The mortgage industry has been monitoring the huge decline in oil prices closely to see if it will have a negative effect on housing, but the truth is, there are both good and bad outcomes to this new crisis.
Housing markets that are major producers of oil will be hit hardest by lower oil prices, while demand will decline for high-end homes from foreign buyers, according to a report from Capital Economics.
"On the one hand, there are a handful of states where lower oil and gas prices will have an adverse short-term impact on local labor markets and confidence, with negative implications for housing," the report stated. "In addition, demand in some states might be dented by a dip in foreign buyer numbers. But in most states, the drop in energy prices should bring benefits in the form of a modest boost to household disposable incomes."
Capital Economics said the lower oil prices will have the following effects on the housing market:
- The most direct impact will be on those states with a significant oil and gas industry, where a collapse in investment is already feeding through into a deteriorating economic backdrop. For example, six of the eight states we identify as being vulnerable to lower oil prices are in the bottom ten for personal income growth.
- In those states, weaker labor markets and income growth will feed through to lower levels of activity and slower house price growth. Homes are already taking longer to sell in three of the most exposed states.
- That said, with the exception of North Dakota, the impact is unlikely to be large. In that state, a building boom that followed the shale revolution is quickly turning into a bust.
- The impact of lower oil and equity prices will also hit the purchasing-power of very wealthy individuals. Combined with the strong dollar, that is likely to cut demand from foreign buyers, and lead to a slowdown in the very high-end of the market.
- So the impact outside of states not directly exposed to oil is likely to take time to come through and be small. But, overall, low oil prices support our call that housing market activity and prices are set for further gains over the next couple of years.
Capital Economics did find a silver lining among the lower oil prices: "The money households save on gas and other energy costs will allow them to spend more on housing. That provides support for our view that housing market activity and prices will rise steadily over the next couple of years."
"The fall in oil prices has the potential to impact the housing market," Capital Economic noted. "But with some states set to lose out, while others benefit, the overall impact is unlikely to be large. That said, unless households simply save all the income freed up by lower gasoline prices, on balance, the housing market stands to benefit from lower oil prices."