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The Next Victim Of Crashing Oil Prices: Housing
While a record amount of ink has been spilled praising the benefits of plunging crude price on the US consumer, so far this has manifested merely in soaring consumer confidence, if not in an actual boost to retail sales.
In fact, as the Census Bureau reported last week, December retail sales were the biggest disappointment and suffered the steepest monthly drop since the polar vortex. It appears that instead of doing what so many economists thought, and immediately using their “savings” to boost discretionary income, households are either i) saving the lower gas price windfall (and considering the unprecedented savings rate revision gimmick used by the US Department of Commerce to boost Q3 GDP to 5.0% this is completely understandable), or ii) as we explained some time ago, instead of spending on discretionary purchases, households are forced to spend more on far less pleasant, if just as GDP-boosting staples, such as soaring health insurance premiums courtesy of Obamacare (those who benefit from Obamacare most likely don’t have any work commute-related expenditures in the first place).
Less has been written about the adverse side-effects of plunging oil, even though by now even the most “undisputed” permabulls have been forced to admit that the imminent collapse in capital spending is truly “unprecedented”, a phrase Goldman uses in the chart below.
So what does plunging CapEx actually mean for the economy, aside from a substantial haircut to 2015 GDP, and what other areas of the economy will be affected by the Saudi Arabian scorched earth war on the US shale industry?
First, we look at the impact of plunging crude on non-residential construction and specifically physical structures, which is where roughly 90% of energy capex is — namely outlays for exploration and wells. Spending there tracked an annualized rate of $140bn in the first three quarters of 2014, a sum that accounts for a whopping 30% of total non-residential private fixed investment in structures, or about a 1% of GDP.
So what about residential construction? Here are some thoughts from bank of America:
The plunge in oil prices is creating havoc in forecasting the US economy. On the upside, lower oil prices supports consumer spending by reducing the cost of gasoline. But on the downside, it hurts oil producers and will curb investment in the sector. These dynamics can directly influence the trajectory of the housing market this year as well. The regions with economic growth driven by oil production likely will see housing conditions weaken….
Let’s focus on Texas and North Dakota, which account for more than half of US oil production. Housing starts in these two states make up about 15% of the nation and have contributed 18% to the national gain from the trough. Using the early 1980s as a guide when oil prices collapsed, starts in Texas declined more than 75% over a five-year period. This is probably the worst-case for today given that starts were at much higher levels then and the regional economy was more dependent on energy production. That said, a similar decline today would translate to a loss of 133K starts between Texas and North Dakota, which translates to a decline of 25K per year over five years. This can likely be absorbed by greater building elsewhere in the country.
Home price appreciation in the oil states likely will also be negatively impacted. Slower job growth means less income creation, hurting affordability and therefore weighing on home sales. Home price appreciation in Texas has been strong especially considering that the market was resilient during the crisis. This has left homes overvalued in many parts of Texas and therefore susceptible to correction.
Given the stickiness in home prices, we would expect this to start to show up in the statistics in the second half of the year.
A chart of where the housing pain will be most acute:
Texas accounts for a significant share of US oil production. Using the early 1980s as a guide when oil prices collapsed, housing starts in Texas declined more than 75% over a five-year period. This is probably the worst-case for today given that starts were at much higher levels then and the regional economy was more dependent on energy production. Furthermore, an 80s-sized drop in starts can likely be absorbed by greater building elsewhere in the country.
Home price appreciation in the oil states likely will be negatively impacted by the decline in oil prices. Slower job growth means less income creation, hurting affordability and therefore weighing on home sales. Home price appreciation in Texas has been strong especially considering that the market was resilient during the crisis. This has left homes overvalued in many parts of Texas and therefore susceptible to correction.
All of this is followed by the obligatory spin: “While the housing market in oil-producing states will weaken from the drop in energy prices, we think this will be offset by positive developments otherwise. The decline in oil prices has been accompanied by a drop in mortgage rates, boosting affordability. There was also an unexpected present from Washington – premiums on FHA loans were lowered by 50bp, reducing the cost of borrowing for lower-income and first-time homebuyers. There are clearly winners and losers from the drop in oil prices. We cannot dismiss the pain caused from the plunge in oil prices in the regions driven by oil production. However, on a national scale, the stimulus from lower oil prices and interest rates is a powerful offset.”
Unless of course it isn’t, just as the latest retail sales report showed, which prompted a violent scramble to preserve the sanctity of the confidence-boosting "crashing oil is unambiguously good” narrative. Then again, if all else fails, it is getting cold outside... almost cold enough to crush the US economy by about $50 billion as "happened" last year.
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The oil crash is starting to look like a prime candidate for the first domino. It's 11:59 O'clock. Do you know where your money is?
the first domino was in 1913, the founding of the federal reserve.
The real question is, what will be the LAST domino
1913 was the when the process of ripping down a solid foundation and replacing it with dominoes started. Now, the foundation is gone and only dominoes are left.
Housing construction costs are plunging, let the good times begin.
Uh, housing collapsed 3 months ago. The spread in many of the "recovered markets" between bid/ask has cratered. It's now a buyer's market once again and the smart investors have completed their rapefest on the .gov financed idiots and walked away. It's late 2007 calendar wise but few have seen the problems until now. When it crashes this time, which it is, the solution will freak everyone out.
What's the solution? War? Will Russia strike first?
Neither Russia or China will start a war. America is the country with the biggest history of unwarranted aggression.
Sooo... do I buy now or pack my shit up and go long sandbags?
It did? Housing is an extreme laggard, so we'll see what housing looks like a year or more down the road.
Bravo! I yield to your superior metaphor
This is nonsense.
Housing was crashing on its own before oil crashed.
Sure it's a problem for TX and the rest of the oil patch.
No cause and effect elsewhere.
Falcon->Agree. People are missing the real dynamics at play here. The globe is disconnecting from the USD, it showing up in the petrol dollar now, watch what happens when Greece rejects Troika next week, and German reaction to Draghis printing press then Shanghai resets Gold price.
The last planned domino is global mono-culture and slavery for all...except the minions at the top - someone has to hold the whips.
Yup PM but oil is going back up and gas here went up .20 cents saturday so dont wory all is great just go spend all you want.
Sarc
Damn....I missed another happy hour.
Inconceivable.
Love the humor in your note......for those uninformed... from the Princess Bride
Vizzini: HE DIDN'T FALL? INCONCEIVABLE.
Inigo Montoya: You keep using that word. I do not think it means what you think it means.
The bubbles in housing since '82 are clear to see in that last chart.
Central Bank intervention creates misallocation of resources and capital, and thus bubbles.
As long as easy credit is available the dance will go on.
"As long as easy credit is available the dance will go on"
"The Dance": "Money for nothing and chicks for free", Dire Straits.
(I Believe) Life Goes On, Joe Barcelona
https://www.youtube.com/watch?v=C9ialIqaGDg
.......speaking of housing, would you care to buy a hotel in williston north dakota ???
dropping like flies.....
Trade ya for 5 McMansions in Texas, and toss in a 5 year old shale well.
Ghost towns throughout the three main oil producing counties in ND. Who's going to clean up what's left of the man camps? Tear down the buildings?
ND's population is going to fall back below 1930 levels, a second time (after they just surpased it a few years ago).
Going from a dollar to ten cents a barrel...now THAT is an oil collapse. How it ever got to 140 is a mystery to me...not how it got to fifty though.
Sorry but this truly is a no biggie in my book. The USA just doesn't use that much oil anymore and it has never been a critical component to the US economy nearly to the extent to which steel and a gold standard were.
For all the oil we created we always created more debt.
And of course this has been true of all the other great "oil powers." Mexico, Venezuela, Saudi Arabia and now Russia...all too dependent on a single commodity while all the while ignoring the value of the money itself.
Not that the USA has been much better of course. "An Empire of Debt" indeed. Wasn't my idea to bail out the Banks...just for the record.
The U.S. oil consumption though less IS still plenty (18M/day). Get a clue.
http://www.indexmundi.com/energy.aspx?country=us&product=oil&graph=consu...
http://oilprice.com/Energy/Crude-Oil/Why-has-US-Oil-Consumption-Steadily...
Perhaps one good question would be:
"How long until America's Political Puppet Pawns activate the Behemoth That is The US MIC both controlled by The Powerful Oil Interest Lobby to make war on The House Of Saud and restore the United States Specified Reasonable Clearing Price For A Barrel Of Oil?"
After all, the cost of a barrel of oil is Saudi Arabia's Sustainable Competitive Advantage.
Military Superiority is the United States' Sustainable Competitive Advantage.
And so the Obvious Truth is that the Saudis (and by extension OPEC) only controls the oil under their feet to the degree that the United States allows them to control it.
And so to be Completely Plain the Saudis only control the oil under their feet as long as they agree to Play Nicely.. something which, apparently, they have forgotten how to do?
Sadly, Saudi Arabia would have no choice but to run back into The Arms Of Mother Russia if such a scenario were to play out in anything but the currently disconnected world of "Cold War" currently being waged in various locations by warring factions around the globe.
Will it mean fewer hummers on the road, as soon as the price of gas goes down every a****** American digs out SUV to drive and goes right back to buying used Hummers to drive around in.
Texas and North Dakota are only 2 out of 50 States. I think the rest of the States will benefit from cheaper oil. What a homeowner doesn't have to pay in his monthly electric bill, he can use to pay down his mortgage. Fewer mortgage failures = better prices.
Americans don't pay down their mortgage. They just keep refinancing.
I think we need to voluntarily pay more for gas so housing prices in oil States will continue to rise and oil producers and the investment sector will feel comfortable. Because we all know they look out for us.
Both oil and housing are great examples of how uck-fayed our abstract finance system has become. People need oil and housing. They will continue to need them, use them, buy and sell them. What has happened to the price of them over the past 20 years has nothing to do with oil or housing, and everything to do with the corruption of our finance system. Our finance system increasingly has little to do with our actual economy, too. It's a mess alright, and the process of getting to a system that does work will be unpleasant. But it's not the real economy, in which people need and use oil and housing. They don't need derivatives and the rest of the finance sleight-of-hand bullshit. The distinction is hard for people to grasp currently, but it's going to become so obvious people will figure it out, and sooner rather than later.
+1 for Pig-Latin!
Housing prices will be fine. Wait. Nevermind. Thank God the state of the union speech on the 20th will fix this shit.
http://www.zillow.com/the-woodlands-tx/home-values/
http://www.zillow.com/casper-wy/home-values/
http://www.zillow.com/saint-marys-pa/home-values/
IN TEXAS
Yes, housing starts would decline in a 'boomtown' once the boom is over, but that doesn't make the correlation to crude prices apply to any market not generally catering to employees of the boomtown's industry.
To suggest otherwise, is daft, deception, or both.
Here's a real world reason why it would help home prices: energy savings on heating carry through to marginally better performance on loans.
The oil collapse will collapse the price inflation in oil regions, which will be enough to drag the aggregates down. Cheap oil *will* boost the overall economy it just takes a few weeks to flow through and hit the numbers, but probably will not boost residential real estate, saving twenty or fifty bucks a week does not buy a new house.
an ebb tide will raise all ships of course
Stop using the word "consumer" its sheep plain white grazing sheep!
Bah bah bah .
I expect some certain assholes to be raising mill levies out the wahoo.