How Will Rock-Bottom Oil Prices Affect the Housing Market?

oilpricesmainIt sure is nice to fill up the gas tank and pay a fraction of what you paid only a few months ago, isn’t it?

But while your dollar might take you further on the road, what are these falling oil prices we’ve been seeing lately doing to the housing market in the US?

It’s expected that US housing prices will increase by about 3.5% in 2016, but some states will likely experience much smaller gains, and possibly even a flatline. In energy-producing states where a good chunk of the job market and economy is heavily dependent on the oil industry, a drop in oil prices can realistically lead to unemployment and a sharp decline in spending power.

In turn, there would eventually be much less of a demand for local housing which would lead to a softening of the real estate market.

Asking prices across the country on active listings were up 0.5% month-over-month in December 2015, which was slower than the increases in the previous three months. Asking prices increased 7.7% year-over-year, which is down from the previous 9.5% year-over-year rise in 2013.

Cheap Oil Prices Don’t Have the Same Effect in All States

Housing prices typically follow oil prices, but with a slight delay in oil-producing markets. That’s why we can attribute a lag in housing prices in states that depend on oil production and higher oil prices to keep the housing market vibrant.

Not surprisingly, North Dakota is slated to be the hardest hit in terms of falling real estate prices. While the past few years have seen a rapid growth in housing as a rush of people flocked to this oil-rich state during its energy boom, this land of opportunity could be fizzling out in the housing realm. As jobs decrease, residents look elsewhere for employment and eventually resettle out of the area. And with fewer people looking for homes comes a shortage of demand, and an eventual drop in housing prices right along with it.

Other states that could face a similar fate include Wyoming, West Virginia, Arizona, Texas, Oklahoma, and Alaska, as they are all energy-producing states that depend on oil for jobs and a healthy housing market. 

On the other hand, housing and oil prices tend to move in opposite directions in many other markets, which means certain states can actually benefit from a drop in oil prices.

With a decline in the price of oil comes a reduction in the cost associated with driving, utilities, and other expenses, which can effectively drive up these local economies. It boosts demand for automobiles and subsequently jobs associated with the automotive industry. As we’ve already explained, a strong labor market supports an equally strong housing market.

But don’t expect a plummet in housing prices to happen right away. Despite the association between oil and housing prices, it typically takes between a year or two for the real estate market to react to a drawn-out reduction in the oil market.

The one saving grace that could prevent housing prices from dropping too much and too fast is the limited supply across the country. As housing inventory remains tight, prices shouldn’t necessarily drop as much or as quickly as they otherwise might.

And more good news for the housing market: the lull in home prices will likely be much less drastic compared to what the US went through in the 1980s after the massive oil price decline. Rather than nosediving, housing prices might just experience slower- and smaller-than-usual increases than they would have if a decline in the oil industry hadn’t hit the US.

The key distinction between what happened in the 80s and what’s happening today is the fact that housing prices continued to fall for eight straight years back then, and by a much larger amount compared to today’s situation. And because the states mentioned above – among others – are not as dependent on the oil industry for jobs as they were 30 years ago, the impact on these local job markets won’t be nearly as severe.

No one knows for certain how long oil prices are going to be pressed down. But they’ll really only affect a handful of states – and not as harshly as they might have back in the 1980s – while actually benefitting others.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.