Economist's Commentary: May 20, 2008
$200 Oil and Housing Opportunities
By Lawrence Yun, Chief Economist
The price of oil seems to be setting a new high each day. It is touching $130 per barrel today. Goldman Sachs had recently called for a possible $200 per barrel in the not too distant future. Herd instinct is to bet on Goldman's advice and the current oil price run-up could in part be due to the speculators wanting to get in on the rush.
High oil prices or any energy prices are a big pain in the wallet. At the start of Bush Presidency the average price at the pump was less than $1.50 per gallon. Then, it took about $30 at the pump. Now it is eating up $75. Aside from this direct hit to consumers' pocketbooks, there is a bigger danger of cost-push inflation. Nearly everything runs on oil. So expect trickling impact to leading to higher airfares, higher food costs (from associated trucking costs), and higher overall consumer prices.
It is conceivable that the current run-up in oil prices is all speculation. Buy and hoard and sell it later at a higher price and simply forget about the intrinsic value of energy usage demand and supply of production. Sure, the rising energy usage from China and India are contributing to higher prices as well as from oil production declines from Russia and Mexico (where oil production has been falling due to lack of heavy equipment investments) and the general geopolitical uncertainty related to Saudi Arabia, Iraq, Iran, Nigeria, and Venezuela and other less democratic countries. But such a sharp run-up in oil prices cannot possibly be from pure supply and demand. Speculators are evidently looking for another betting opportunity after the bad bets on subprime mortgages. A bubble in the oil market is a distinct possibility. A collapse will then soon follow - or maybe not.
We may in fact have entered an age of permanently higher energy costs. What to do then? Shouting and complaining is one option. Another is to see if there are opportunities.
Job growth is strong in Texas largely due to oil. The people of Alaska and citizens of Norway are expected to receive a record high "dividend" checks this year from their oil reserve fund. (The people of Saudi Arabia will beg and hope for a similar check from its monarchy, who somehow believe and have decided that the oil belongs to the royal family.) Perhaps, you could move to these oil rich regions to find jobs or get dividend checks. Another simpler option is to buy stocks of oil companies or be an oil speculator. But as with any investment, it first requires having money to make money.
In regards to real estate, opportunities are there if you realize that people will want a smaller house and a shorter commute. Price appreciations on energy-guzzling large homes could notably lag behind smaller-sized homes. Commuting from downtown to downtown job centers is short and sweet. Now these regions will command even a higher premium above other far-out regions as people will rationally calculate better financial bottom line from a shorter commute. An article that appeared today shows one distinct area where the housing market has been holding on well: downtown. Washington, D.C. was left out of the article, but as a local resident, I can say that the inside the Beltway neighborhoods have been holding on very well despite the overall price declines in the greater metro region.
Another housing trend to monitor is the neighborhoods in close proximity to rail stations. Will America - the land of automobiles and suburbs - give way to the European high density way of living with efficient mass transit system? The Gen-Y or the children of the Baby Boomers are at the age of wanting to be near the vibrant downtown happening areas so this trend may become notable within a decade.
A secondary trend to watch out for after people crowd into the downtown regions is a "congestion" tax. London has a tax on vehicles as it enters the city limits (a camera on every lamp post assures every vehicle is taxed at entry). At $16, it is not beer money to keep driving back and forth to the city. Stockholm has one as well and New York City is debating about it. If congestion tax becomes popular or a necessity at some point long over the horizon, then real estate within the city limits will command sky high prices.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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