Fretting over Mortgage Backed Securities, Fitch Warns about Home Prices in Texas

Real estate pros are preparing for a downturn.

Texas is, let’s say, in transition – from a phenomenally booming economy to something other than a booming economy. The oil bust is hitting in some places, and contagion is spreading.

In Houston, commercial real estate, particularly the office market, is melting down. Some smaller oil towns have been hit hard. Consumers, hit by “negative ripple effects,” as the Dallas Fed put it so elegantly, are having second thoughts about spending, for the first time since the Financial Crisis.

But some cities are still hopping. And in terms of home prices, Dallas is still exuberant, as “David in Texas” wrote in an email:

The real estate frenzy in the Park Cities area of Dallas and the surrounding neighborhoods continues unabated and west Plano (where Toyota is moving its North American HQ) is going completely nuts.

And the pros, the astute ones who’ve been through this before, are already smelling a rat. In mid-February, “C in Dallas” wrote this in an email:

I am one of 16 investors in a small, experienced-only, investor group that meets every two weeks here in Dallas with a combined 1400+ house rentals and 1600+ apartment unit rentals, mostly B-class and C-class properties rented to blue-collar, working-class folks for $800-$1200 a month for houses and $600-$1000 a month for apartments.

He owns over 100 houses and duplexes in Dallas and a fourplex in Houston.

To prepare for the downturn, I am selling some, paying off some, and fire-walling them away from banks, pulling out cash, and leveraging up some of my long-term keepers at today’s ridiculous rates and valuations to generate cash and pay-off the others.

So the housing boom is still raging in Dallas and other places and valuations are “ridiculous,” but the pros see a dust cloud on the horizon and are circling the wagons in preparation.

Now comes Fitch Ratings. It’s interested in the topic of housing and home prices because it rates Mortgage Backed Securities — both residential (RMBS) and commercial (CMBS). They’re once again in vogue, impossible as this might seem, after what the country and the world have been through during the Financial Crisis because of them.

And Fitch isn’t inclined toward undue pessimism.

For example, in February, Fitch surmised that the San Francisco housing market was “16% overvalued.” This is a housing market where the median home — 50% cost more, 50% cost less — sells for over $1.1 million, where a classic 20% down payment for that median home would set you back $220,000, in a city where the median household income, depending who does the counting, is between $78,400 and  $84,160.

These income limitations push even a 5% cash down payment ($55,000) out of reach because the median household in perhaps the most expensive city in the US can save absolutely nothing for a down payment. And for this median household to make mortgage payments, after a 5% down payment (charged to eight credit cards), on a median home is completely illusory. San Francisco is not “16% overvalued.” It’s ludicrously overvalued.

So we know Fitch is not given to hysterics about a housing market being overvalued. Nevertheless it now warned about Texas.

“Texas homes are now overvalued by 10% to 15% on average,” it said. So similarly overvalued as San Francisco? That would be a scary thought.

For the last two years, home prices in the state’s two largest cities, Houston and Dallas, grew faster than incomes. Smaller cities, such as Midland, also face risk from their economic dependence on natural resources and the decline in the price of oil.

Dallas became overvalued in 2014, while Houston began in 2013. Dallas and Houston have seen 42 and 54 months of consecutive price growth, respectively. And, over just the past two years, Dallas home prices grew 10%, outpacing income growth by 3.3%.

“In some Texas cities, the risk of the overvaluation is amplified by the decline in energy prices,” it added. The oil bust has started to bite in numerous ways, including the destruction of highly-paid jobs in the sector – job cuts that have been going on since late 2014 and have built into a crescendo. Just in the first quarter this year, Texas-based companies announced an additional 60,350 job cuts, by far the highest in the nation.

And so Fitch warns that “any decline in income or increase in unemployment would diminish sustainable prices.” That is, even if home prices remained flat, their overvaluation would rise as a function of additional oil bust contagion hitting incomes and jobs.

We see the potential for the biggest impact of the oil price decline in cities, such as Midland, where 40% of wages come directly from the natural resources industry. The risk is more muted in Houston where oil and gas make up only 10% of income. Dallas is well diversified around the private sector, outside of natural resources.

So no problem in Dallas.

During the last oil bust, Dallas too was supposed to have been spared due to its diversified economy. But oil-bust contagion, including a housing crash, took down nine of the ten largest banks in Texas, and these banks were big in Dallas, including the institution where I was banking: MCorp and its brand “MBank.” It collapsed in 1989, at the time the second most costly resolution in FDIC history.

The shrapnel ricocheted through the local economy. It wasn’t as bad as Houston. And it wasn’t nearly as bad as Tulsa, Oklahoma, which billed itself as the “Oil Capital of the World,” a title it relinquished to Houston after all the oil companies had moved to Houston. No major city got hit as hard as Tulsa. And it never really recovered. But it wasn’t pretty in Dallas either. Surely, this time around, it won’t be as bad, but we doubt Fitch’s scenario that the Dallas housing market will be left unscathed.

And this shows why American consumers, as individuals and households, are stuck in the stagnation zone, though official “consumer spending” for the country has been rising for years. Read… This Shows Why Consumers Are Bogged Down

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  23 comments for “Fretting over Mortgage Backed Securities, Fitch Warns about Home Prices in Texas

  1. Tech Insider says:

    Silicon Valley companies let go of more than 20% IT consultants across the board as of end of March. All major IT firms Wipro, Infosys, TCS etc., will be lowering their guidance for the coming months.

  2. Ptb says:

    Housings been “recovering” for 6 years and that’s about right for a correction. But it’s all local. Some will be hit harder than others. Employment beng the strongest indicator.

    • OddFellow says:

      Remember….. a “housing recovery” is falling prices to dramatically lower and more affordable levels by definition.

      Just how much has housing been recovering in the last 6 years?

  3. Bobster says:

    During the last oil bust (1987-1993 or so) you could buy OK rental houses in OKC for under 10K, Tulsa too. Almost every single larger landlord I knew of who bought during the previous bubble went under. You only made it if you bought during the collapse, since rents collapsed too. Bubbles draw people into an area for jobs, when the jobs vanish so do the people.

  4. Bobster says:

    You can make good money in moderate rent landlording if you do everything right, but it’s only for a certain kind of person who can be extremely firm with tenants and handle any problem, and can tolerate a high level of stress most days. You deal with problems you didn’t know existed in the USA.

    • Paulo says:

      Bobster hit it on the head. That’s why I am not a landlord, to be honest. My neighbours are in their 80s and when they one day move out we will probably pick their place up mostly to control who lives there. All it takes is a quad riding owner of a barking dog to wreck the neighbourhood. We would rent the place out as a vacation place, summers only, or cheap to good tenants. I live in a rather poor rural area, or at least some of the renters are pretty broke, and horror stories abound about some of the renters. Plus, there seems to be a continual cycle of moving outs and cleanups. I don’t like conflict and had enough in my working life to last me for a long long time.

      I have a neighbour that rents out a place and he is continually over there fussing around. As far as I’m concerned if you rent a place you should be left alone and the place should give you some privacy. But….grow ops, whatever, leaves owners wide open for heartache and problems.

      • nick kelly says:

        Leaving the tenant in peace is known in English law as ‘quiet enjoyment’ which doesn’t refer to noise.

  5. Texas Bob says:

    There is one huge difference in Texas during this oil bust compared to the 1980’s. Today people are moving here in droves from California, Illinois, New York, because I see their license plates. But the taxes and regulations are so onerous in these states that the businesses are moving here. With CA and NY passing $15 minimum wages, I only see it increasing. In Springfield, IL, 98% of the total property tax levy goes to pension payments. Pension payments that are to underfunded plans in a big way using unrealistic assumptions (assumed return of 7.5% and old mortality expectations). In Illinois, they don’t send you a notice that your car/truck registration is due, you are supposed to know. But if you are late, there is an additional $20 fee. It saved the state of Illinois $400,000 per year I am told. This is what a hidden tax increase looks like. I live in Dallas not far from the Toyota site, and I saw Minnesota, Illinois, Nebraska, and California license plates YESTERDAY. I still expect the oil bust to have more impact but I don’t see it having as much of an impact as it did in the 1980’s. When it comes to taxation and regulation, Texas is one of the nicest houses in a bad neighborhood.

    Today my house is valued at $123 / sq foot. My friend’s house in West Covina, CA is valued at $377 /sq foot. If you made $50k per year, where would you have the best standard of living? The people moving with Toyota are astounded at how much house they can buy here and still have money left over to stash in the bank.

    • TheDona says:

      Nice summary linked here as to why so many business are moving here…to Texas. And this just talks about from California.

      Texas is also number 2 in Fortune 500 HQ.

      • TheDona says:

        Wolf: why is my comment still awaiting moderation from 12:14? All I posted was 2 links. :-(

        • Wolf Richter says:

          Which comment? There is no comment in moderation. One of your comments got caught in it (too many links, I think), but I released it hours ago. Please check and see if it is there (make sure you check the right article). Let me know if it’s not there.

        • TheDona says:

          Hi Wolf. Yes my 12:14 comment appeared right after I posted my 2:47 comment to you asking about it. All good. Thanks!

    • Steve in Flyover says:

      I “see” TONS of Colorado/Nebraska/Texas/Oklahoma plates here in Kansas.

      Doesn’t mean s##t. NOBODY is moving to Kansas. In fact, the 30 year old and younger crowd is moving to Missouri as fast as they can, just so they don’t have to say they are from Kansas.

      As from your own observations, Texas will be getting all of the people who can’t make/aren’t worth $15/hour in California.

      They can join all of the Texas and Old South carpetbaggers coming back home, when the Bakken goes Tango-Uniform.

      But I’m biased. I think Texas (and especially the DFW Metroplex) sucks on briquets (not ice……too damn hot). No redeeming features whatsoever. Especially the highways. Terminal gridlock on the “free” Interstates, or $10 worth of tolls to cross town one time.

      • TheDona says:

        If you like your State, you can keep your State….and your little dog too.

    • CrazyCooter says:

      It is funny – you just described why I left TX.

      I was actually born in Dallas and lived there well over half my life (born, volunteered, went to college, and worked professionally).

      If you knew what the city looked like in the 70s or 80s and then compared it to what it looks like now, it highlights the problem in my mind. There is no geography to constrain expansion. It just grows, grows, and grows some more. There is no space between Dallas and Ft Worth anymore. They used to be separate cities – you could tell when you left one and arrived in the other. And then you have all the suburbs.

      What I found depressing the year I decided to pack and move was driving from East Dallas to West Ft Worth – it took me two hours – and it was nothing but strip malls, restaurants, neighborhoods, commercial buildings, roads, gas stations, construction, and lots of traffic. Non stop. The whole way. And I was making fairly good time on the highway.

      Texas is a tax haven, which is why they are vacuuming up HQs. In fact, there used to be a stat where NY had the most HQs by volume, SanFran by land area, and Dallas by per-capita.

      The growth is what is making the place miserable to live in – it is why I left – and the city is going to keep growing – but one day when things start going south – it is going to be an ugly ride down hill with all that sprawl. Can you imagine how well Dallas would work if there was a 70s style fuel shock? Cheap oil is the problem right now, but that will change one day and folks who have to do these crazy commutes are going to suffer. I bet the mileage average per person in Dallas is one of the highest in the nation. And that is before all this toll road madness – the cost of getting around is going to be a real problem for Dallas in the long run.



    • Lee says:

      “But if you are late, there is an additional $20 fee. ”

      Here in Victoria there is no ‘late fee’…………

      Get caught driving without having paid your registration and the fine is……………….the registration fee!!

      Right now it costs around A$800 to register a car here, So get caught and the fine is around $800.

      And no, here in Victoria they send out registration renewals, but no stickers to place on the cars. That is how they are ‘saving’ money. Of course, you used to be able to tell when the registration was due by looking at the sticker on the windshield. No more.

      I wonder how extra revenue the state has picked up by fining those that forgot to pay their registration.

      That $A800 is a huge cost to the average person here.

  6. michael says:


    You might want to do an article on Santa Clara office space. Just took a drive around the Bowers, Scott, and San Tomas. Behemoth construction of multi floor commercial buildings. Many smaller spaces being torn down. Who the heck is going to occupy all this space? By the way, the company that owns many of these must be huge, perhaps you have heard of them….Available?

  7. William says:

    Austin-area is attracting people of all demographics. Cheap housing, $80 sq ft, is still available on the edge of town, while downtown can be $400 per sq ft. There are no signs of a slowdown in the real estate boom, yet.

  8. kevin grigsby says:

    I am a loan officer in a credit union in Midland, TX and I can tell you it isn’t just mortgage loans that are a concern but consumer loans as well. The biggest problem is that a lot of banks & CU lent money to oil field workers using their overtime pay, which no longer exists. I think we’ve only seen half of what’s coming.

  9. MikeInAustin says:

    Austin is not immune, but it’s certainly a quite different real estate market than either Houston or Dallas. Home prices have continued to appreciate in the greater Austin area anywhere from 7%-11% annually since 2012. Dallas will not suffer the fall out from the oil bust like Houston will. Dallas is a pretty diversified economy now, and on top of that there is a lot of Chinese money buying property up all around Dallas. The Chinese like Dallas, and as long as the outflows of wealth continue from China, Dallas is not likely to see a drop in housing prices anytime soon. Nor will Austin, though Austin is more due to just mass inflow from the rest of the country, along with the huge tech scene here. Houston is the only big city in Texas that will really feel the effects of the oil bust.

    Compared to most of the other major population areas around the continental US, Texas housing is still dirt cheap, and salaries here aren’t that much lower than they are on the coasts for the most part. A computer programmer in Austin can expect to command ~$90k while in the Bay Area you’re looking at ~$130k average. Now compare the median prices of homes between Austin and the Bay Area (doesn’t matter what part), and tell me again how “over valued” housing prices in Texas are?

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