Impact of Oil Prices to Housing Prices

In April, 2015 I wrote an article for a Houston client that was never used. Today Zero Hedge has an article titled “NAR Admits Oil Slump Finally Hits Housing Sales” that says in part, “We were told that low oil prices were unequivocally good for America, so it’s odd that, after seeing the weakest growth in pending home sales since Nov 2014, NAR blames “softness in sales on oil-related job losses from low oil prices.” Pending home sales grew 2.1% YoY in October, (way below the 4.3% expected growth and 3.2% growth in September).”

So here is the article that I wrote: Impact of Oil Prices to Housing Prices

Impact of Oil Prices to Housing Prices

Impact of Oil Prices to Housing Prices

A paper delivered in April 2011 by Rachel Ang and Xiaobing Shaui titled “The Financial Impact of Oil Prices on the Housing Market in the Houston Economy” examined the relationship between the impact of oil prices to housing prices, unemployment rate, and population in Houston. The chart above shows as oil prices increased to $80, the population increased from 3.6 million to almost 5.4 million. The census data for the area in 2010 was 5,920,416. The Texas Department of State Health Services projects the population of Houston-The Woodlands-Sugar Land MSA to be 6,473,316 in 2014.The study concluded, “There is a significant correlation between oil prices and housing prices in Houston.” Duh, you say!

Impact of Oil Prices to Housing Prices

Impact of Oil Prices to Housing Prices

The next question of the research was “To what degree are oil prices correlated with unemployment rate in Houston?” The study concluded “There is a significant correlation between oil prices and unemployment rate in Houston.”

We might conclude from the study that the last time oil prices were this low, population was about 5 million according to the study and according to the census figures about 500,000 higher, so about 5.5 million. That might mean Houston could lose 1 million people or at best remain flat from here. Second, that the last time oil prices were this low, unemployment was near 6% to 7%. Right now Houston has the lowest unemployment of the major cities in the US.

Last June, 2014, oil prices hovered near $100 and since the first of the year has traded between $45 and $55. So far the fall in oil prices hasn’t had much effect except for a cancellation of some major high rise housing projects. Belt tightening as it were. The big question is what’s next for oil? Some suggest our storage capacity in Oklahoma is full and oil will have to be sold into the market to make room for new supply. That would be bad for oil prices. Others are worried about the geo politics of oil. The Mid East is aflame with terrorists close to seizing another choke point in Aden. A cut off in oil could send oil prices rocketing.

Houston seems to be at a crossroads.

If Houston experiences layoffs by the big energy companies in Houston and higher unemployment, housing will feel the impact. The financial stress brings on financial stress in the family leading to higher debt to maintain the standard of living, divorce because of money woes, downsizing to make ends meet, and homeowners wanting to move where jobs are plentiful.

If oil prices rebound, more people will conclude that Houston for a lot of reasons, is a great place to move to. The weather is wonderful most of the year, education is one of the best in the country, and there is a lively arts and culture environment. If sports and outdoor activities are your interests, then Houston has it all. The demand for homes in the $300,000 to $500,000 range will surge and prices of housing will rise to meet the demand.

It all depends on oil. Whatever oil prices do, Houston has been through it and will weather it and come out bigger and stronger. That’s what veteran real estate people know from experience.

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