What is happening with real estate values, interest rates, construction, natural resources, and lending? It’s time to be proud of our Texas heritage despite what others say about the heat and no rain. They are jealous!
Without question, Texas has survived the real estate crunch, starting back to 2007 and the subprime meltdown. Who says we’re slow learners? Remember the real estate crunch that hit Texas so hard in the 80’s? I hear a lot of complaints from disgruntled borrowers about the state law that will not allow one to borrow more than 80% of their current home value in cash. It is this specific law that has been instrumental in keeping almost all of us in Texas above water. Keep in mind, most other states will still allow consumers to borrow up to 90%, and more. It is no coincidence that those states with lax home equity borrowing rules had exponentially-inflated real estate values back in 2007, greatly contributing to the housing bust faced in many of those markets.
Recently, Bernanke has announced that the Federal Reserve will no longer maintain artificially low interest rates by supplementing mortgage backed securities. I get it and will resort to a popular parent quote, “You have no idea how lucky you are to have single digit interest rates!” Does that mean the end of the recent poor economy is here? I saw Bernanke speak in Austin in December, 2008; he was asked to compare the current economy and The Great Depression. The Great Depression was 9 long years and unemployment was twice what it is today, was the short answer. Is there a new New Deal? We are fortunate to be in Texas.
My patriotism to the State is not just that we learn from our mistakes, but we also have and develop our own natural resources. Others can stereotype us all they want. It is a bit ironic that oil and cattle ranches seem to be butt of most of the jokes. Historically, there has been a strong relationship between mortgage interest rates and the price of oil. My opinion is that relationship will still remain accurate as we move through the next decade. What does strong oil and gas demand mean for the local economy? Jobs, stability, money, and spending. Let’s not leave out our entrepreneurial spirit. How about a few of my favorites? HEB and Southwest Airlines. We also understand that lower taxes create jobs.
How does a strong Texas economy affect real estate? Values are stable to increasing and in many cases above pre-recession highs. The secret is out, based on the number of out-of-state buyers in Texas. Clearly the heat and rain are not as much of a deterrent as the state’s economy they just left behind. Over the past decade, mortgage interest rates have dropped pretty steadily. This steady decline is a function of economic announcements. During the past 10 years there have been a few “increasing rate” periods. When “bad” news hits the streets, consumers tend to hunker down and accept what they’ve got at a cheaper price. When “good” news hits the streets, consumer confidence spikes and we accept the “we could have more” risk. This “we could have more” confidence will be relayed in real estate. Even though mortgage rates are increasing and may continue to do so, we seek more and bigger housing to improve our lives and net worth. Borrowing money for real estate sternly corrected itself as a result of the subprime meltdown. I’m not saying it is perfect, but it is more secure than it used to be. Most purchase and refinance borrowers stomp through process with a feeling of relief at closing. All of the redundant and illogical underwriting hurdles are forgotten with resolution of the new house or reduction in payment.
The self-employed borrower is still penalized in this market. Most self-employed borrowers make more money than their tax returns say; that’s the beauty of being self-employed. I’m not saying we need liar loans again, but I am saying there should be a fair equation to qualify. 20% down and assets that demonstrate paying power should be two of the variables. Lending is not there yet.