The Texas housing market enjoyed a remarkable upswing in the middle of this decade. ; Home sales and building accelerated in 2004 as the state's economic engine revved up, generating strong population and employment growth. Historically low interest rates attracted new homebuyers, while the rise in nontraditional mortgages fueled the market's strength as more Texans were able to obtain financing even if they had flawed credit or lacked down payments. The state's homeownership rate reached a record 66 percent in 2006, up from 61.8 percent 10 years earlier.Economic conditions - Texas ; Housing - Prices ; Construction industry

D'Ann Petersen

English

Research Papers in Economics

FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2008    11    SouthwestEconomy
Hot Housing Market 
Catching Cold in Texas 
By D’Ann Petersen
 T he Texas housing market enjoyed a 
remarkable upswing in the middle of this 
decade. 
  Home sales and building accelerated in 
2004 as the state’s economic engine revved 
up, generating strong population and em-
ployment growth. Historically low interest 
rates attracted new homebuyers, while the 
rise in nontraditional mortgages fueled the 
market’s strength as more Texans were able 
to obtain financing even if they had flawed 
credit or lacked down payments. The state’s 
homeownership rate reached a record 66 
percent in 2006, up from 61.8 percent 10 
years earlier. 
  The nation’s housing market began fal-
tering in 2005, but Texas’ kept expanding at 
a feverish pace through spring 2006. Then 
it began to cool. Buyers turned cautious 
and builders cut back in response to slower 
demand. Texas’ existing-home sales bucked 
the national trend through December 2006, 
but they too started to slip as the new year 
got under way. 
  In 2007, national housing ills took a 
toll on Texas’ housing sector. Persistent 
declines in U.S. sales and home prices 
spooked many potential Texas homebuy-
ers. In addition, a slowdown in the regional 
and national economies, along with tighter 
credit conditions brought about by the sub-
prime fallout, further reduced the pool of 
willing and able Texas home purchasers. 
Sales continued edging down, and home 
construction retrenched further. Home-
builders and manufacturers of residential 
construction products bore the brunt of the 
housing downturn and reduced payrolls to 
cut costs. 
  The Texas housing industry faces a 
difficult year in 2008. Many potential home-
buyers are unable to get financing or await 
news of a housing turnaround. While Texas’ 
housing sector is weakening, it remains 
healthier than the national average, and 
Texas metro markets are better positioned 
than many other parts of the country to 
thrive when housing demand turns the cor-
ner. 
Homebuilding Takes a Hit
  With sales in other parts of the country 
spiraling downward, large national build-
ers—whose cash flow and balance sheets 
were hurt by problems elsewhere—at first 
shifted building to Texas and its robust 
economy. Permits for single-family home 
construction surged in late 2005 and early 
2006 (Chart 1). 
  As concerns about the national housing 
market trickled down to Texas, the cooling 
showed up initially in new-home building. 
Buyers became more wary. Cancellation 
rates soared as would-be Texas homebuyers 
became unable to sell their existing homes 
elsewhere in the country.
  The state was left with an increas-
ing supply of finished homes. New-home 
inventories in Texas had already begun 
to edge up above the comfort zone of six 
months before new-home sales showed 
signs of cooling in the second half of 2006. 
That’s when builders, responding to lagging 
demand and rising inventories, pulled back 
strongly on new-home construction. 
  As the pace of building slackened, oth-
er segments of the market remained on the 
upswing. Strong job growth of 3.5 percent 
in 2006—more than double the nation’s—
extended Texas’ existing-home market 
expansion. Pre-owned-home sales, which 
account for almost twice the volume of 
new-home sales, hit a record high in 2006, 
despite a decline of 8 percent nationally. 
  Affordability was a major factor in 
Texas, where the median home sold for less 
than 70 percent of the nationwide price. 
While increased job opportunities, rising 
incomes, low interest rates and easy credit 
spurred sales among Texans, residents from 
other states found Texas homes more at-
tractive as prices skyrocketed in other parts 
of the country. 
  Texas owes its housing affordability to 
ample land supply and relatively few regu-
Booming Industry Creates Jobs Faster than State
lations on construction. This allows supply 
to respond quickly to demand, boosts com-
petition and keeps a lid on price increases 
in both new and pre-owned markets. Dur-
ing the housing boom, Texas homes ap-
preciated modestly, while prices elsewhere 
soared out of reach of many Americans 
(Chart 2).1
  The National Association of Home 
Builders–Wells Fargo Housing Opportunity 
Index, which measures the percentage of 
homes sold at prices an area’s median-
income household can afford, gave Texas 
metros high scores in 2006. The index 
ranged from 52 percent in San Antonio to 
67 percent in Fort Worth, compared with a 
national average of 41 percent. Areas of the 
country that witnessed rapid appreciation 
during the boom, including parts of Califor-
nia and Florida, recorded affordability rates 
in the single digits and teens. 
  Diminishing affordability contributed to 
the nation’s housing woes. 
Chart 1
Texas Housing Market Falters
Index, January 2000 = 100
Texas existing-
home sales
U.S.
permits
50
70
90
110
130
150
170
190
2007 2006 2005 2004 2003 2002 2001 2000
U.S. existing-
home sales
Texas
permits
NOTE: Existing-home sales are five-month moving average; housing 
permits are six-month moving average.
SOURCES: Census Bureau; National Association of Realtors; Texas  
A&M Real Estate Center; seasonal and other adjustments by the Federal  
Reserve Bank of Dallas.SouthwestEconomy       12      FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2008        
  In 2007, U.S. home sales fell at a record 
pace, national home inventories ballooned 
to levels not seen since the mid-1980s, fore-
closures shot up and home prices deterio-
rated throughout the year, especially on the 
East and West coasts.
  Because Texas’ housing sector held 
up relatively well in 2006, industry execu-
tives remained hopeful the state would 
be spared a hard hit in 2007.2 Most were 
hoping for a minor dip in building. Those 
hopes were short-lived, however, as sev-
eral negative factors converged during the 
past year, resulting in a statewide housing 
slump. 
  Although conditions were better than 
in the rest of the country, Texas homebuy-
ers turned apprehensive, which damp-
ened demand for both new and existing 
homes. In addition, more stringent lending 
standards associated with the subprime 
mortgage crisis eliminated many potential 
first-time homebuyers, a market that had 
spurred much of Texas’ sales in prior years. 
Finally, a slowdown in economic growth 
both nationally and in Texas further re-
duced the demand for homes.
  Texas’ home sales, both new and pre-
owned, fell in 2007, although the annual 
decline was less dramatic than the nation’s. 
According to anecdotal reports including 
the Dallas Fed’s Beige Book, the higher-
priced segment of both markets remained 
strong throughout the year, but sales of 
lower-priced homes dropped dramatically 
after August 2007.
A Closer Look: Metro Markets
  Because of their sheer size, the state’s 
major metros make up the lion’s share of 
new-home building and sales—accounting 
for roughly 80 percent of the state’s total.
  Like in the state as a whole, the pace 
of homebuilding began to edge down in 
most major metros in 2006 and decelerated 
further in 2007 (Chart 3). Metro existing-
home sales held up through 2006 but weak-
ened in 2007, especially in the second half 
of the year as the credit crunch took hold 
(Chart 4). 
  While the housing downturn has im-
pacted all major Texas metros, the extent 
of the fallout is somewhat varied. The 
cooldown has been most prominently felt 
in Dallas–Fort Worth. The metroplex more 
closely resembles the nation than other 
Texas metros in economic structure. Follow-
ing the U.S. lead, D–FW job growth slowed 
to 2.3 percent in 2007, down from a robust 
4.3 percent in 2006. Fort Worth’s rate of job 
increase decelerated from 2.7 percent to 2 
percent over the same period. While still 
respectable, the slower rates of job forma-
tion mean fewer homebuyers. 
  Total new-home sales in the metroplex 
fell 17 percent in 2007, according to Met-
rostudy, a residential consulting company, 
and existing-home sales declined 8 percent 
in Dallas and 5 percent in Fort Worth.3 
Builder inventories of finished homes 
reached record levels in early 2007. A sharp 
reduction in construction—with building 
permits plunging by more than 16,000, or 
37 percent—brought inventories down to 
more comfortable levels by year-end.
  In San Antonio, vigorous 2006 job 
growth, coupled with recognition as one 
of the country’s best places to live, pushed 
up home sales and expectations of future 
demand. In 2007, however, the Alamo City’s 
job engine slowed, putting a damper on 
sales. New-home sales edged down 8.5 
percent and existing-home sales dropped 
9 percent from the previous year. Build-
ers reacted quickly and pulled the reins on 
housing construction. As a result, single-
family permits fell by 4,511 last year, or 33 
percent.
  In 2006 and 2007, Houston and Austin 
led the state’s major metros in job growth. 
Initially, the booming energy sector in 
Houston and a strengthening high-tech 
sector in Austin helped cushion the metros 
from the full impact of national factors that 
led to homebuyer uncertainty elsewhere. 
Despite their strong economies, the two 
metros saw new- and existing-home sales 
falter in 2007, especially as credit tightened 
late in the year. Builders cut back on con-
struction; by December, single-family per-
mits had fallen 21 percent in Houston and 
30 percent in Austin from 2006 levels. 
  Texas home prices held up quite well 
in 2007, despite the weakening housing 
landscape. U.S. median existing-home 
prices fell 6.5 percent from December 2006 
to December 2007, but Texas metros saw 
mostly stable home prices, with an overall 
increase of 1 percent (Chart 5). Price ap-
preciation varied by metro, with Austin in 
the top spot at 8 percent and Dallas prices 
inching down 2 percent.
Chart 2
Texas Home Prices Less Volatile 
(OFHEO House Price Index)
Quarterly change, year-over-year (percent)
Texas
U.S.
0
2
4
6
8
10
12
14
16
2007 2006 2005 2004 2003 2002 2001 2000
SOURCE: Office of Federal Housing Enterprise Oversight; adjusted by the 
Federal Reserve Bank of Dallas.
Chart 3
Homebuilding Ebbs in Texas Metros 
(Monthly single-family permits)
Thousands*
Dallas–Fort Worth
Houston
0
1
2
3
4
5
2007 2006 2005 2004
Austin
San Antonio
* Five-month moving average.
SOURCE: Census Bureau; seasonal adjustments by the Federal Reserve 
Bank of Dallas.
Texas’ home sales, 
both new and pre-owned, 
fell in 2007, although the 
annual decline was less 
dramatic than the nation’s.FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2008    13    SouthwestEconomy
  New-home prices aren’t readily avail-
able at the metro level, but Dallas Fed busi-
ness contacts say prices have held mostly 
steady despite aggressive discounting on 
unsold inventory in some areas. 
  
Down but Not Out
  While the Texas housing industry faces 
some tough challenges in the year ahead, 
the state has so far managed to avoid the 
pitfalls of the nationwide housing down-
turn.
  One major concern is the possibility of 
dramatic increases in foreclosures, which 
could inflate Texas home inventories and 
push down prices. So far (through third 
quarter 2007), foreclosures as a percentage 
of total loans outstanding have held rela-
tively steady in Texas, while spiking in the 
U.S. (Chart 6). Likewise, Texas’ inventory of 
loans in foreclosure as a share of total loans 
outstanding is below the national average. 
  Texas’ foreclosure rate remains close 
to the level recorded during the state’s 
high-tech downturn, when telecom-related 
layoffs forced many homes back on the 
market. While the percentage is roughly the 
same, today’s foreclosures are more likely 
skewed toward higher-cost loans and ad-
justable rate mortgages (ARMs) often used 
by first-time homebuyers and those without 
downpayments or with blemished credit.4
  As interest rates reset on homes pur-
chased with ARMs, homebuyers drawn in 
by creative financing may be unable to 
afford higher monthly payments. Texas’ 
slower housing appreciation affords less 
opportunity to tap home equity when these 
homeowners become financially strained.5 
While rising, prime and subprime ARM 
foreclosures remain a small part of Texas’ 
overall loan pool—0.8 and 3.6 percent, 
respectively, in the third quarter 2007, well 
below the U.S. shares of 0.97 and 4.7 per-
cent. 
  Because of its relative affordability, 
Texas has a smaller share of jumbo loans—
loans above the government’s conforming 
limit of $417,000. While overall credit has 
tightened for all types of loans, the market 
for jumbo loans has become especially re-
strictive recently because it includes a large 
share of subprime mortgages.6 In contrast, 
nonjumbo loans were mostly made up of 
traditional fixed-rate mortgages (88.1 per-
cent).7  The smaller percentage of jumbo 
loans may lessen the impact of the credit 
squeeze in Texas relative to some more ex-
pensive areas of the country.
  Other factors should help Texas hous-
ing markets avoid the problems other states 
Chart 4
Existing-Home Sales Edge Down in Texas, Plunge Nationally
Index, January 2004 = 100*
80
95
110
125
140
155
170
2007 2006 2005 2004
Fort Worth
Austin
San Antonio
Houston
Texas
Dallas
U.S.
* Six-month moving average.
SOURCES: National Association of Realtors; Texas A&M Real Estate Center; seasonal and other adjustments by the Federal Reserve Bank of Dallas.
Chart 5
Texas Median Existing-Home Prices Hold Up
Thousands of nominal dollars*
Fort Worth
Austin
San Antonio
Houston
Texas
Dallas
70
80
90
100
110
120
130
140
150
160
170
180
190
200
2007 2006 2005 2004 2003 2002 2001 2000
* Four-month moving average.
SOURCE: Texas A&M Real Estate Center; seasonal and other adjustments by the Federal Reserve Bank of Dallas.
While rising, prime 
and subprime ARM 
foreclosures remain 
a small part of Texas’  
overall loan pool.are facing. Most notably, Texas home prices 
continue to hold up fairly well compared 
with prices at the national level.
  Thanks to plenty of land and few 
building restrictions, Texas didn’t join the 
nation in the run-up in housing values dur-
ing the boom years. More recently, builder 
restraint in response to weaker demand has 
helped keep Texas’ new-home inventories 
in check—near six months’ supply in most 
major metros, compared with more than 
10 months at the national level (Table 1).8  
While existing-home inventories edged up 
slightly in 2007—from 5 months’ supply to 
6.1 months’—they’re still well below levels 
recorded even as recently as the mid-1990s.
  Tighter inventories should help buffer 
Texas markets from the large price declines 
prevalent in other areas of the country. 
While some downward movement is pos-
sible, the risk of price declines is much 
smaller in Texas than in other parts of the 
U.S.
  The PMI Mortgage Insurance Co.’s U.S. 
Market Risk Index—a measure of vulnera-
bility to future price declines—ranks Texas’ 
metros among the 11 least vulnerable in its 
50-city survey. In fact, Dallas, Fort Worth 
and Houston rank among the four lowest 
for risk of price deterioration.
  Most important, while economic 
growth is expected to continue to slow, 
Texas is still expected to outpace the na-
tional average.  
Long-Term Advantages 
  2008 will be a tough year for the Texas 
housing industry. While fundamentals are 
healthier in Texas than in many other parts 
of the country, housing demand has lost its 
luster, and it may be some time before buy-
ers feel confident enough to jump back into 
the market.
  A slowing national economy, the recent 
move toward more stringent lending practic-
es, rising foreclosures and lagging housing 
prices in other states will continue to nega-
tively impact the housing industry in Texas.
Chart 6
Texas Foreclosures and Inventories Relatively Steady
Percent
0
.2
.4
.6
.8
1
1.2
1.4
1.6
1.8
2007 2006 2005 2004 2003 2002 2001 2000
U.S. foreclosure inventory
Texas foreclosure inventory
Texas foreclosures
U.S. foreclosures
NOTE: Foreclosures are number of foreclosures initiated in the quarter as a percentage of total loans. Inventory is total number of loans in the foreclosure process 
as a percentage of total loans.
SOURCE: Mortgage Bankers Association; seasonally adjusted by the Federal Reserve Bank of Dallas.
  There is a bright side. Texas metro 
housing markets remain better off than 
other areas of the country in terms of  
prices, inventories and foreclosures. More-
over, despite the recent pullback, Texas is 
still the top state for homebuilding. 
  In the longer term, Texas’ location and 
cost advantages, fast-growing population 
and relatively buoyant economy put the 
state’s housing industry in a strong position 
to respond when demand turns the corner.
Petersen is a business economist in the Research 
Department of the Federal Reserve Bank of Dallas.
Notes
Thanks to Bill Gilmer for comments and to Mike Nicholson 
for research assistance. Thanks to Metrostudy for sharing 
housing data.
1 The OFHEO home price index is a broad measure of the 
movement of single-family house prices. It is a weighted, 
repeat-sales index, meaning that it measures average 
price changes in repeat sales or refinancings on the same 
properties. This information is obtained by reviewing repeat 
mortgage transactions on single-family properties whose 
mortgages have been purchased or securitized by Fannie Mae 
or Freddie Mac since January 1975.
2 Based on the Dallas Fed’s Beige Book, a regular survey of 
current economic conditions.
3 Calculated as total sales in 2007 versus total sales in 2006.
4 For more information, see “Neither Boom nor Bust: How 
Houston’s Housing Market Differs from Nation’s,” by Amber 
C. McCullagh and Robert W. Gilmer, Federal Reserve Bank of 
Dallas Houston Business, January 2008. 
5 A decline in Gulf Coast foreclosures, including Houston, can 
be attributed to actions taken by the Department of Housing 
and Urban Development, which implemented a moratorium 
on foreclosures in federal disaster areas for properties 
insured by the Federal Housing Administration from August 
31, 2005, through August 31, 2006. 
6 According to the Office of Federal Housing Enterprise 
Oversight, risky interest-only loans and negatively amortizing 
ARMs made up nearly two-thirds of the dollar volume of 
first-lien jumbo loans originated in the U.S. in the first half 
of 2007 and later securitized, whereas traditional fixed-rate 
mortgages composed only a quarter of those loans.
7 “Mortgage Market Note 08-01: Potential Implications of 
Increasing the Conforming Loan Limit in High Cost Areas,” 
Office of Federal Housing Enterprise Oversight, Jan. 11, 
2008.
8 Inventories are months’ supply of single-family homes on 
the market at the current sales pace.
SouthwestEconomy       14      FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2008        
Table 1
Texas Home Inventories Tighter
(Months’ supply of single-family homes) 
     Existing homes      New homes*
   Q4’07    Q4’07
Austin    4.6   7.3
D–FW       6.8
  Dallas    6.5 
  Fort Worth    6.3 
Houston    6.6   6.0
San Antonio    6.4   5.6
Texas    6.1   
U.S.    10.0    10.6
*Not seasonally adjusted.
SOURCES: Metrostudy; Census Bureau; National Association of 
Realtors; Texas A&M Real Estate Center; seasonal and other  
adjustments by the Federal Reserve Bank of Dallas.

Hot housing market catching cold in Texas

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Hot housing market catching cold in Texas

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