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Texas Housing Flies High, U.S. Fastens Seat Belt

News Release No. 1, November 2006
By David S. Jones

COLLEGE STATION, Tex. – Remember that “soft landing” economists were predicting for the national housing market? Now, they have turned on the “fasten seat belt” light.

National analysts foresee an 11.5 percent decline in housing starts this year and another 11.7 percent drop in 2007. U.S. housing should hit bottom by the middle of next year. Once the bulwark of the national economy, housing is now seen as a major source of weakness.

The Texas housing market, however, continues to fly high. The state’s population has soared by two million so far this decade. Home inventory remains low, and prices continue to appreciate.

Some speculative money has made its way to Texas, but much less than in Florida, Nevada and California, says Real Estate Center Chief Economist Mark Dotzour.

Despite the smooth flight Texans currently enjoy, Dotzour sees two blips on the radar screen that might spell trouble ahead. 

“At this time, the most significant risk to the Texas housing markets is the possibility of large-volume builders attempting to make up for lost volume in East and West Coast markets by increasing volume in Texas cities,” says Dotzour. But he added, “I’m hopeful that will not happen.”

The second is one the entire U.S. housing market faces — a recession in 2007.

Dotzour is concerned because the United States has had a flat or inverted yield curve for nine months. This artificial situation occurs when short-term interest rates are higher than long-term rates.

“It almost always causes a recession within 12 to 18 months,” says Dotzour.

The Center’s chief economist says the declining ten-year treasury rate and home mortgages indicate that bond investors are convinced the 5.25 percent Fed funds rate is high enough to slow things down considerably.

“I don’t expect any movement on interest rates between now and the end of the year,” he said. “The Fed doesn’t like to take action before elections. But I think it’s highly likely that every day the yield curve stays inverted as it is now, brings us another day closer to a national recession.”

A real estate agent from Austin asks Dotzour how one goes about recession-proofing a real estate business and personal portfolio.

“The good news is that even though the United States could have a recession, it’s highly possible that Texas won’t participate in it,” Dotzour says. “The Texas economy is not overheated in the housing market, and we don’t have a lot of ailing auto plants in our state.

“When an economic cycle is near the top, the best plan for businesses is to not take on a lot of new debt. If revenues start to flatten out,” he says, “the people that can continue to meet their debt obligations will be around for the next cycle.”

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