Takeaways:
- Home prices may fall over the next five years in oil-producing states due to lower oil prices.
- In the 1980s, Texas home prices fell by double digits even as home prices rose 32 percent nationally.
- Some states may be less at risk depending on the diversification of their economy and advancements in production technology.
Declining oil prices are usually welcome news for consumers, but the news that they may contribute to declining house prices will not be good news to homeowners in some states, according to Fannie Mae’s latest edition of Housing Insights.
The government-sponsored enterprise’s report, “House Price Risks in Oil-Producing States: Repeat of the 1980s?” predicts that over the next five years, house price growth will “drag,” partly due to this past year’s oil price decline in 10 oil-producing states.
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That prediction is related to what happened in the 1980s, when most Americans enjoyed lower gas prices, but others in certain states that saw large employment losses in their oil industries also saw their house prices decline, Fannie Mae said. For example, in Texas, house prices fell 11 percent from 1983 to 1988, at a time when national house prices actually increased by 32 percent.
“The Texas experience illustrates the dynamics in play during the period,” the report states. “Real oil prices peaked in 1980, followed by a near-decadelong decline. This included a crash in late 1985. A clear pattern exists.
“Real oil prices first fell, then with a time lag, oil industry employment declined (along with royalties and state and local tax receipts). This, in turn, weakened the broader labor market, and eventually drove house prices downward as demand fell.”
However, our current situation differs from that of the 1980s in many ways, Fannie Mae noted. Prices fell continuously for eight years in the 1980s and by a greater magnitude than that which has occurred presently to date, the GSE said.
Most oil-producing states’ economies rely less heavily on the oil industry today, and 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, Fannie Mae added.
From Fannie Mae Housing Insights report
The three states with most risk of a decline are Wyoming, North Dakota and Alaska, according to the report. While there may be localized metro areas experiencing greater stress, short of a worst-case scenario, Texas will probably not see cumulative home price declines over the period.
The key to any correlation between oil prices and house price declines in these and other states is shale oil production, which has a higher minimal viability price than that of traditional sources, Fannie Mae said.
“In the short run, it has remained relatively viable, and while industry employment has been declining, losses are still modest relative to the 1980s. States with higher oil industry concentrations are showing comparatively weaker general labor markets. Although there is no evidence yet of negative house price effects, given the historical time lags, we continue to monitor the situation,” the report concluded.
