Oil prices and housing, is there really a link?

Oil and housing

It seems that anytime there is turmoil in the Middle East, there is concern over disrupting the oil supply and spiking energy prices – notably at the gas pump. Spiking gas prices not only makes everything seem more expensive, it has been thought to compel people to re-think their home buying strategies as well. Is the chaos in the Middle East and increasing oil prices coinciding with a shift in home sale trends?

Gregory White, of Business Insider (businessinsider.com), stated that “The simple reason why a rise in crude prices could tank the housing market is that it has done it before.” This is not a recent story; no, White wrote this in a March 6th 2011 piece titled: “Barclays On How The Oil Price Spike Could Crash The Housing Market Again.” The article was a brief commentary on Luca Ricci’s (who was at Barclays at the time he was quoted) analysis of the possible consequences of the surge in oil prices to the U.S. housing market.

Ricci was quoted to say, “The main effect is on consumption via gasoline and energy prices. As consumption generally accounts for 60% of GDP, the effect is large. In oil exporters this effect will be offset by windfall revenues from the higher oil prices, so the overall effect is unclear. In our view, the oil price increase in 2008 significantly contributed to the recession and the financial crisis in the US, which then spread globally. By raising CPI inflation, it reduced real disposable incomes and, hence, the purchasing power of the average households, leading to a contraction in real consumer spending and lowering the ability to repay mortgages.”

Indeed, a 2008 sharp increase in gas prices and road congestion was a factor for many to re-think their home location. It was not only those living in suburbia whose idea of an ideal home shifted toward saving fuel costs; home buyers at that time, who did not put their housing search on hold, looked for a home that was closer to their work or easily accessed some form of mass transit. A National Association of Realtors® (realtor.org) study reported that 28% of home owners surveyed indicated that high fuel costs were a decision to sell their home, while 40% of home buyers surveyed indicated that high fuel and commuting costs offset the higher home prices closer to the city center.

How much could you save by moving closer to your office? Based on the Washington Metropolitan Area Transit Authority Savings Calculator (WMATA.com), eliminating 20 miles of daily driving can save over $224 per month or $2,688 per year (estimates at the date of this article). And if gas prices peak like they did in 2008, savings from curbing your driving could be double – or more!

However, while the immediate focus may be on saving on energy costs, urban living could have a trade off in higher property taxes and housing costs. And as much as increasing oil and gas prices may have an indirect effect on the housing market, the urbanite trend may be more about convenience and a healthier living style rather than saving money on gas and commuting costs. Nonetheless, the urban living trend surged in 2010, when sales soared in planned walkable communities with embedded shops and services. Market demands resulted in suburban renewal, where planned urban villages were built (and are being built) in convenient locations; which have also become destinations for the community’s restaurants, shops and offices.

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By Dan Krell
Copyright © 2014

Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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