Falling energy prices may cause decline in home prices in certain areas
The rapid decline in oil prices the U.S economy has experienced could have substantial effects on the housing markets in states whose economies are dependent on the oil, coal and gas industries. While low oil prices are exciting for U.S. consumers, they may not be the best news for anyone trying to sell a home in states that produce coal, oil or gas - or the Energy Patch, as a winter 2016 report by Arch MI calls it. Falling oil prices in the Energy Patch are likely to cause a decrease in both home prices and demand for homes.
A LITTLE HISTORICAL BACKGROUND
In late 2014, explained the Durango Herald, oil prices experienced a sharp and drastic change, falling a whopping 50 percent. Prices had not been that low since the financial crisis. It seemed the oil boom - which was caused by an improvement in fracking technologies and created tens of thousands of jobs - had ended. As a result, many drilling projects were halted and workers began to lose their jobs. As we move into 2016, oil prices don't seem to be rising anytime soon, and the layoffs continue.
The Arch MI report, called the "Housing & Mortgage Market Review," said the states most in danger of weakening home prices are Alaska, North Dakota, Wyoming and West Virginia, with Louisiana, New Mexico, Oklahoma and Texas trailing close behind.
HOW OIL PRICES AFFECT HOME PRICES
As stated above, the slowdown of the oil, coal and gas industries has led to a huge number of layoffs.
"Fewer jobs means less home buying demand and that will naturally soften the housing markets in those job-impacted areas," Lawrence Yun, chief economist for the National Association of Realtors, told CNN.
The Durango Herald said during the oil boom, houses were selling like hot cakes as workers flooded the area, but now people are being forced to leave these oil boom towns to find work elsewhere, which is drastically reducing housing demand.
The level at which a city's housing market is affected by oil prices has to do with how reliant its economy is on oil to begin with. The Durango Herald explained that larger markets in oil-dependent states, such as the Texas cities of Dallas-Fort Worth, Houston and Austin, won't be affected as strongly because their economies also rely on other industries. Of course, if oil prices continue to fall, this might change.
The Arch MI report explained it is the smaller towns, those that are wholly dependent on oil, gas or coal, that will be hit the hardest. It also said that its possible states in the Energy Patch will simply see slower home price growth, rather than a decline. Some, however, will probably see that drop.
WHAT'S HAPPENING NOW - AND WHAT COULD HAPPEN
JP Ackerman, president of strategic real estate products at HouseCanary, told CNN it takes time for oil prices to show their effects on the housing market. Prices won't change overnight, and it could actually take between 1.5 and two years for the decline in oil prices to demonstrate any real impact on the housing market.
That being said, it is important to anticipate the possibility that a decline in home prices will occur in certain areas of the Energy Patch. According to Arch MI, North Dakota has a 46 percent chance of experiencing a home price decline over the next two years. Throughout this past year, the state has experienced a 2.9 percent employment decline, and its current home prices are overvalued.
When something happens in the housing market, it is always negative for some and positive for others. Anyone who wants to buy a home in these markets may find the next few years to be the perfect time. Houston Real Estate AgentTim Suratt explained in the Durango Herald that the lack of demand is making buyers feel okay about making lower offers. In addition, CNN said low oil prices mean consumers have more money to spend, which is excellent for buyers.
According to the Durango Herald, oil prices are not expected to bounce back any time soon. This means more layoffs and greater weakening of oil-dependent economies. Some areas have already felt the effects, such as Odessa, Midland and El Paso, all in Texas. Still, the state of Texas is experiencing an overall rise in home prices and an overall increase in home sales. Arch MI even expects Dallas to experience growth in home prices due to its strength in other industries, such as health care and tech.
CNN explained that despite potential weakening of oil-dependent economies, home prices in the U.S. on the whole should rise by about 3.5 percent in 2016. Yun explained to CNN that it is possible falling oil prices will simply lead to "a more balanced market," considering there is already a housing shortage and demand outweighs supply.