthly payments are in line with their current income (instead of projected income) they respond to future problems.

It’s also possible that by slowing down home ownership, Texas reduced the potential unemployment that results.

A simple and effective set of regulations, and proof of how blame can be distributed.

10

I am also curious to know if this is correct, as it is the impression I got from reading the OP.

11

No: he’s in favour of government regulations to prevent banks making stupid investments with other people’s money.

12

Where do you see that? He’s only talking about regulations that restrict people borrowing money. There’s nothing there about preventing banks from making stupid investments.

13

Laws, regulations, and rules are essential for a society to operate. Should seem obvious but some people have trouble with obvious.

Looking back on the massive clusterfuck that was the financial meltdown, we can see three simple little rules that could have prevented it all:
*ensuring that homeowners make significant down payments
*barring home-equity lines of credit worth more than 80 percent of their mortgage
*banning “cash-out refinancings,” which add to homeowners’ debt.

What’s both sad and depressing is that those simple acts shouldn’t need to be banned. Like putting on sunscreen, tying your shoe laces, or wearing a seat belt, some things should be obvious. But it seems that people can’t be expected to make good decisions for themselves, so mommy government needs to be there to remind them to eat their vegetables.

Traditionally, a lender wouldn’t have allowed those three things, because that would have put them at risk as well. Sort of a mutually assured destruction. But we took that incentive away when both foreign investors and the government started buying up mortgages.

In all the hysteria concerning deregulation and Libertarianism, the focus ends up on evil corporations. But here we see just a few simple choices that could have avoided a huge mess. And in Texas it took the government to protect people not from corporations but from themselves.

So as **John Mace **said, people made stupid decisions.

14

Technically speaking, a bank that violates those simple rules listed above is making a stupid decision with other people’s money. And in many ways I feel like the investors believed both the banks and the borrowers were following those basic rules, otherwise they wouldn’t have invested.

Like I just said, when banks stopped holding loans, they stopped looking for good borrowers.

But for some reason our society was full of people that didn’t bother to put money down, or leave some equity in their home.

Take a look at this chart showing historical savings rates going back to 1947

In the midst of a roaring economy, people saved less and less each year. And unfortunately so did the government.

Simple acts that shouldn’t require regulation.

15

:rolleyes:

I asked a simple question based on your OP and your posting history because they don’t seem to be in sync. You’ve been an unabashed libertarian promoter and that particular rule is the very antithesis of libertarian thinking.

16

As far as libertarianism goes, these rules *shouldn’t *be needed. And what they do is point towards the stupidity of the individual, rather than the maliciousness of the corporation.

We shouldn’t need regulations telling people not to shoot themselves in the foot, some things just seem obvious. Texas had such a rule, and in the end it saved them.

This case study shows that individual borrowers in the rest of the country can be just at fault as bankers and mortgage brokers, due to their stupid decisions and bad choices. It didn’t require high pressure sales tactics and lots of phone calls. If given enough rope the American consumer will happily hang himself. All they had to do was put equity into their homes.

It seems the problem with libertarianism isn’t that someone else will poison your well, it’s that people will do it to themselves.

17

Are you claiming that loaning money to financially insecure homeowners is the only stupid investment that exists? Because regulating homeowners alone does nothing to stop banks from making any of a hundred other stupid investments that don’t involve homeowners.

18

You do realise that there are two sides to a loan, don’t you? You’ve got the person borrowing the money and the person lending the money. Forbidding mortgage holders from taking out home equity lines of credit exceeding 80% of the value of the mortgage is the same thing as forbidding the bank from offering a home equity line of credit exceeding 80% of the value of the mortgage. And the reason for such a rule is to prevent the bank from putting its clients’ money into a loan where the receiver of the loan is considered likely to choose foreclosure over the continued repayment of the loan.

19

That’s a false dichotomy. There is plenty of stupidity to go around, both in individuals and banks.

20

Quite. And there’s not a whole lot of daylight between malice and mere stupidity in the name of greed.