Could Rising Oil Prices Prevent a Housing Recovery?

United States homeowners, having already suffered in the recent recession, are headed for further woes as unrest in the Middle East drives up the price of oil, raising transportation and heating costs.

The rising price of oil has made a severe impact upon the country, with citizens trying to further cut back on already reduced spending, and hiring freezes from both small businesses and large corporations.

Rising gas prices are going to make suburbia even less appealing than it already was with its expensive commutes to work. Economists predict that demand for suburban homes will fall, and along with it, growth in the real estate market and broader economic recovery.

"It really blunts the hope of rebound in a lot of those outlying areas," said Joe Cortright, president and principal economist of the consulting group Impresa, in Portland, OR. "Those housing units come with the added penalty of a higher commuting price."

Not only will driving become increasingly prohibitively costly, but heating and cooling a home will rapidly lose affordability. For home owners and renters who pay their own utilities the costs normally associated with shelter could become untenable.

"Once you start to see gas prices get into the $4 range, that's going to have a downward effect on sales," said Bernard Baumohl, chief global economist at the Economic Outlook Group, who until recently was known for his relatively optimistic predictions. "Home sales deteriorate probably exponentially after that."

"The big increase in oil prices serves as an effective tax on consumers, which means they'll have less capital to spend on housing expenditures," said Michelle Meyer, an economist at Bank of America Merrill Lynch. "People are going to be looking for an even lower price."

Further crippled by high unemployment levels, the housing market is sure to suffer.

Since peaking in 2006, home prices have fallen 31 percent, according to the Case-Shiller 20-city index. In 2010, nearly 2.9 million homes received foreclosure notices, an increase of 2 percent from 2009, according to data collected by RealtyTrac, an online foreclosure market. More than a quarter of all U.S. home sales last year were of foreclosed properties.

Lack of demand is also sinking home prices. Potential buyers, themselves watching home prices fall, aren’t viewing low prices as a good deal so much as a currently-diminishing money-sink. Buyers will be tentative to invest in something that may very soon be worth less than their mortgage. This kind of hesitation only aggravates such a slump.

Some prospective home buyers may be encouraged to close on properties, if they view rising gas prices as a temporary. Meyer weighed in saying, "People would have to perceive that energy prices would be stuck at this high of a level for the foreseeable future. At this point I don't think people are convinced of that, nor should they."

Prospective buyers will have to weigh the likelihood of a decreasing supply of oil and unrest continuing in the Middle East, both of which drive the price of oil higher. Experts and professional investors warn that events that seem improbable can nevertheless happen.

"Chronically-high energy prices obviously are not a friendly development for housing," Baumohl of the Economic Outlook Group said. "If households are squeezed, you can expect the demand for homes will likely weaken. With that, of course, we could expect to see perhaps even more foreclosures."

Those who have considered buying a home are also delaying their search for property. House-hunting involves many hours of driving to various homes on the market and many people do not have the inclination to shell out for such a trip, especially given the unlikelihood that the housing market has fully bottomed out yet.

Yet some experts don’t believe that expensive gas will really do much damage to what is already a persistently weak market. Diane Thompson, a lawyer at the National Consumer Law Center, who has spent almost two decades representing homeowners, said the problems in the housing market run deep.

"The scale of the housing crisis swamps all of things you might expect to contribute to it," Thompson said. "We had this explosion of predatory non-affordable loans for a decade leading up to this, and those loans are still working their way through the system."