Been meaning to write about real estate for a few weeks now, but somehow haven’t gotten around to it. Was on Rortybomb today – great site, worth checking out – and Mike had a post about the peculiar lack of a housing bubble in Texas. Here is Dallas real estate compared with Phoenix on Case-Shiller:
My gut answer is zoning. Texas is famous for its lack of zoning laws, even though it is Houston and not Dallas that is a free-for-all. Zoning seems to define crazy housing situations, such as coastal CA and NY/Boston, which contrary to popular belief “should” not rise faster than the market overall (La Jolla may be a fantastic place to live, but it was just as wonderful twenty years ago and will be no more wonderful twenty years from now – the price level might be higher than Bismarck, but there is no reason to assume the rate of change would be). From the fantastic NYT profile of Ed Glaeser that I try to steal all of my real estate beliefs from:
“It’s so easy to forget the world that we were living in around 1970, when basically almost all of the value of houses was in the physical infrastructure. That was actually the cost. There was some land, and it was worth something, but it wasn’t worth more than 20 percent of the value of the house.” Even in New York City, Glaeser says, the price of an apartment back then was essentially the cost of building the next floor. In researching New York City’s housing prices, in fact, Glaeser and Gyourko discovered that over the past 30 years, the average height of new residential buildings in Manhattan decreased in size. “That’s crazy,” he insists, especially in light of how much the demand to live in New York has increased. “You know, if prices in Manhattan are skyrocketing, you should be building more and more at 50 stories, rather than at 30. Not the reverse.” So is it his contention that Manhattan could build far more than it has recently? “Oh, for sure,” he says. “Technologically? Certainly. No reason why you couldn’t.”
Let’s go back to Manhattan in the 1920′s, Glaeser says. “New York in the 1920′s is a pretty developed place, a pretty mature place. But they’re producing a hundred thousand units a year. They’re tearing up swaths of Manhattan and building higher buildings.” That would be legally and politically impossible today, but as he and Gyourko see things, it is precisely those legal and political roadblocks to “tearing up” the city that have made the place so expensive. Actually, in 2004, the two men took a close look at Manhattan and estimated that one half or more of the value of condominiums in the borough could be thought of as arising from some type of regulatory constraint preventing the construction of new housing.
Rortybomb suggests that the difference stems from Texas’ housing laws. And it’s true that there are restrictions on some exotic products, and borrowers are guaranteed the right to prepay. It is even true that there is a homestead exemption in bankruptcy, so it’s tougher to have a forced sale due to a breakdown elsewhere in someone’s capital structure. But plenty of people with vanilla products went upside down in the crazy times in Phoenix, and Florida also has a homestead exemption and managed to have a perfectly frothy bubble.
I would suggest something a bit more simple: People didn’t move to Texas in large numbers during this bubble. Look at data from Pew on net migration rate per thousand residents:
| Year | NV | TX | AZ |
|---|---|---|---|
| 1985-1990 | 155.7 | -21.2 | 64.1 |
| 1995-2000 | 126.2 | 7.7 | 66.5 |
| 2000-2006 | 127.5 | 19.2 | 87.8 |
There is some migration to Texas – Glaeser points out the correlation between average January high temperature and population growth – but Texas has been big for a long time. Arizona and Nevada just hit musical-chairs level of ridiculous. For a while there was enough space that the explosion could dissipate laterally, but eventually the limits of infrastructure and other boundaries (reservations in Phoenix, BLM land in Las Vegas) began to weigh and central prices exploded. At least until someone discovered that absolutely everyone in each city was employed in building someone else’s house and could not afford to stay if the merry-go-round stopped.
Texas sat this one out.
