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A Blessing and a Curse: Oil Prices Weigh Heavy on U.S. Economy

money-deterioratingOil prices continue to decline at rates that were unexpected to many in the housing industry, and while we all certainly enjoy lower gas prices, this may not be good for the general U.S. economy.

“The magnitude and duration of the slump in oil prices has far exceeded what we originally expected and the longer it persists, the harder it is to argue that decline will ever be a net positive for the US economy,” said Steve Murphy, U.S. Economist at Capital Economics in a recent report. “As a net importer of oil, lower prices should have boosted real economic growth in the US. Instead, the hit to domestic investment has been unrelenting, while households still haven’t spent any of their savings”

Last week, Arch Mortgage Insurance Company's Winter 2016 Housing and Mortgage Market Review showed that while home prices have consistently been on the rise for quite some time, this upward trend could come to a screeching halt over the next two years—especially in energy-producing states.

“Nationwide, the housing market is likely to strengthen over the coming year in spite of economic headwinds from a strong dollar and expected gradual rate increases by the Federal Reserve,” said Dr. Ralph G. DeFranco, Senior Director of Risk Analytics and Pricing at Arch Mortgage Insurance.

However, Dr. Defranco noted that this forecast is not one size fit all. Among the riskiest states are oil-producing North Dakota (46), Wyoming (37), West Virginia (33), Alaska (33), and New Mexico (31), with high Arch MI Risk Index values. These states "are at greatest risk of experiencing declining prices as their economies continue to slow due to continued fallout from the large drop in coal, oil and natural gas prices seen over the last year," he said. Oklahoma (28), Louisiana (28), and Texas (26) are also on this list of riskiest states for home price declines.

DeFranco said in an interview with MReport that the drop in oil prices is affecting real estate sales, servicing, defaults in markets where job growth has been driven by energy jobs.

He placed most of his concern on Alaska, North Dakota, and Wyoming because of their large portion of employment in energy extraction. Other states worth watching are Louisiana, Oklahoma, New Mexico, and Texas.

“Home sales volumes are declining in most of the energy extraction states. That is likely driven by a steady deterioration in employment growth over that past 18 months that hasn’t hit bottom yet,” DeFranco explained. “Home prices have continued to grow thus far, thanks to low interest rates, lower transportation costs, etc., but the risk is clearly rising that we could see price declines in some of the less populous states, such as North Dakota.”

When the fracking boom occurred, money was being thrown at workers and home sales took off in oil-producing states. DeFranco believes that “sales will continue to lag and the risk of price declines are elevated, but a widespread housing bust is not the most likely scenario.”

He continued, “Fortunately, direct employment in fracking was relatively small, except in thinly populated areas such as western North Dakota. Since the fracking boom only lasted three or four years, it didn’t create a widespread housing bubble. Home valuations are far more reasonable now than before the large oil patch bust in the 1980s. We expect several years of substandard growth, but not a repeat of the regional-wide recession that occurred in the 1980s. Conditions are stronger now than in the 1980s, thanks to a more diversified employment base, a well-capitalized financial sector (a regional financial crisis greatly exacerbated the problems in the 1980s), still affordable home prices and spill-over benefits of solid employment growth from the United States overall.”

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