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Recent Oil Price Trends and What They Mean for the Housing Recovery

  • Crude oil prices are now trading at slightly below $50/barrel resulting in steep declines in gasoline prices. As of January 5, 2015, the U.S. Energy Information Administration (EIA) reported that the price of regular gasoline was $2.20 /gallon, the lowest since gas prices peaked to about $ 4/gallon in May 2011. In its December 2014 Short-term Energy Outlook Report, the EIA 2015 forecast for gasoline prices was $2.50 per gallon (which now seems on the high side given the developments in January 2015).  The EIA also forecasts savings of $ 550 per household in 2015.

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  • Lower oil prices mean lower inflation rate which pushes down mortgage rates. Based on Freddie Mac’s weekly mortgage survey as of January 8, 2015, the 30-year fixed rate averaged 3.73 percent and the 15-year fixed rate averaged 3.05 percent.1  At the median home price of $205,300, a 0.75 percentage point drop in mortgage rates will yield savings of about $1,000 annually.
  •  The economic and housing recovery in the Midwest and South states from North Dakota to Texas has been underpinned by the boom in oil production. The steep price declines may lead to a flattening of revenues. Companies can either make up for the cash requirement by borrowing or issuing shares of stock as they have done since 20112.
  • Companies may also resort to layoffs as has been announced by some companies3. The overall impact on employment is not likely to be significant since most of the employment growth is coming from many economic sectors.  Of the almost 3 million net jobs created in 2014 , 10,000 came from other nondurable goods that includes oil and gas. However, there will be indirect impact to those localities as restaurants and shops will also likely cut back employment.
  • State economies are also well-diversified. Based on 2014Q2 data from the BLS, there are 197,121 employed in oil and gas extraction, representing 0.14 percent of total employment of 138 million (Chart 1). In Texas, the biggest U.S. state oil producer which accounts for about half of the U.S. oil and gas extraction workers, employment in oil and gas extraction accounts   for less than 1 percent of Texas’s total employment . However, the direct effect will be larger in some counties in Oklahoma, Texas, West Virginia, Illinois, Kansas, Utah, and Pennsylvania (Chart 2) .
  • What this means for REALTORS®: The decline in oil prices is generally positive to households by way of the gas savings and lower mortgage payments. That savings will boost consumer spending in other areas. But there may be some layoffs in oil-producing states.

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1 Freddie Mac’s Mortgage Rates Survey as of Jan 8, 2015. http://www.freddiemac.com/pmms/

2 U.S. EIA, Today in Energy. http://www.eia.gov/todayinenergy/detail.cfm?id=17311

3 Already, layoffs have been initiated by service companies like Halliburton and Hercules Offshore. And oil producer ConocoPhillips pared its 2015 drilling budget by deferring drilling in America’s shale developments. Both announcements, made in December, likely will be followed by news of other companies cutting back. http://theadvocate.com/news/11127710-123/louisiana-oil-service-companies-expected