Monday, December 8, 2014

Do Lower Oil Prices Lead to Higher Housing Demand?

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For the week of

December 8, 2014

Do Lower Oil Prices Lead to Higher Housing Demand? 
The question is intriguing, given the steep decline in oil and gasoline prices over the past couple months. After all, less money spent on gasoline, the more money that can be spent elsewhere. Housing is elsewhere. 
CoreLogic recently tackled the oil/housing question in a blog post by one of its senior economist Molly Boesel. The quick answer is that it appears that lower oil prices can lead to higher housing demand. A few variables come into play, though: number of miles driven; the actual price of gasoline; and for certain homeowners, the price of oil for heating fuel. 
Number of miles driven and gasoline prices are most interesting. Data show that the lower gasoline prices fall, the more buyers are willing to move from urban centers into higher-priced homes. The key is that consumers need to believe that lower gasoline prices are sustainable over the long haul. The longer gas prices fall, or hold lower levels, the more willing consumers are to buy a home, particularly a suburban home.  
Predicting oil prices, though, is as difficult as producing mortgage rates, maybe more so. Oil prices can hold low levels for an extended time, as in the 1990s. But oil prices are frequently spiky, and the spikes can be quite volatile. Oil priced at $65/barrel in one year can soon be $140/barrel the next. 
In short, we are not banking on oil prices holding these low levels. But if they do, the good news is that housing is likely to be a beneficiary.
As for good news in the present, mortgage purchase applications continue to trend higher.  The Mortgage Bankers Association's purchase index was up again last week, posting a 3% increase. Purchase activity has been gradually ratcheting higher over the past month. We are seeing more purchase activity despite a slight decrease in mortgage credit availability.  This suggests more buyers are entering the market, and they are getting credit. 
Going forward, sustained lower oil prices would be nice, and so would a sustained rise in purchase application activity. The former gives consumers more money, the latter signifies the return to a more normalized lending market. 


Date and Time
Mortgage Applications
Wed., Dec. 10,
7:00 am, ET
Important. Purchase activity continues to trend higher and portends rising overall housing sales.
Import Prices
Thurs., Dec. 11,
8:30 am, ET
1.5% (Decrease)
Moderately Important. Lower oil prices will continue to depress the import-price index. 
Retail Sales
Thurs., Dec. 11,
8:30 am, ET
0.2% (Increase)
Moderately Important.
Despite lower energy prices, sales in total dollars are rising. The good news is that more dollars are flowing to bigger-ticket items. 
Producer Price Index
Fri. Dec. 12,
8:30 am, ET
0.4% (Decrease)
Moderately Important.  Falling producer prices ensure interest rates will continue to hold today's low levels. 


Where Do We Go From Here? 
We're near the time of the year when people begin to gaze into their crystal ball. What should we expect for 2015?
Bill McBride at gathered estimates from a number of difference sources. So far, nothing is out of the ordinary. Most prognosticators see the recent past extending into the future. New home sales estimates range between 498,000 and 620,000 units on an annualized rate for 2015. (The NAR estimate is on the high end.) Total home starts range between 1.056 million and 1.3 million units on an annualized rate. (The NAR again offers the high-end estimate.) 
On the price front, nearly everyone has throttled back price-appreciation expectations for next year. Estimates range between 2.4% and 5.2% annual price increases at the national level. (CoreLogic offers the high-end estimate.) This is no surprise. We've been saying since the beginning of 2014 that price appreciation will decelerate.  We expect it to continue to decelerate to within the range most analysts expect. This is, after all, a normalized range based on historical trends. 
As for mortgage rates in 2015, CalculatedRiskBlog doesn't say.  But we see the rate on the 30-year fixed-rate loan hovering between 4.0% and 4.5% for the first quarter of 2015.  After that, it is hard to tell. Rates will depend on economic growth, job growth, wage rates, and inflation. If they are mostly up after the first three months, the Federal Reserve will start to talk up interest rates, which will lead to rates actually rising.

Article courtesy of Patti Wilson, American Momentum Bank

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