Low Oil Prices and Colorado Home Buying
A positive thing about oil price drops is that, experts say, it’s a good thing for the housing market. American consumers will have more spendable income, feel wealthier and be able to save more (hopefully for that down payment). This can lead to more household consumption on all kinds of things related to housing, including the ability to invest in new homes. Along with the loosening of standards from Fannie and Freddie and lowering of costs by FHA, this could add measurably to housing sales in the United States.
Others caution that there will be job losses in the energy states (Texas, Oklahoma, Colorado, Alaska, North Dakota, Montana, Ohio, Louisiana, and Pennsylvania, to name a few) and that employment will take a material hit in those states. What matters is a consumer’s income, not their monthly consumable living expenses. Therefore, there are many forecasters who think that the crash in oil prices (and natural gas has followed it down) may have, at the best, a neutral effect on the housing market.
What are the impacts on the American housing market when the world’s economy slows? With over 12 percent of all purchases last year coming from outside the country, it could have a material impact, especially when you consider that the country with the largest numbers of its citizens buying our real estate, Canada, has broad exposure to the world’s natural resource economy.
We’ve had a strong couple of years in the U.S. housing market and a great spring/summer selling season. First-time home-buyer activity rebounded in August, and prices moderated — good news for a healthy housing market. It’s important to note that prices in 10 U.S. states could be impacted from a sustained oil and gas price slump, according to the Fannie Mae analysis, which compared what occurred to house prices during the nation’s last big oil slump in the 1980s to what is happening today. Fannie projects a five-year cumulative “drag” on future house price growth caused by the oil price decline for 10 oil-producing states under the assumption of sustained lower prices. The 10 states affected are Alaska, Colorado, Kansas, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, Utah and Wyoming.
Here’s the good news that we want to stress: The house price impacts in these 10 states should be less severe than the 1980s with most states experiencing only a deceleration of house price growth, not an actual decline in prices.
Fannie Mae’s analysis points out key differences over the 1980s and today. In the 1980s, prices fell continuously for eight years and by a greater amount than what is happening now. Also, Texas and other state economies are now more diversified and less dependent on the oil and gas industry.
Although the current price collapse was similar in that it was triggered in part by OPEC, there are differences. Labor losses this time around may be less because new technologies allow for more efficiencies. That means output could continue to expand despite falling prices.
Fannie Mae considered three scenarios for home price impacts in each of these 10 states: a pessimistic, an optimistic and a traditional scenario on what will happen with domestic oil and gas production.
It’s simply not possible to know exactly what will happen to house prices in these states, thus the different scenarios.