As gas prices continue to decline, oil-producing states remain at high-risk for home price decreases, according to Fannie Mae's recent edition of Housing Insights.
Oil price declines within the past two months show no signs of a fast rebound, and the idea of a protracted bust prompts comparisons to the oil price slump of the 1980s, the report says.
"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," Fannie Mae said. "This often led to house price declines. Prices in Texas, for example, fell 11 percent from 1983-1988 during a time when national home prices rose by 32 percent."
The top five states with the most significant projected home price index changes includes Wyoming, North Dakota, Alaska, Oklahoma, and Louisiana.
Looking at oil prices, oil industry employment, and home price growth, Fannie Mae projects "that the negative effect on house prices is likely to be less severe for most oil-producing states than in the 1980s. However, three states (Arkansas, North Dakota, and Wyoming) are at risk of experiencing significant price declines.”
Although the 1980s slump suggests that today’s fall in oil prices could lead to a similar house price decline in oil-producing states, a number of key factors differ between the current situation and 1980s. The insights report also noted that the current decline is likely to be less severe than that of the past.
Major differences include:
• 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.
• State Economies are More Diversified: Most oil-producing states’ economies rely less heavily on the oil
• 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.
"Examining how house prices were affected during the 1980s oil price bust allows for an estimate of the potential home price growth impact currently," the report stated. "However, even in a depressed oil price environment, after taking into account changing oil industry dynamics and how state economies have become more diversified, we expect that home price weakness will not be as severe in most oil patch areas as it was in the 1980s."
The Housing Insights report projected a five-year drag on future home price growth caused by the oil price decline for 10 oil-producing states under the assumption of sustained lower prices.
"States with higher oil industry concentrations are showing comparatively weaker general labor markets," the report said. "Although there is no evidence yet of negative house price effects, given the historical time lags, we continue to monitor the situation."