The Housing Bubble: A Lesson from Texas and Vermont

On Labor Day, the CBP will release our annual survey of the economic well-being of California’s workers and their families. Needless to say, this won’t be a happy story. Not only is unemployment at record high levels, inequality has risen nationally, and earnings here in California have suffered due to lagging wage growth and a loss of weekly work hours.

Before I give away the whole story, I think it is worth considering one reason why California has fared worse than the nation as a whole: lax consumer lending protections. Earlier this week, the Wall Street Journal published an interesting story suggesting that Vermont’s strong consumer lending laws protected that state from the worst of the housing crash. Now, Vermont is a small state, with little in common with California. Interestingly, it appears that Texas may have also avoided the brunt of the bubble bursting for the same reason. Researchers from the Federal Reserve Bank of Dallas note that:

“Due to the state’s strong predatory lending laws and restrictions on mortgage equity withdrawals, a smaller share of Texas’ subprime loans involve cash-out refinancing, which reduces homeowner equity and makes default more likely when mortgage payments become unaffordable.”

As we’ll soon report, the downturn has spread far beyond the housing sector and the “great recession,” as some economists have christened the current downturn, now calls for a comprehensive set of policy responses. But as California’s legislators think about how to prevent the next boom-bust housing cycle, here’s one lesson that we might learn from Texas and Vermont.

— Jean Ross

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