A Dichotomy In Housing - Texas and California

NBC news had an interesting report tonight on the boom in the Texas housing market. In an earlier post I wrote about the booming Texas economy due to the high price of oil. So even as the housing market deteriorates across the country Texas's housing market stands out as one of strength. Texas has had these boom bust cycles before. In the early 1980s after the price of oil collapsed the Texas housing market went with it. But at least for now Texas stands as a beacon of hope for the housing market.

Last week I was on the Wachovia Bank earnings conference call and was a bit taken aback by what I heard. The bank is facing losses from home owners who could afford to make their mortgage payments but chose not to. These home owners have taken this route because they owe more on their mortgage than what the house is worth. So they are getting up and leaving. Now I was a bit astounded by this when I heard it and did not want to write about this until I was able to confirm this. There are so many things said on a conference call that some times it is easy to make a mistake. Well it was no mistake as CBS's 60 Minute's tonight confirmed it in their feature. They interviewed a California couple who could afford their monthly mortgage payment but have decided that since the price of the home has dropped they were going to walk away from the home. Now Wachovia was not mentioned in this report so I imagine that they are not the only bank facing this problem so I do not wish to single out Wachovia. Note too that even with California's large oil presence, its housing market does not seem to be benefiting from it.

Before I get into this further I would say that most banks' lending practices played a large role here as well. Had the banks never issued no money down loans and instead stuck with the tried and try standard mortgages in which a down payment of about 20% is taken it is unlikely that the home owner would walk away from a house she could afford to make payments on as the prospect of losing the down payment is not very appealing. How in the world does a bank not take collateral when issuing a loan? Let me switch my attention back to the home owner. If you can pay your mortgage payment, even if the price of the home dropped, you have an obligation to make that payment.

At some point house values will stop dropping and people will stop walking away from their homes. Unfortunately until that time as long as house prices keep dropping those with little or no equity in their homes will continue to walk away from their homes, even the ones who can afford to make the payments. It is hard for me to believe that this is actually going on and it saddens me. At least Texas is booming so that is the bright spot I leave on.

* Disclosure: I have no position in Wachovia nor am I aware of one that the firm I advise holds.