Like everyone else who has to fill up a gas tank, I’m enjoying low prices at the pump.
Low pump prices, however, can reverberate throughout the economy and cause some unintended consequences in states whose economies depend heavy on oil and gas production. Housing, for example, can be impacted.
The silver lining in this oil industry downturn is the severity is more muted compared to the downturn our country experienced in the 1980s.
An analysis released by Fannie Mae notes that declining economies in states that depend heavily on oil and gas production could produce a drag on home prices in those locations.
The good news: Any drag in prices is likely to be far less severe than what the country experienced during the last big oil price decline in the 1980s. And the “drag” might not cause housing prices to drop at all, but may only cause prices to rise more slowly than they would have without the downturn in the oilfield.
Reasons behind price drop
First let’s look at why gas prices are dropping. One reason is increased domestic production. Domestic oil and gas production has been on the rise for several years thanks to new technologies such as hydraulic fracturing.
Internationally, how OPEC manages production of its member countries also plays a role. This year, OPEC has declined to cut production despite a glut in supply as it wages a price war with non-OPEC nations to maintain market share. World economies — China’s declining demands for example — can also affect the price.
The effect on house prices
Now let’s look at home prices. We’ve had a strong couple of years in the U.S. housing market and a great spring/summer selling season. First-time homebuyer activity rebounded in August, and prices moderated — good news for a healthy housing market.
It’s important to note that prices in 10 U.S. states could be impacted from a sustained oil and gas price slump, according to the Fannie Mae analysis, which compared what occurred to house prices during the nation’s last big oil slump in the 1980s to what is happening today.
Fannie projects 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. The 10 states affected are Alaska, Colorado, Kansas, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, Utah and Wyoming.
Then and now
Here’s the good news that we want to stress: The house price impacts in these 10 states should be less severe than the 1980s with most states experiencing only a deceleration of house price growth, not an actual decline in prices.
Fannie Mae’s analysis points out key differences over the 1980s and today. In the 1980s, prices fell continuously for eight years and by a greater amount than what is happening now. Also, Texas and other state economies are now more diversified and less dependent on the oil and gas industry.
Although the current price collapse was similar in that it was triggered in part by OPEC, there are differences. Labor losses this time around may be less because new technologies allow for more efficiencies. That means output could continue to expand despite falling prices.
Fannie Mae considered three scenarios for home price impacts in each of these 10 states: a pessimistic, an optimistic and a traditional scenario on what will happen with domestic oil and gas production.
It’s simply not possible to know exactly what will happen to house prices in these states, thus the different scenarios.
To be sure, we don’t know for sure how long gas prices will remain low, for example. The analysis assumes a “sustained” downturn. We do know that only 10 of 50 states will be affected. And of those impacted, the consequences should be more muted than what occurred in the 1980s.