Although oil prices are expected to be lower for longer, the negative effect on home prices is likely to be less severe for most oil-producing states than what happenned in the 1980s, a new Housing Insight report from Fannie Mae said.
Now that oil prices are estimated to stay lower, Fannie decided to figure out how this drop compares to the 1980s oil glut.
The good news is that this time should generally be less severe.
Back in the 1980s, Fannie explained that while most Americans enjoyed lower gas prices at the time, others felt a negative impact as large employment losses occurred in the oil industry followed by a general economic slowdown in many oil-producing states.
Desipte most Americans enjoying lower gas prices, others felt a negative impact as large employment losses occurred in the oil industry followed by a general economic slowdown in many oil-producing states.
This time around, Fannie projected 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.
Fannie examined the historical relationship in the 1980s between oil prices, oil industry employment and house price growth.
If the approximate current oil price futures curve ($60 by 2019), Fannie projected that the negative effect on house prices is likely to be less severe for most oil-producing states than in the 1980s.
Fannie listed three main difference between the 1980s and now, despite what you may read on the topic in the Wall Street Journal:
1. Oil price behavior
Prices fell continuously for eight years in the 1980s and by a greater magnitude than that which has occurred presently to date.
2. State economies are more diversified
Most oil-producing states’ economies rely less heavily on the oil industry today.
3. Technology advancements
Advancements in production technologies have changed how the industry responds to oil prices, potentially reducing the price sensitivity of oil industry activity, but also increasing the level of uncertainty.
However, it is important to note that this isn’t true for three states.
Alaska, North Dakota and Wyoming are at risk of experiencing significant cumulative declines, and, in a worst-case scenario, other states could be, as well.