Houston, we have a potential problem.
This is what I was telling you about both Houston and Dallas, probably Austin too. They're gonna go down with the rest of the crap when it happens.
June 29, 2005, 5:46PM
If housing bubble bursts, area will feel gust
Although Houston values have not skyrocketed, the national numbers would take a toll
By JESSICA HOLZER
Copyright 2005 Houston Chronicle Washington Bureau
WASHINGTON -- The overheated housing markets on the East and West coasts may seem far removed from Houston, where home prices have been nearly flat over the past year, but the city would still be hurt if the bubble bursts.
"There are lots of communities that think they are immune because their house prices are at reasonable levels," said Barton Smith of the University of Houston's Institute for Regional Forecasting. "But a bust in the Northeast or in California will affect places like Houston because it will be so significant that it will hurt the national economy."
HOT MARKETS
States ranked by the biggest one-year home price gains for the period that ended March 31, 2005:
1. Nevada
31.2%
2. California
25.4%
3. Hawaii
24.4%
4. District of Columbia
22.2%
5. Florida
21.4%
National average
12.5%
51. Texas
3.8%
Source: Office of Federal Housing Enterprise Oversight
The Office of Federal Housing Enterprise Oversight, the agency that oversees Fannie Mae and Freddie Mac, reported that house prices rose across the country by 12.5 percent in the year that ended March 31, the biggest jump since 1979. By contrast, it found that prices rose by just 4.38 percent in the Houston area and by 3.77 percent across Texas -- the lowest of any state.
Low interest rates have fueled home sales in Houston just like they have across the country. The city is adding 10,000 more new homes a year than it did during the boom years of the late 1970s and early '80s, Smith said.
But prices have not been bid up as much as in the crowded coastal cities because builders in Houston have kept pace with demand. Geography is key.
"The biggest thing that Dallas and Houston have going for them is the ability to deliver new land to the market," said Chris Engle, vice president of AngelouEconomics of Austin. Relaxed government regulations, cheap labor and "a lot less opposition to sprawl " have also helped fuel the construction boom, he added.
As a result, homes in Texas are relatively affordable. The median house price in Houston in May was $144,800, according to the Houston Association of Realtors, compared with $204,600 nationwide.
Houston has a house-price affordability index of 1.09. Anything above 1.00 means that a family earning the median income can afford to buy a median-priced house, said Jim Gaines of the Real Estate Center at Texas A&M University.
Although the Federal Reserve has said it is impossible to know if there is a housing bubble until it bursts, economists note that house prices in many markets have departed from fundamental measures such as income growth, supply of homes and rental income that properties can command.
Federal Reserve Chairman Alan Greenspan has talked of "froth" in various local markets. The Federal Deposit Insurance Corp. says 55 boom markets account for 40 percent of the country's housing stock.
Housing busts are generally characterized by milder price drops than stock market crashes. This is because homeowners are loath to sell at prices they deem too low.
But a housing correction today may in fact be steep, thanks to the explosion of risky mortgage debt in 2004.
Owners with little or no equity in their homes may be forced to sell at low prices if rates rise and they can't meet their mortgage payments.
So-called option adjustable-rate mortgages and interest-only mortgages allow borrowers to postpone principal and interest payments.
Risky mortgages have likely lured fewer homeowners in Houston. Even so, Houstonians are more vulnerable to rising rates than they have been in a decade.
In 2004, 20 percent of all conventional single-family home loans in Houston had adjustable rates, according to the Federal Housing Finance Board.
This is triple the percentage than in 2003, although Houston hardly rivals places like San Diego, where adjustable-rate mortgages account for about 70 percent of loans.
Houston foreclosure rates, which are now at levels not seen since 1991, show that many homeowners are struggling to meet mortgage payments.
Across the nation, many people are borrowing against their homes to finance more spending. Others have piled on mortgage debt to gain a foothold in a hot housing market.
A collapse in house prices or a rise in interest rates would slow the national economy by reining in this willy-nilly spending and perhaps even setting off a round of foreclosures.
This would be bad news for Houston.
"We need the national economy to be healthy for our economy to be healthy," Smith said.
Because of the amount of debt homeowners have piled on, it won't take a sharp drop to slow the economy.
The FDIC estimates that people extracted between $600 billion and $700 billion from their homes in 2003 and 2004.
They pulled out cash by refinancing, folding second mortgages into first mortgages and taking out home equity loans, said Rich Brown, chief economist at the FDIC.
"You don't need collapsing house prices to make people more reluctant to tap into that equity," said Nigel Gault of Global Insight, an economic forecasting firm in Lexington, Mass. "You just need them to slow down."
jessica.holzer@chron.com |
