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Cheap gas makes suburban houses morevaluable

By Dina ElBoghdady[1] December 18, 2014

(AP/Rich Pedroncelli)

Its no mystery why high gas prices can influence where people live. The more gas costs,

the less consumers want to drive. That may explain why five percent [2]of people whomoved between 2012 and 2013 said they did so to get closer to work or cut down oncommuting hassles.

Now, there are studies suggesting that gas prices affect the housing market in other

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ways. They may influence where builders decide to build, one study concluded. They mayeven impact home values in substantial ways, according to another. And the authors saythats true whether gas prices are rising or falling.

These days theyre falling, of course. They have been for 11 consecutive weeks, tumblingto $2.55 per gallon as of Dec. 14, the lowest price since October 2009, according to theEnergy Information Administration. Next year, the amount U.S. households spend on gasand motor oil is on track to be the lowest in 11 years.

So how does all of this affect the housing market?

Raven Molloy, a senior economist at the Federal Reserve Board, and Hui Shan, aneconomist at Goldman Sachs, analyzed the effect of gas price changes in hundreds oflocal markets from 1981 to 2008. They concluded that a 10 percent rise in gas prices leadsto a 10 percent drop in construction after four years in areas that are far from job centerscompared to closer-in locations. Demand for homes in these outlying areas wanes whengas prices increase, and builders respond accordingly, recognizing that this will make itharder to sell homes there.

Given that the study[3] spans nearly three decades, it factored in the effects of sharp gasprice increases (1980, 2000, from 2003 to 2005 and in 2008) as well as decreases (1986,1998 and 2009.) It found evidence that a drop in gas prices will raise demand for homesin suburbs far from employment hubs.

But the effects won't be immediate, if they take place at all, said Robert Denk, a senior

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1. http://www.washingtonpost.com/people/dina-elboghdady

2. http://www.census.gov/content/dam/Census/library/publications/2014/demo/p20-

economist at the National Association of Home Builders. "It would take time to play out,"Denk said. "The builders would have to believe that this is a longer term phenomenonbefore they act on it."

As for the impact on home values, that shows up only in areas where there are regulatoryor land constraints, the study said. In other words, home values are affected in regionswhere builders cant simply build wherever the demand takes them, whether that be far-flung suburbs or closer in locations.

A study[4] released by the Brookings Institution earlier this month picks up on that front.The study delved into home sales that took place from 1978 through 2010 in NevadasClark County home to the Las Vegas metropolitan area, where 32 percent of the land isundevelopable, in part due to mountainous terrain.

It found that a 10 percent increase in gas prices from the historical average can shiftaverage home values within a range of about $13,000. Values rose by up to $5,600 forhomes near the areas urban centers, and dropped by about $7,800 on average for homesthat are farther out, according to the authors Adele C. Morris of the Brookings Institutionand Helen R. Neill of the University of Nevada.

What this means for today is that if people expect the low gas prices to persist, its goingto make homes in the outer areas more attractive than they would be if gas prices hadremained high, Morris said in an interview. The question we ask is how much more dopeople care about where they live when gas prices are high and how much less do theycare when gas prices are low. Were looking at relative changes.

Whether home values rise or fall in reaction to gas prices may not have to do solely withcommuting times, Morris said. There are notable differences in the effect of gas pricesacross adjacent neighborhoods, which suggests other factors may be at play. It could bethat higher-income neighborhoods are less concerned about commuting costs, andtherefore the property values there are less sensitive to large changes in gas prices.Dina ElBoghdady covers housing policy for The Washington Post.

Links

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574.pdf

3. http://www.federalreserve.gov/pubs/feds/2010/201036/201036pap.pdf

4. http://www.brookings.edu/research/papers/2014/12/04-gasoline-prices-affect-property-value-morris

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