Did gas price spike cause the housing market collapse?

February 22, 2012

Given the recent spike in gas prices that is forecast to continue, a paper released today by the University of California Center for Energy and Environmental Economics is especially compelling. The paper presents an apparently new theory about what triggered the collapse of the housing market that then brought about the worldwide financial crisis in 2008. The alleged culprit: high gas prices. The authors have developed an economic model that shows the housing boom was driven largely by relatively low-income buyers purchasing homes far from where they worked. The gas price shock, they suggest, made those homes less valuable while also making it more difficult for potential new buyers to afford them, leading to a drop in housing prices and the start of an historic wave of foreclosures. Interesting stuff. An excerpt is below. Download the whole thing here.

For much of the housing boom in the 1990s and early 2000s, and indeed since the mid-1980s, world oil prices remained relatively flat at $30 per barrel in constant 2011 dollars; U.S. retail gasoline prices were typically below $2.00 per gallon in real terms. In nominal terms, gas prices were below $1.50 per gallon from January 1976 to March 2000. Low energy prices during the housing boom, in combination with lax lending practices and new mortgage products, made suburban houses affordable to a new class of homeowners characterized by low incomes, high leverage, low credit worthiness, and long work commutes. As a result, housing markets by 2005 were fragile. When oil prices more than doubled between late 2005 and mid-2008, peaking at a record high $129 per barrel in July and sending gas prices to $4.15 per gallon, the calculus of suburban living changed. High commute costs made typical homes less valuable and mortgages less affordable for homeowners characterized by lower average incomes than urban counterparts. Some households could no longer meet mortgage obligations and others walked away from mortgage debt that exceeded the deflated market values of their homes.

  • Digg
  • del.icio.us
  • Facebook
  • Mixx
  • Google Bookmarks
  • Reddit
  • StumbleUpon
  • Technorati
  • Twitter

Share This Post

You must be logged in to post a comment Login