Will the Falling Price of Oil Hit Housing Markets Hard?

March 14, 2016 | By

According to data from the U.S. Energy Information Administration, crude oil prices have fallen by roughly 70 percent since June 2014 and are currently sitting at a 13-year low.

That’s good news for drivers and consumers generally, but it’s potentially bad news for real estate markets in some oil-producing regions. Specifically, North Dakota, Wyoming, Alaska, Texas, Louisiana, New Mexico, and Oklahoma are at risk of seeing plunging oil prices lead to slower housing activity and, in some cases, perhaps even falling home prices down the road, says Eric Brescia, an economist with Fannie Mae’s Economic & Strategic Research (ESR) Group.

Persistently low prices have led to oil industry cutbacks and job losses in these states, which could continue if prices remain low, he notes. And that will likely lead to a weakened housing market. In fact, Brescia says, he and his colleagues have already begun to see sales slowdowns in markets such as Houston. And in smaller markets like West Texas they’ve seen evidence of year-over-year house price declines, he adds.

Danielle Hale, managing director of housing statistics at the National Association of Realtors®, likewise noted slowing markets in certain oil-producing regions.

“What we have seen so far is an indication from agents in those areas that their expectations are lower now than they were before and also some indication that there is weaker traffic and expectations for prices going forward,” she says.

“People move to an area if there is a lot of economic vibrancy, if it is easy to find jobs,” she adds. “So if a decline in oil prices does translate into a reduction in jobs in a particular area, then that would tend to weaken that real estate market.”

The last time declining oil prices significantly dampened housing markets was in the 1980s, Brescia says. Happily, he notes, he and his colleagues don’t expect the effect to be as severe this time around.

For one thing, he says, “producing states are much less reliant [today] on oil industry employment, so whatever negative impacts there are should be considerably less.”

Additionally, he says, housing inventory has been relatively tight, so these markets don’t, for the most part, have large inventory overhangs.

Also, Brescia says, the 1980s oil bust coincided with the savings and loan crisis, which caused the collapse of many local banks. And because mortgage lending was a much more localized business than it is today, that collapse created a negative feedback loop in which, Brescia notes, “people [in oil-producing areas] defaulted, then banks failed, which created a credit crunch, which meant house prices went down further, and so on.”

States like North Dakota, where oil production has in recent years gone from middling to booming, are at particular risk, while states with more mature industries could be less affected, Brescia says.

“If you have a fast rise, you potentially come down faster, too,” he says. Whereas, “Alaska has a large oil industry, but [it] never really had a boom, so you don’t have as many oil companies that are [as] highly leveraged as many local municipal governments that dealt with the boom of tax revenue all of a sudden—all of those different dynamics.”

Of course, on the flip side, lower oil prices also put more money in peoples’ pockets through savings on energy and transportation costs, but, says Hale, those savings probably aren’t enough to significantly drive housing decisions.

“For consumers not in [oil-producing] parts of the country, low oil prices are a bit of a benefit because it gives them more spending power, but it probably isn’t something that shows up in housing prices,” she says.

Although, “to the extent that lower oil is contributing to lower long-run interest rates,” it is a bonus for housing, adds Brescia. “Mortgage rates are lower than everyone expected a year ago, and part of that is wrapped up in the oil equation—and that is obviously going to help support home prices.”

 

Estimates, forecasts and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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