Tuesday, February 3, 2015

How Oil Affects Real Estate Value

Consumers across the United States are thrilled with the recent decline in oil prices. Oil has dropped roughly 60 percent in just the past six months alone, and with prices under $2 a gallon at many pumps across the country, filling up is no longer such a dreaded chore for consumers. But what many people don't see is the potential harmful effects the decline could have on other areas of the US economy - in particular, housing markets in areas of the country where the most oil is produced.

Research from the data company Trulia shows that there is a significant correlation between gas prices and the value of real estate in major cities across the US, though the impact is not felt immediately. "Home prices do tend to follow oil prices in major cities, but with a lag — roughly two years, historically."

The main issue at play here is the link between employment and real estate. Rapidly dropping oil prices means lower levels of employment in areas that are heavily dependent on oil to provide jobs. This drop in employment subsequently sends the housing market into a tailspin, with higher levels of vacancies and reduced property income.

Back in the 1980's there was a similar plunge in oil prices that sent the housing markets in Houston, Oklahoma City, Tulsa and New Orleans crashing due to the deflated levels of employment. While the drop in oil certainly benefits the majority of consumers by saving them money, it has potentially catastrophic implications for real estate in oil-producing towns.

For cities that don't rely on oil for employment, however, the slide in oil prices has the potential to be beneficial to the housing market. Falling oil prices make it cheaper to both drive a car and heat a house, which leaves more room for consumer spending in other areas of the economy. Since the housing sector accounts for nearly 18 percent of the US economy, this means that the demand for home ownership is likely to increase as consumers save more money at the pump.

The potential boost to housing markets across the country will be slight, however, compared to the devastation looming for oil-producing towns across the country . A prolonged downward pressure on oil pricing could spell disaster for the real estate market in areas like Texas and Colorado, where the production of oil comprises a major part of the economy.

Gennady Barsky is the CFO of JetSmarter and Real Estate Mogul. Barsky is a lover of all things automobile and has a passion for Social Media.

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