The S&P/Case-Shiller Home Price Indices are watched closely by politicians, investors, and homeowners, especially after the housing market peak in 2006 and collapse thereafter.

The index of 20 major metro areas (20-city index) provides a good look at national home prices. The report for December 2013 shows this measure rose by 13 percent over the last year. This broad index of home prices bottomed in January 2012 after falling 34 percent from the April 2006 peak, but it remains 19 percent lower than the peak almost eight years later (see figure below).

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Clearly, the rise in home prices before this was unsustainable. In other words, the housing market boom led to an inevitable bust.

Looking back, economists argue this was from a number of factors including: low interest rate policy by the Federal Reserve, homeownership pushed by Presidents Clinton and Bush, commercial banks providing mortgages with little proof of credit or income because they would sell them off to Fannie Mae and Freddie Mac, individuals not fully understanding their mortgage agreement (i.e. adjustable rate mortgages), and a host of other reasons.

In addition to the lower 20-city index, home prices in large cities, such as San Francisco (-17 percent), New York (-20 percent), and Detroit (-26 percent), remain substantially lower than their peaks in 2006. This decline in home values is one reason many people have moved to other cities in states with a more stable housing market.

One such state that did not have a large housing boom and therefore fared better during the housing market collapse and eventual national recession was Texas.

According to the index for Dallas, home prices peaked in April 2007-a full year after most other major cities-and bottomed in May 2011 after dropping 10 percent. Since the bottom, housing prices are up 18 percent and are up 7 percent since the previous peak to reach a record high in December 2013. These stats are dramatically different from those in other major cities across the nation.  

There are a number of reasons why Texas did not experience a housing market boom and bust.

If we consider market factors, there was a huge influx of housing demand from more people moving to Texas and the vast land available throughout the state provided plenty of housing supply to match the demand.

Another factor the Dallas Fed considers is increased banking regulations after the housing market crash in the 1980s. The Dallas Fed finds the following:

Rules governing home equity borrowing are not uniform across the U.S., and Texas’ rules are significantly more stringent. The data suggest that the tighter regulations in Texas helped keep underwater mortgages and default rates from rising by as much as they did elsewhere. By extension, lower default rates and fewer underwater homeowners might also have helped Texas avoid the subsequent sharp drop in home prices other states experienced.

To be sure, these benefits did not come without attendant costs. Just as the restrictions helped Texas navigate the housing downturn, the same restrictions could have constrained consumer spending growth during the boom by preventing homeowners from fully tapping their housing wealth. At the same time, this may have helped limit swings in consumer spending. Moreover, the inability to access housing wealth may have driven some credit-constrained Texans to more-expensive credit card debt, unsecured consumer debt or even payday loans. Any estimate of net benefit of Texas’ home equity regulations must also account for such costs.

Another factor could be that banks in the Lone Star State righted their wrongs of the 1980s and Texans were better off for it. There are certainly a number of factors to study to provide a framework for other states and the nation to follow.

No matter which factors dominate, the solution that will always be at the top of the list: a free market that allows prices to adjust based on supply and demand and not outside forces provides the best path for price stability and therefore prosperity.