GAS PRICES DROP! Now, What's Ahead for the Housing Market, and Things in General?
IN ESSENCE, PRECIPITOUS DECLINE IN PRICE OF CRUDE OIL HAS PUT MONEY IN EVERYONE'S POCKET!
This past summer, when a barrel of oil was over $145, and a gallon of regular gas here in Chicago topped $4.50 in many parts of the city and suburbs, my cousin Bob pulled me aside at a family party.
"When the price of gas drops below $3.00 per gallon," Cousin Bob said. "THAT'S when the Real Estate Market around here will start to recover!"
He took me a bit by surprise, and I'm not sure I agreed with Bob then, or agree with him now.
But I feel the point he was trying to make was that the decline in the price of a gallon of gasoline would ease the economic fears of Americans, put a few more discretionary bucks back in their pockets, and get them to say, "OK, the economy will pull through this! Let's look for our new house now!"
What has happened since Bob and I talked?
A massive U.S. Housing Relief Bill - whose full effects are not yet known. A $700 Billion Financial Rescue/Bailout Plan - whose full effects are not yet known.
Increasing unemployment. Rising numbers of foreclosures. Still-sky-high levels of homes-for-sale inventory in many Metro Areas across the U.S., including Chicago. Falling home prices.
But still no recovery immediately seen for the Housing Market! Although, there are some signs of improvement, especially in the hardest-hit markets in California, Florida, Michigan, and Nevada - areas where the price balloon inflated most quickly, and popped just as swiftly, as prices here hit near the basement in recent weeks.
Indeed, the plunging price in a gallon of gasoline - to roughly $64 at the market close last Friday - has put more discretionary money in the pockets of American consumers. Even the OPEC Cartel, cutting production by a significant 1.5 Million barrels of oil daily effective November 1st, hasn't stopped plummeting oil prices short term. This, despite the fact that the 13 Member Nations of OPEC account for about one-third of the world's total supplies of crude oil.
According to Francisco Blach, Head of Commodities Research at Merrill Lynch in London, "It follows that there's going to be some spending effect."
Within the last few weeks, Oil Demand in the U.S. has dropped 10%, says the U.S Department of Transportation. Last August, Americans drove 15 Billion fewer miles, a drop of 5.6%, versus this time last year. That's the largest single month decline, year over year, the agency has ever recorded!
Want more figures? U.S. Drivers have logged 78 Billion fewer miles during the first 10 months of 2008, compared to the first 10 months of last year. Many experts feel the price of gas surpassing $4.00 per gallon earlier this year has dramatically altered driving patterns - perhaps on a permanent basis!
Julian Lee, Senior Energy Analyst with the Center for Global Energy Studies in London, observes, "We are seeing changes in habits. The sales of big gas-guzzling vehicles have collapsed. If we see that kind of change it becomes a much longer term issue with long-term demand destruction."
Ken Medlock, an Energy Fellow at the Baker Institute at Rice University in Houston TX, uses this simple formula -
"The average driver goes about 12,000 miles a year at 20 miles per gallon," says Medlock. "If gasoline drops $1.50, the $900 that Joe Average Driver saves would amount to a big stimulus package." Further, because we're already past the peak summer driving season right now, there isn't too much of an immediate reason right now to drive more simply because gas prices have fallen.
Ed Leamer, Director of the UCLA Anderson Forecast, says the current tumble in the price of gas could put as much as $250 Billion into the wallets of drivers. He estimates second quarter personal spending for gasoline, fuel oil, and other energy was about $442 Billion, annualized.
Will the savings consumers enjoy translate into a rebounding housing market?
Apparently, not yet, as high for-sale inventory, coupled with tougher standards for approving most new mortgage loans and re-finances, have not been touched by dropping prices in the oil markets.
Yet gas prices are likely to continue to decline in the coming months. Why?
In addition to better driving habits domestically, demand has slowed internationally as well. China, India, and other developing countries, whose soaring economies in recent years helped fuel oil prices to record levels, are retrenching, because the souring worldwide economy has lessened demand for products these countries produce. Without continuing growth in worldwide demand for crude, OPEC cuts in production will have a blunted, perhaps negligible impact.
If there is a global recession, as many economists predict, $50 or even less for a barrel of oil is a definite reality. That's not good news for oil-producing countries like Nigeria, Iran, Qatar, as well as other OPEC Member Nations who assumed the price of oil would fall to no lower than $80 or $90.
According to Medlock, this could be good news for the U.S. Consumer, who would enjoy more disposable income - assuming they are still employed. But alone, he continues, lower oil prices will not get the country out of the current Credit Crisis, or create a Housing Market rebound overnight.
For more, read Vivienne Walt's article via Time Magazine's Online Edition, October 24th.
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