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Texas and the Housing Bubble

Monday, 12 April 2010 05:31

Paul Krugman asks in his column this morning why Texas managed to largely escape the worst of the housing bubble while Georgia leads the country in the number of failed banks. Both are states in which the major cities have relatively few zoning restrictions or natural barriers, which allows for easy sprawl to meet new housing demand. Krugman explains the difference by the better consumer protection legislation in Texas.

While this may have played a role, it is important to note that Texas had just been through a boom/bust cycle in the 80s. The state was at the epicenter of the S&L crisis. Land prices had soared with the oil boom at the start of the decade, but then collapsed along with the price of oil in the middle of the decade. Texas bankers who had lived through this experience might have had more realization that house prices could fall than bankers in other parts of the country. Of course, the experience of a recent boom and bust cycle did not affect in slowing the bubbles in either southern California or Colorado.

Comments (3)Add Comment
Property taxes
written by Matt, April 12, 2010 11:13
You're both missing an important factor: property taxation. Half of the property tax falls on land rents: thus, there's a built-in brake to an upward spiral in land rents with a property tax, with higher rates being a stronger brake.

Texas property taxes bring in 1.76% of "home" (land and improvements) value, where as Georgia only brings in a very meager .77%; that level is much closer to California's pathetic .61% or Arizona's .57%: both massive-bubble states.

If we made a comprehensive effort to tax land rents entirely, or nearly entirely, there's never be land bubbles because no one would ever build large amounts of what you call "housing wealth."

Why do economists refuse to acknowledge this?
written by leo, April 12, 2010 11:36
Probably the most disappointing thing I've read by Krugman since he figured out (finally) that off-shoring our industrial base probably wasn't the best idea.

It's almost as if he set his goal to defend monster banks and any argument, including this one, would do.
It's the property tax, stupid
written by Michael, April 14, 2010 10:31
As Matt comments above, the taxation of land rents is what stabilizes real estate values and makes home ownership a retirement investment (as it should be) as opposed to being a stack of poker chips. Most sane people want to own a small home in a place out of the mainstream when they retire. They will get tax breaks because of their age and retired status. We buy a kid ranch closer to jobs when younger and trade it for the retirement place later. That is the way Americans thought about it before the 70's and the real estate boom in Texas tied to inflation and oil. Many still think about it this way. The tax rate on land (property taxes) stops land rent speculation.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.