Friday, January 17, 2014

How to Avoid a Housing Bubble

Interesting research by Ali Anari, a Research Economist from the Real Estate Center at Texas A&M University titled "Land, Lots of Land - How Texas Dodged the Housing Bubble", reveals how Texas managed to dodge the housing bubble of the mid- to late-2000s.  

As we know, house prices are composed of two components; the cost of the land and the cost of construction which itself consists of two components, the cost of labor and the cost of building materials.  It was the ample supply of land and an efficient land development process that gave Texans a residential real estate advantage that most of the rest of the United States missed.

Here is a graph showing what happened to the average value of an average single-family detached home in the four main centres in Texas from 1984 to 2012:

Notice the complete absence of a collapsing bubble?

From 1985 to 2012, the average annual growth rate in home values for the four cities was:

Dallas: 1.8 percent
Houston: 3.8 percent
Fort Worth: 2.2 percent
San Antonio: 3 percent

When you look at the growth rate, it quickly becomes apparent that prices in these four markets were below the rate of inflation.

Now, let's look at a graph showing what happened to the average value of an average single-family detached home in four main centres in California from 1984 to 2012:

And there's the collapsing real estate bubble for you.

From 1985 to 2012, the average annual growth rate in home values for the four cities was:

San Francisco: 7.2 percent
San Jose: 8.2 percent
Santa Ana: 6.8 percent
Los Angeles: 7.0 percent

While these growth rates are two to three times the rates seen in Texas, the situation was far worse over the six year period from the first quarter of 2000 to the first quarter of 2006.  Here are the total growth rate in home values for the four cities over the six year period:

San Francisco: 109.4 percent
San Jose: 77.6 percent
Santa Ana: 164.2 percent
Los Angeles: 164.9 percent

By 2012, housing prices had fallen from their 2006 peak prices by the following amounts in the four California markets:

San Francisco: 38.2 percent
San Jose: 28.9 percent 
Santa Ana: 36.9 percent
Los Angeles: 37.5 percent

Statistics show that construction costs in all four markets in both Texas and California rose steadily over the period from 1984 to 2012 with no "bubble" in any of the eight communities.  The construction costs for an average single-family detached home in Texas ranged from $50,000 to $70,000 in 1984 and rose to between $120,000 and $160,000 in 2012.  The construction costs for a similar style home in California rose from between $45,000 and $55,000 in 1984 to between $165,000 and $225,000 in 2012.

What really changed was the cost of the land component in both states.  Here is a graph showing the land component costs in Texas between 1984 and 2012:

Here is a graph showing the land component costs in California between 1984 and 2012:

As you can quickly see, the rise in house prices in California (as shown above) closely mirror the rise in the cost of the land component.

Interestingly, between 2000 and 2010, the number of housing units in Texas grew by 22.3 percent compared to only 12 percent in California.  Despite the greater demand for housing in Texas, the state's housing market successfully met the growing demand for homes by supplying and developing additional low-cost land for housing developments.

While many economists blame the ready availability of easy credit for America's housing market implosion, as this analysis shows, perhaps states that saw their residential real estate markets collapse could learn from the example of Texas.


  1. Very interesting, especially since it breaks my theory that Texas is just a delayed housing boom.

    I'm wondering about how the house flipping craze affected both areas. I know everyone and their pet cat in Georgia was in the business of buying homes just to raise the price and sell it immediately afterwards, typically to another flipper. The whole thing was less driven by actual demand and more by houses being bounced around like pinballs by people with no interest in actually owning the things.

    If I were to guess, Texas' housing growth was by focusing on actual demand and sales rather than increasing costs.

  2. Looks like Georgians were playing a game of hot potato and hoping they weren't the last one holding it.

  3. I have owned an apartment complex for many years and we are currently experiencing the largest number of vacancies we have ever had. Many houses in the area are empty or under leased. In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway, today not only have they shed the extra home many have doubled up with family or friends reducing the need for housing. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. More on why artificially low interest rates are harmful to housing in the post below,

  4. Author you are only looking at the supply side. What about the demand side? Maybe demand in California increased more rapidly than demand in Texas. While the supply side could be one part of the story, you need to consider the demand side too.