Oil Prices and Real Estate

Depending on how closely you follow this issue you might be surprised at the magnitude of results from an internet search with the words "oil prices and real estate."

First, you will quickly learn that oil prices are going up. There is almost no debate about this fact, the only thing experts don't agree on is how much. Global oil consumption continues to rise as our world's ability to produce oil as near the peak. As I write, the average costs of a gallon of gas in Raleigh is $3.51 and estimates for 2011 and 2012 don't suggest we will see relief from these prices. The unrest in Iraq and Saudi Arabia (the two largest producers of oil) only adds to fears that oil supplies could be further restrained causing additional price pressures.

So, what do rising oil and energy prices mean for our economy as we continue with our "muddle through" recovery (borrowing a term from John Mauldin). Most folks quickly point to inflation and the overall rise in costs for all goods. As an owner of real estate, and more specifically apartments, you might think this is all good news and in general I would agree. Inflation typically means higher rents and an increase in values as interest rates rise and construction of new units slows.

However, you can't lump all housing into one category and assume the outcome will be uniform. After all, what is the first lesson you learn in real estate? Location makes a difference ... a BIG difference. I encourage you to consider the differences between housing in the suburbs and housing near urban and employment centers. Will the desire to commute 30+ minutes to work increase or decrease as gas prices rise? Will access to public transportation or walkable living environments become more desirable during an inflationary period?

I believe we could be on the verge of an interesting cycle in the real estate market. While inflation could push all housing prices up, you can make a case that homes and apartments close to employments hubs, retail or shopping centers and downtown areas will see a greater rise in rents and prices than homes in rural or even suburban areas. This is certainly something to consider when making your next investment decision.