For a number of years I have advised clients that high gas prices are negatively affecting the economy and, consequently, are also likely hurting real estate market recovery and property values. Just the other day a client asked me what I thought was going to happen this fall for the economy in general and how that would affect their property value. They were trying to decide whether to sell now if property values were going to continue to decrease or remain in their property. One of the concerns I expressed to them was the fact that according to recent projections by so-called experts we appear to be headed for higher gas pricing this year. While I think for the most part, we’re used to gas prices around $4.00 a gallon going over the $4.00 psychological barrier and remaining there will initially cause a lot of people to rethink their gas consumption spending. If we push up to the $5.00 range and do so quickly, I think we’re going to have some real backlash from consumers. Facing that possibility I told my clients that, while recent reports indicate we might be entering an economic recovery, I was concerned that higher gas prices might end up pushing us in the wrong direction and we will continue to see further property price depreciation.
Interestingly the next day a HealtyCal.org online article came out with a new theory (to me) about the effect of high gas prices on housing. Here’s an excerpt from that article along with a link to the full report.
Did gas price spike cause the housing market collapse?
Published by HealthyCal.org: February 22, 2012
Given the recent spike in gas prices that is forecast to continue, a paper released today by the University of California Center for Energy and Environmental Economics is especially compelling. The paper presents an apparently new theory about what triggered the collapse of the housing market that then brought about the worldwide financial crisis in 2008. The alleged culprit: high gas prices. The authors have developed an economic model that shows the housing boom was driven largely by relatively low-income buyers purchasing homes far from where they worked. The gas price shock, they suggest, made those homes less valuable while also making it more difficult for potential new buyers to afford them, leading to a drop in housing prices and the start of an historic wave of foreclosures. Interesting stuff. An excerpt is below. Download the whole thing .
For much of the housing boom in the 1990s and early 2000s, and indeed since the mid-1980s, world oil prices remained relatively flat at $30 per barrel in constant 2011 dollars; U.S. retail gasoline prices were typically below $2.00 per gallon in real terms. In nominal terms, gas prices were below $1.50 per gallon from January 1976 to March 2000. Low energy prices during the housing boom, in combination with lax lending practices and new mortgage products, made suburban houses affordable to a new class of homeowners characterized by low incomes, high leverage, low credit worthiness, and long work commutes. As a result, housing markets by 2005 were fragile. When oil prices more than doubled between late 2005 and mid-2008, peaking at a record high $129 per barrel in July and sending gas prices to $4.15 per gallon, the calculus of suburban living changed. High commute costs made typical homes less valuable and mortgages less affordable for homeowners characterized by lower average incomes than urban counterparts. Some households could no longer meet mortgage obligations and others walked away from mortgage debt that exceeded the deflated market values of their homes.
If the theory is valid, higher gas prices this year could be an anchor to any recovery we had hope to see in the housing market this year. There’s the hope that Presidential election year politics by the current administration might put pressure for lower gas prices in order to make their reelection look more appealing to voters. Of course, higher gas prices aren’t a good thing for most of the general public, but this is the first time I’ve read or heard that they might have been responsible for the housing market collapse.
Tags: economy, foreclosures, High gas price, housing, recovery
Thanks for the information. Fuel costs for worker commutes is an interesting variable, but you stated something that makes me curious. Here is your quote “… I was concerned that higher gas prices might end up pushing us in the wrong direction and we will continue to see further property price depreciation…”
To most property trasactions there is a seller and buyer. Most real estate agents work for both types of customers, sellers AND buyers. If you ever represent buyers, can you explain how price depreciation is harmful to buyers? Your implication is that real estate agents, MUST BE CONCERNED about normalization of house prices.
Please consider this glaring fact. Any buyer who requires a mortgage to buy a property for shelter is sensitive to monthly budget payments as PITI. Most people will experiece unpredictable life events that were not planned in a household budget. These life events include loss of income/job (economic depresssion), divorce, disease, death and disaster. These are the 5 D’s of real estate that keeps the churn in buying/selling ie one of the “engines” of real estate ( read any Donald Trump study).
Isn’t it more prudent for BUYERS ( 1/2 of the equation) to pay lower PITI so they can have a realistic budget to save for emergencies such as the 5 D’s of real estate. In this way, they would not be forced into refinancing or getting a second loan, short sale (due to inability of qualifying for a second or refi) , or walking away. I posit that many short sales, foreclosures, and walk aways are the direct result of home owners inability or lack of responsibility to prepare for the negative events like the 5 D’s. Along with the wide-eyed optimism that we constantly project must be a balance of REALISTIC financial analysis. This knowledge is best provided by an accountant not a property salesman. Many of us may be our own worst enemy. We don’t want to be “enemies” of buyers who may take advantage of them and their wild dreams, but instead work as facilitators for them to realistically achieve their housing goals.
Today we stiill have very affordable (only in terms of PITI), and easy to qualify mortgage loans. Look at the historically low mortgage interest rates and house prices have not stabilized. Perhaps some of the recent “homeowners” have learned a lesson ie extreme leverage in any investment is risky.
Your comment was, “Here is your quote “… I was concerned that higher gas prices might end up pushing us in the wrong direction and we will continue to see further property price depreciation…”
The quote cited was referring to the economy being pushed in the wrong direction. While it’s certain that a failing economy benefits some people, since it’s bad for the great majority of people, I think it would be considered by most of the public to be going in the “wrong direction” if it’s going downwards.
Yes, I represent buyers along with sellers. If we’re only looking at an individual, real estate price depreciation is good for that buyer, but only until they purchase a property. Then it’s no longer a good thing. Price depreciation is only good until we’ve reached the bottom of the decline and only for those few buyers who are lucky enough to buy at the bottom. Predicting the exact bottom is impossible in my opinion. While some educated guesses can be made, it’s mostly a matter of lucky timing.