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How Rising Oil Prices Can Affect The Value Of Gilbert Housing

As Americans we have enjoyed historically cheap oil for the last 5 years.  While many Americans may not keep it at the forefront of our mind, oil does have a big impact on our actions.  It was only little more than a decade ago when everyone was worried about the price of oil spiking to crippling prices due to “Peak Oil”.  Peak oil was was the concept in the early 2000’s that we had reached the peak level of oil production due to earths oil reserves being depleted.  While it is true that oil is a finite resource and once its gone we wont be getting more, this theory forgot to take into consideration one important factor, Human Ingenuity!  As prices rose and technology progressed we found newer and safer ways to get to oil deposits that had previously seemed impossible.

The United States has been a leader in the new oil revolution.  We used to be dependent on foreign oil suppliers where now we actually produce more oil than we import.

Another huge benefit for Americans is our strategic oil reserves. America has the largest oil reserves of any country in the world. While these reserves were steadily depleting for over 35 years, from the early 70’s until the mid 2000’s we have recently been adding to the reserves and are nearing an all time high.

Americas rise in production and increase in the reserves is great news and allows us much more independence from Middle Eastern oil producing countries. However, just because things have been going our way does not mean we are immune price fluctuations from those countries. After a recent drone attack on Saudi Arabia’s largest oil production facility oil prices have been driven up 15%. The attack which took out as much as 5% of the worlds oil production could prompt even higher prices in the days to come.

Here at The Reeves Team we want to let you know how these increases can affect your housing prices, as well as other potential scenarios that can come from this surge in oil price. We will detail some of the most important ways that housing can be affected by oil prices below.

Disposable Income

As oil prices rise so does the cost of gas an pretty much all consumer goods.  This hits Americans pocketbooks as quickly as anything can.  If you want proof just look at Americans driving habits. In the early 2000’s Americans were driving massive vehicles with almost no regard for gas mileage. However, as oil prices rose and the recession hit practicality took over and those big vehicles were traded in for smaller more fuel efficient vehicles.  Now after 5 years of low prices you are hard pressed to find an American made vehicle that is not a SUV or truck.  Will we see that trend reverse itself again if oil prices rise?  Because oil prices take a huge chunk out of a families budget it means they have less to spend on housing.  When thinking about how much mortgage a potential home buyer can afford it could be hundreds of dollars less if gas and other consumer goods rise in price.  This equates to lower purchase prices and puts downward pressure on the housing market.

Location, Location, Location

As gas prices sore people may also be hesitant to purchase homes farther away from where they work.  When oil prices are low distance to work is less a factor of cost than it is time, however if the prices of gas doubles or more as it has in the past, people will start considering how much extra per month it is to live further away from work than to buy in closer to there company.  This phenomenon will affect houses on the outskirts more so than homes that are in the more urban areas.

Recession

Yes that big scary word.  Oil prices can be a cause of recession.  As Americans we live in a consumer driven economy, as our pocket books struggle and we stop spending it can lead to a vicious cycle that ends in recession.  As we have seen in the past if we do enter a recession you can expect to see a modest pullback in home prices.  Because housing would not be what leads us into recession you should not expect to see any drops as significant as we saw in the great recession.

So what do you think?  Are we set to see oil prices spike even higher or is this a temporary blip that will come back down to normal soon? Let us know in the comment section below.

What happens to mortgages if interest rates go below zero?

We have been living in interesting financial times.  Over the last decade plus we have been in a financial experiment and nobody knows how the results are going to turn out.  Since the great recession we have have very unique monetary policy from the federal government.   In the wake of the financial crisis driven by the housing market the federal reserve reduced the effective interest rate to 0 and also pumped trillions of dollars into the economy in the form of quantitative easing.  The main reason the federal reserve started the Quantitative Easing experiment is because they felt that interest rates could not be lowered below 0.   Experts have always said that 0 is the lower bound for interest rates and cannot be crossed.

That was then, this is now.  We now have federal reserve members actively talking about interest rates below zero.  The International Monetary Fund also suggested that central banks including the United States government should consider allowing interest rates to drop below zero.  With the current economic concerns weakening both in the United States and in the world abroad this would normally be the time that central banks would begin to ease interest rates to lessen the impact of a recession.  There is just one problem,  central banks were not able to raise interest rates during the boom times of the last decade.  While there were a few interest rate increases the current federal funds rate sits at 2.5%.  This does not give us very far to fall before we go to zero.  The federal reserve already started cutting rates in June of this year by .25% and some expect a cut by as much as .5% in the September meeting.  If we do slip into a recession as many experts predict in the next 18 months the federal reserve will not have many proverbial bullets in the gun to lower rates before the hit the zero mark.  Here at The Reeves Team we want our clients to be prepared for any scenario.

A negative interest rate would be something many Americans never thought they would see.  It would also behave in a way that many would not expect.  For instance, people that put their money into a saving account expect a return on their account.  Even in elementary school you are taught that banks make money by taking money from depositors, paying them an interest rate and then loaning that interest rate out to others at a higher rate.  That whole model would be turned on its head.  Now imagine if you take your money to a bank and instead of the bank telling you how much per month they will pay you, they tell you how much you will be paying them for the benefit of leaving your money in the bank.  Strange times indeed.

So what does the mean for mortgages?  If we have to pay the bank to keep our money with them, they should have to pay us if we borrow it right?  Well it might not end up working out like that for consumers.  In some news that can be glass half full, or glass half empty depending on how you look at it, we do have some examples of countries that have negative interest rates that we can learn from.  Europe has been flirting with negative interest rates since 2015 and Danish banks have actually been providing loans with -.5 basis points.  This may be hard to wrap your head around but the bank is actually going to get back less money than they loaned out to the homeowner.   It will be interesting to see how this plays out, especially due to the fact that currently banks front load the interest you pay on a home so that most of the payment goes to interest in the beginning and as the life of the loan continues more money goes towards principal.

Even if the federal funds rate dips below zero it is unlikely that mortgages will follow suit as fast.  Many home buyers would jump for joy at rates around 1% or lower, and it would be hard to convince the majority of banks to lend money to consumers basically for free.

Do you think we will see mortgage rates in the United States fall below zero?  Or is this all just hypothetical and things will continue on as they have?  Let us know in the comments below.