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What Falling Oil Prices Means for Real Estate

Oil Well

  |  By Chris Shanahan, CISP®

As the old saying goes, what goes up must come down and that is certainly the case right now when it comes to oil prices.

Crude oil prices have fallen by more than half since last summer, causing Exxon Mobil and Chevron to lose more than $95 billion from their combined market value, according to the Wall Street Journal. Instead of predicting a rebound, some in the industry believe oil prices will continue to fall and could quickly hit $40 per barrel, dragged down by oversupply in the global oil market.

Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, has said that the drop in oil prices is a good thing for the overall economy and it has helped to put money back in consumers’ pockets.

What do falling oil prices mean for real estate?

To gauge the effect of falling oil on home prices, Trulia looked at year-over-year trends in oil prices, jobs and home prices from 1980 to the present in the 100 largest metro areas.

Trulia came to these three conclusions:

  1. Any negative impact of falling oil prices on home prices should be concentrated in oil-producing markets in Texas, Oklahoma, Louisiana and other places with large oil-related industries.
  2. In these markets, oil prices won’t tank home prices immediately. Rather, falling oil prices in the second half of 2014 might not have their biggest impact on home prices until late 2015 or in 2016.
  3. Falling oil prices will probably help local economies and home prices in markets that lack oil-related industries.

In what could be good news for potential home buyers, the New York Times offers this explanation for how cheaper oil plays a role in driving down mortgage rates: In general, interest rates tend to be sensitive to inflation and inflation is being pulled downward because cheaper oil prices are lowering costs throughout the American economy. In turn, this lower inflation allows for interest rates to decline.

But falling oil prices could hurt leasing and construction demand in energy-driven markets like Houston and North Dakota. According to Bloomberg, energy and technology have been the main drivers of demand for US office space in the four cities with the highest rent growth for the year ended Sept. 30 -- San Jose, California; Dallas; San Francisco and Houston. Office rents in Houston, the fourth-largest US city, rose 4 percent in the third quarter from a year earlier, compared with a 0.4 percent increase for the United States as a whole.

What does this mean for self-directed IRA investors?

Like we stated above, investments in properties that are in and around areas where oil and energy production has been booming could potentially see a slow-down in rental income as production drops. Additionally, REITs that have a high concentration of commercial properties in these areas could possibly underperform based on a lack of demand.

Hiring slow-downs, especially in shale oil production boomtowns like Williston, North Dakota, could affect new building and infrastructure development that was planned when oil production was peaking. For example, Williston was forecast to need massive road, airport, and waste water production improvements, along with thousands of new housing units to accommodate its growth. But those projects may not be completed -- or even started -- if production in the area continues to slow with the drop in oil prices and production. While these types of real estate and infrastructure investments have been very popular among self-directed IRA holders, we could see a slowdown in interest as investors wait to assess the fallout from plunging oil prices.

Want to learn more about investing in real estate with your IRA? Download our guide:

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.