Texas Has Foreclosure Lessons, Especially for Nevada, Arizona, Florida, California

We should look at how Texas avoided the foreclosure crisis.

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By Michael Barone, Thomas Jefferson Street blog

The often underrated USA Today has a terrific article on where the foreclosures are. As I have previously written, they are very concentrated geographically.

The USA Today story includes some terrific maps, including one interactive map on which you can track foreclosure activity from 2006 to 2008. The foreclosure rates are highest in four states that have seen rapid growth during most of this decade—Nevada, Arizona, Florida and California. There's a certain logic in this. In long-settled areas, many homeowners have paid their mortgages off or got their mortgages a long time ago and have plenty of equity in their houses. Even if the sudden loss of a job makes it impossible for the latter to meet mortgage payments, they can sell and pocket their equity (to be sure, with some loss due to recently falling prices). In newly settled areas, many homes were bought with subprime and Alt-A mortgages, the basis for the toxic waste mortgage-backed securities that Fannie Mae and Freddie Mac flooded through financial institutions all over the world from 2004 to 2007.

Still, not every fast-growing state has the same rate of foreclosures—far from it. The data show that foreclosures are higher in Nevada, Arizona, Florida and California—the "sand states"—than in Colorado, Georgia or Texas, which have also had substantial population growth. These states evidently didn't have the same rapid rise in housing prices seen in the sand states; Arizona prices went up something like 100 percent between early 2005 and early 2008 and since have fallen by something like 50 percent—i.e., they're back to where they were at the beginning. A lot of buyers who bit off more than they could chew found themselves (to mix the metaphor) underwater, and walked away. Similarly, much of the buying, especially in Florida and Nevada, was by speculators. They took a risk that proved to be unwise and are lucky that under our no-recourse mortgage law their lenders can't come after their other assets.

As unfashionable as it may be to do so in the wake of George W. Bush's presidency, I think it may be worthwhile to look at the experience of Texas for clues to good public policy. Texas has grown rapidly, from 20.9 million in 2000 to 24.3 million in 2008, 17 percent in eight years. Its growth was broad-based, with robust natural increase (births minus deaths) of 1,884,000, net positive internal migration of 711,000 and immigration migration of 851,000. It has plenty of "minorities"—its population in 2007, according to Census estimates, was 12 percent black and 36 percent Hispanic. Yet it didn't have much of a housing bubble and hasn't had much of a housing bust. Its foreclosure rate in 2008 was 1.0 percent, well below the 1.8 percent national average. Its economy has continued, at least until very recent months, to grow robustly. I think Texas has some lessons for the rest of us, and we should be pondering what they are.

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