texas mortgage

The Boom Of Texas Housing

America’s red-hot housing market has recently started to cool. U.S. single-family home sales are below last year’s, residential construction activity has slowed, and rapid price escalation has waned in many parts of the country.

Not so in Texas. Housing activity remains strong in the state, with new construction and overall sales running ahead of last year’s records. In addition, home-price increases in major metros show signs of picking up speed.

Why is the state bucking the national trend? What metros are the strongest? Will Texas’ housing demand continue upward? How vulnerable is Texas to slowing sales and falling prices? In answering these questions, it’s helpful to examine the factors that led to the state’s housing boom and the risks on the horizon.

In essence, Texas’ housing market has been driven by economic fundamentals—affordability, new residents and economic growth. Although demand remains strong, the state hasn’t seen price increases as large as those stirring fears of housing bubbles in many parts of the country. As a result, the risk of a sudden collapse of the Texas housing market is low.

Thriving Through the Downturn
Texas’ housing market has been on an upswing. Both new construction and existing home sales have set records each of the past five years (Chart 1). The housing market even flourished during the technology bust of 2001–03, which brought other segments of the construction industry to a standstill.[1] Housing demand was especially strong in 2005, when new construction and existing home sales both jumped more than 10 percent from the previous year.

Although housing has also been strong in other parts of the country, Texas has been responsible for a growing share of new U.S. construction. Texas ranked either second or third among states in single-family homebuilding for six years and held the top spot in 2000. Last year, it trailed only Florida. The pace of homebuilding remains brisk even after taking into account Texas’ large population. The state’s share of U.S. homebuilding rose from 4.8 percent in 1990 to almost 10 percent in 2005—a substantial increase.

This strength can also be seen in the state’s metros. Houston and Dallas–Fort Worth were among the top five U.S. metros in single-family permits issued each of the past six years (Table 1). In 2005, Houston was third and Dallas–Fort Worth fourth. Austin also ranked high last year, despite its much smaller population.

Driving Texas’ Housing Boom
In the early years of this decade, falling mortgage rates fueled housing demand in both Texas and the U.S. The national average for a 30-year fixed-rate loan fell from over 8 percent in mid-2000 to under 6 percent in 2003.

At the same time, lenders offered new types of mortgages that made it easier and less expensive to buy a home.[2] These include interest-only loans and mortgages with low initial payments that rise later in the term.[3] With stock market gains tepid, real estate became an attractive investment nationwide.

According to the Beige Book, Texas sales of both new and existing homes in the first few years of the decade were driven largely by first-time homebuyers. With mortgage rates low, it became almost as cheap to buy a home as it did to rent. After dipping to 63.4 percent in 2002, the Texas home-ownership rate rose to 65.5 percent in 2004, allowing the state to gain ground on the national rate.

Even as mortgage rates edged up in 2005, a rebounding Texas economy helped stoke the fires of homebuilding and buying. Employment rose 3.1 percent last year, Texas’ best showing since 2000. Every major metro and sector contributed to the gains—a change from the previous year. Austin led the state in job growth as its high-tech sector began to revive, and San Antonio was close behind. Houston’s economy expanded rapidly, fueled by demand for oil-related services. Dallas, the hardest-hit metro during the downturn, made great strides in 2005, almost doubling its rate of job growth.

The strengthening Texas economy and the state’s cost-of-living advantages attracted new residents and businesses, which added to already strong housing demand.

The characteristics of Texas homebuyers have begun to shift. First-time buyer demand, which had carried the market for several years, ebbed in 2005, and Beige Book contacts reported a pickup in relocation and move-up buyers. The price distribution of existing-home sales changed between 2001 and 2005, reflecting increased demand for pricier homes by families with prior home ownership and less demand for the inexpensive houses favored by first-time buyers.